Tag Archives: unemployment

Globalization and the Jobs Challenge

The popular discourse on globalization is that it results in the export of American jobs overseas. You hear this refrain during campaign season, as politicians promise to “protect American jobs” and to eliminate tax breaks for companies that “export American jobs.”

But like many campaign sound bites, this message misses the complexity of globalization and its impact on jobs in the United States. This video, produced by the New York Times, illustrates the challenge of maintaining jobs in the face of low wage competition from the developing world while simultaneously arguing that globalization results in a shifting of employment, increasing the need for highly skilled employees. It’s a good way to complicate what can sometimes be a tired debate.

[This post was originally blogged at Politics Matters and is reposted here with permission].

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Taxes, Big Government, and Economic Growth

It’s often taken as a truism that lower taxes lead to higher levels of economic growth. The National Center for Policy Analysis, an anti-tax think tank, goes so far as to assert that if the United States had lowered its marginal tax rate to the “optimal tax rate,” growth in the United States would have increased from 3.4 percent per year to 4.6 percent per year between 1950 and 1995. They argue that lowering taxes will encourage people to work more, thus increasing the total revenue collected by the government through taxes. It’s a restatement of the Laffer Curve. It’s also the argument advanced in every introductory economics textbook. And according to most studies, it’s also wrong.

Baseline Scenario has a great analysis of the relationship between tax rates and growth in gross domestic product in the United States since the end of World War II. Their finding? There is no relationship. An analysis of the data comparing unemployment rates and tax rates in OECD countries suggests that there is no direct relationship there either. Baseline Scenario’s conclusion is a good one:

I don’t think these pictures prove anything. Well, maybe they prove one thing: that the real world is more complicated than the first-year economics textbook…If there’s one thing I’d like people to take away, it’s that any theoretical economic argument that can be stated in a sentence is as likely to be untrue as true in the real world, no matter how clever or intuitive it is.

The Challenges of Monetary Union

Paul Krugman’s recent analysis of the “Spanish Tragedy” deserves more consideration than it’s received. Krugman’s argument is essentially that the current problems faced by several European Union members (chiefly the high rate of sovereign debt) are the result not of irresponsible governments spending recklessly. Rather, the fundamental problem is the European Monetary Union itself.

Monetary Unions are interesting things. When the Euro was established as the single currency for many European Union members, there were two schools of thought. The first (pro-integration) position was that it would lower transaction costs, increase efficiency, and make the European Union an important global player. The second (anti-integration) position argued that the single currency would be difficult to manage because of the competing impulses and demands of the individual member states. A single currency makes using monetary policy [glossary] to manage the economy across a large area increasingly difficult. Encouraging economic expansion in Spain, for example, by expanding the money supply could only work if the other monetary union members went along. If the European Central Bank is concerned about inflation in Germany and stagnation in Spain, what is it to do? The two problems require fundamentally different (indeed, opposite) policy approaches under monetarism. 

As Krugman summarizes the situation:

Spain is an object lesson in the problems of having monetary union without fiscal and labor market integration. First, there was a huge boom in Spain, largely driven by a housing bubble — and financed by capital outflows from Germany. This boom pulled up Spanish wages. Then the bubble burst, leaving Spanish labor overpriced relative to Germany and France, and precipitating a surge in unemployment. It also led to large Spanish budget deficits, mainly because of collapsing revenue but also due to efforts to limit the rise in unemployment.

The Spanish crisis, in other words, resulted from the monetary union. Can the monetary union now be its savior? Doubtful, but we’ll see.

Is the U.S. Economy Now in Recovery?

On Friday the Bureau of Economic Analysis released its fourth quarter 2009 estimates of economic performance in the United States. The figures were surprisingly positive, with gross domestic product [glossary] growing at an annualized rate of 5.7 percent. According to the BEA, the increase was driven primarily by an expansion in business inventories. Consumer spending increased at a much slower pace (2.0 percent in the fourth quarter, down from 2.8 percent in the third quarter).

Analysts were surprised by the growth in GDP, which had been forecast to increase at a much slower rate. The Obama Administration expressed cautious optimism regarding the figure, with Christine Romer, chair of Obama’s Council of Economic Advisors describing it as the “most positive news to date on the economy” and concluding that, “There will surely be bumps in the road ahead, and we will need to continue to take responsible actions to ensure that the recovery is as smooth and robust as possible. Nonetheless, today’s report is a welcome piece of encouraging news.”

Most observers now agree that we are unlikely to experience a “double-dip” recession. But the nature of the recovery still remains uncertain. Job figures released last week suggest that unemployment remains high and that employers remain hesitant to add jobs—thus Obama’s proposal to offer a $5,000 tax credit to employers who create new jobs. The concern—and one that seems entirely plausible given recent economic reports—is that the recovery of the U.S. economy will resemble the performance of the Japanese economy over the past decade, a “jobless recovery”  in which economic growth continues at a slow pace but unemployment remains high.

Five Stories You Might Have Missed

It was mostly bad news for the U.S. economy again last week, as official figures show an increase in the unemployment rate to 8.9 percent—the highest level in more than 25 years. Attempting to put a relatively positive spin on the news, President Barack Obama noted that the number of job losses declined in April, marking the smallest monthly loss in almost six months. During that period, a total of 3.94 million jobs have been lost, the largest total on record, exceeding even the number lost during demobilization after the second world war. In the finance sector, stress tests performed by U.S. banking regulators concluded that ten of the country’s largest banks were undercapitalized and require an infusion of at least $75 billion to survive an economic downturn.

In news from outside the United States last week:

1. In Venezuela, President Hugo Chávez initiated a new round of nationalization in the oil industry, seizing 60 oil service companies, at least a dozen oil rigs, 30 oil terminals, and 300 boats. Chávez announced the move during a visit to the country’s main oil producing region, stating, “To God what is God’s, and to Caesar what is Caesar’s. Today we also say: to the people what is the people’s.” Venezuela is home to the world’s second largest oil reserves, with 172 billion barrels of proven reserves. But PDVSA, the state-owned oil company, has suffered serious losses in recent years as a result of declining oil prices and a shortage of hard currency. Analysts expect global oil prices to increase next week on the news.

2. Jacob Zuma was sworn in as the third president of post-apartheid South Africa last week, following the ANC’s victory in nation-wide elections late last month. After taking formal control of the government on Saturday, Zuma announced a cabinet reshuffle intended to placate weary business interests. South African businesses had feared that Zuma’s election might result in a political shift to the populist left. But in promoting former finance minister and key Mbeki ally Trevor Manuel to the powerful position overseeing central planning, Zuma seems to be demonstrating his interest in maintaining a positive relationship with the center-right wing of the African National Congress.

3. Experts are warning that the German welfare state could collapse this year as a result of the continuing economic crisis and poor economic measures by the government. In a move criticized by economists last week, Chancellor Angela Merkel de-linked increases in pension payments with the prevailing national wage rate. Legislation passed by the ruling party and signed into law by Merkel last week prohibits future cuts to pension rates. Economists have criticized the move as an attempt to appease retired voters ahead of a general election scheduled for September. Germany is in the midst of the worst economic crisis in decades, raising concerns about political stability and economic growth.

4. Next month’s presidential elections in Iran will be contested by four candidates. In addition to Mahmoud Ahmadi-Nejad, who is seeking re-election, the Guardian Council is expected to approve three other candidates as meeting the qualifications to stand for office: a strong educational and political background and a proven commitment to the Islamic regime and supreme leader Ayatollah Ali Khamenei. The three other candidates will be: Mir-Hossein Moussavi, a leftist and former prime minister of Iran, Mehdi Karroubi, a noted reformer and former speaker of parliament, and Mohsen Rezaei, former commander of the revolutionary guard and noted hardliner.

5. Pakistan’s offensive against Taliban militants in the northern part of the country continued last week. The offensive focused on the Swat valley region, where the government had made a number of concessions to militants last month, including permission to introduce sharia law into the region. Full-scale operations began on Thursday, but the government eased a curfew on the region to permit civilians to flee on Sunday.

Five Stories You Might Have Missed

Recent data about the U.S. economy indicates that the current crisis is worse than economists had believed. On Wednesday, the government announced that initial jobless claims spiked unexpectedly, reaching the highest levels since 1982. About 667,000 people made initial claims fro the week ending February 21, sending the total number of unemployed people in the United States over the 5 million mark for the first time in the country’s history. The official unemployment rate stood at 7.6 percent, the highest level since 1992. Consumer sentiment also fell to record lows in February, as housing prices fell precipitously. Housing prices declined 18.5 percent over 2008, and have declined 26.7 percent from the peaks of July, 2006.  Although the Federal Reserve is forecasting an economic contraction of 0.5-1.3 percent this year with an unemployment rate of between 8.5 and 8.8 percent, many economists are offering more dire predictions, calling this the worst downturn in U.S. post-World War II historyThe U.S. economy shrank by an annualized 6.2 percent in the fourth quarter of 2008 (its worst performance since the recession of 1982).

And now for five important stories outside the ongoing economic crisis:

1. On Friday, President Barack Obama announced a plan that would see the majority of U.S. forces withdrawn from Iraq by August 2010.  Obama’s plan was greatly coolly by anti-war Democrats, who were disappointed that the plan did not accelerate the drawdown in forces. Congressional Republicans appeared more supportive of the president’s plan.

2. The Bangladeshi army has reaffirmed its support for the government of Prime Minister Sheikh Hasina after an attempted mutiny by paramilitary forces was put down earlier this week. On Wednesday, a paramilitary force of border guards—the Bangladeshi Rifles—mutinied over a pay dispute, but violence quickly spread throughout the Bangladeshi capital, Dhaka. The government was able to reassert control over the region as members of the Bangladeshi Rifles surrendered. At least fifty people are believed dead in the fighting, and the whereabouts of 168 officers who were in the building where the mutiny began are still unaccounted for. The discovery of a mass grave in the building has led to speculation that the number of dead will rise. 

3. Tobias Billström, who is slated to become president of the European Union when Sweden takes over the position from the Czech Republic in July, has indicated that immigration reform will be on the agenda. Immigration and asylum have long been controversial issues in European politics, as countries have vastly different policies. But E.U. member states have been hesitant to transfer responsibility for coordinating policy to Brussels. Billström has suggested that the European Court of Justice in Luxembourg would have final discretion over asylum cases.

4. The new power-sharing government in Zimbabwe appears to be making good progress in addressing the economic meltdown in the country. According to the African Development Bank, Zimbabwe has made an impressive start on addressing the problems it faces. The ADB has called on Zimbabwe to make progress on repaying its external debt as a precondition for securing more outside assistance. The new Prime Minister, Morgan Tsvangarai, has said that Zimbabwe urgently needs $5 billion in foreign assistance to repair the economy. Meanwhile, the power sharing agreement itself appears to be at risk, as President Robert Mugabe’s party has been accused of creating its own parallel government, effectively attempting to bypass the power-sharing agreement. Further, members of the opposition party remained jailed, and the push for land reform has intensified.

5. In an attempt to address growing concerns of farmers over poor forecasts, the government of Argentina has agreed to increase protectionist measures, including waiving some export tariffs and granting subsidies to small producers. Longstanding drought conditions in the country have led to declining yields, and farmers are forecasting the worst harvest in forty years. The crisis has exposed deep political divides in Argentina, resulting in a weakening in the ruling alliance and the resignation of four senators and two deputies over policy differences.

Five Stories You Might Have Missed

Despite the passage by the United Nations Security Council of a resolution calling for an immediate ceasefire, Israel continued its offensive in Gaza over the weekend.  The resolution was passed by the United Nations with the United States abstaining, marking the first time the United States has permitted a resolution opposed by Israel to pass.  Hillary Clinton, the incoming Secretary of State, is expected to deliver a speech on the Middle East next week, and speculation is that the speech may provide some insight into the policy of the Obama administration.

In other news from the last week:

1. More bleak data released last week dampened hopes for a speedy recovery from the global economic crisis.  On Friday, it was reported that the United States lost more than 2.6 million jobs in 2008 and the unemployment rate jumped to 7.2 percent in December—the highest level in 16 years.  Similar figures indicated that the United Kingdom and continental Europe are also suffering from falling economic output and rising unemployment

2. Russia and Ukraine reached a deal on Saturday aimed at restoring Russian natural gas shipments to the European Union.  The deal, which has yet to be formally signed by Ukraine, would permit European Union, Ukrainian, and Russian observers to monitor a pipeline that transports Russian gas through Ukraine to the E.U.  The European Union hopes the deal will prevent future disputes over the pipeline, stabilizing shipments to E.U. member states.

3. After receiving a ransom payment of U.S. $3 million, Somali pirates released a captured Saudi oil tanker sized last fall.  After the United Nations authorized military action against the pirates late last year, a number of countries have moved naval forces into the region in order to cut the level of piracy in one of the world’s busiest shipping lanes.

4. A three-day long strike by employees of state-owned energy companies in India ended on Friday.  The striking workers failed to garner popular support for their demands, and the strike, which resulted in fuel shortages throughout the country, became highly unpopular. 

5. A U.S. businessman with ties to the State Department and Central Intelligence Agency has purchased lease rights over 400,000 hectares of land in Sudan.  The purchase becomes the largest private land deal in post-colonial Africa, but raises concerns over the increasing foreign control over the continent’s agricultural land.