Iceland Bankers Convicted and Unemployment is Down

Remember Iceland? During the high-flying early 2000s, its three main banks went berserk, paying high interest rates to international investors that accumulated deposits equal to more than 100% of the country's gross domestic product (GDP) and making loans equal to 980% of GDP. When the collapse came, Iceland took a route not taken by Ireland, Spain, and other EU countries: Rather than bail out the banks, the government simply let them go bankrupt. The value of the krona fell by about half, the country was embroiled in disputes with the Netherlands and the United Kingdom over paying off Dutch and British depositors, and it had to take an International Monetary Fund (IMF) loan just to stay afloat.

When we last checked in, there were indictments and criminal investigations of the officers of all three banks, and Icelandic banks were forced to forgive all mortgage debt in excess of 110% of a home's value. Iceland's 2012 unemployment rate was 6.0% compared to Ireland's 14.7%. But that was two years ago; what's happening now?

In December 2013, four top officials of the country's formerly largest bank, Kaupthing, were sentenced to jail terms ranging from five and a half years for its chief executive to three years for one of the majority owners. While their cases are currently under appeal, they were indicted this July for further fraud charges. Various bank and government officials have had final convictions as determined by the Supreme Court of Iceland; Wikipedia has a handy rundown on where numerous cases stand, all based on Icelandic-language sources so I cannot read them myself.

Homeowners are still in difficulty in Iceland, however. This is because mortgages in Iceland are usually indexed to the inflation rate; that is, the amount of principal is increased by the rate of inflation. Iceland's inflation rate was 5.2% in 2012 and 3.9% in 2013, while Ireland's inflation was 1.7% in 2012 and a near-deflation 0.5% in 2013. That is a pretty hefty load for Icelandic homeowners. The current conservative government has instituted a new round of mortgage relief, but there are a lot of devils in the details. Almost half of the "relief" comes in the form of people being allowed to use their retirement savings  (which are tax-advantaged like U.S. individual retirement accounts) to pay down their debt. Yeah, it's great to pay your mortgage with pre-tax dollars, but it's still your own money you're paying, which will no longer be available for retirement. The IMF has raised doubts about the plan's overall effect on government finances, too.

As I mentioned in my last post, unemployment in Iceland stood at 4.4% in July, versus 11.5% in Ireland (navigate to Labour Force Statistics, then Short-term Statistics, Short-term Labour Market Statistics, then Harmonised Unemployment Rates). And, as I also mentioned in the post, Ireland's unemployment rate has been artificially lowered due to net emigration from the country.

While Iceland suffered a great deal from the crisis and is by no means out of the woods, it looks like the country made the right call by not bailing out the banks. The economy is growing and unemployment is down to less than half of its peak crisis level. As Paul Krugman has emphasized, having your own currency to devalue helps as well, although it substantially raised inflation and mortgage balances. Iceland was dealt a bad hand by its bankers, but it's making at least some of them pay for that, which is more than we can say in the United States.

Cross-posted at Angry Bear.

Real Wages Rise Slightly but Remain below Peak for 41st Straight Year

Remember the Economic Report of the President? If you've been reading this blog for at least a year, of course you do. It's where we get our annual data on real wages (and apparently some other stuff, too). The 2014 edition was released on March 10. As you may recall, I made my first post on the declining real wage trend through 2011 and was literally the first person to notice 2012's further slight decline.

The good news is that, in what is now Table B-15 rather than B-47, real wages advanced somewhat in 2013, from $294.31 per week (in 1982-84 dollars) to $295.51, an increase of 0.4%. Woo hoo!

The bad news, of course, is that this is still 13.5% off the peak real weekly wage of $341.73, achieved in 1972. One swallow doesn't make a spring, and all that.

Interestingly, last week Paul Krugman felt compelled to argue that real wages aren't going up all that fast, but so what if they did? He said that basically, this was something primarily only visible in the real hourly (my emphasis) wages of production and non-supervisory workers, which happens to be one of the components of Table B-15. However, he was reporting based on the Bureau of Labor Statistics' monthly reporting of this stat.

As he puts it, the folks he is criticizing are saying that "a dangerous acceleration in the pace of wage increases is already underway. Time to raise interest rates!" His response to them is fine as far as it goes, but he misses that even on the terrain of the supposedly most rapidly increasing measure, there is no there there.

Table A-2. Current and real (constant 1982-1984 dollars) earnings for production and nonsupervisory employees on private nonfarm payrolls, seasonally adjusted(1)

	Feb. 2013	Dec. 2013	Jan. 2014(p)	Feb. 2014(p)
Real average hourly earnings(2)	$8.73	$8.81	$8.83	$8.86
Real average weekly earnings(2)	$294.96	$295.22	$295.69	$295.08
Consumer Price Index for Urban Wage Earners and Clerical Workers	229.180	230.919	231.233	231.344
Average hourly earnings	$20.00	$20.35	$20.41	$20.50
Average weekly hours	33.8	33.5	33.5	33.3
Average weekly earnings	$676.00	$681.73	$683.74	$682.65
OVER-THE-MONTH PERCENT CHANGE
Real average hourly earnings(2)	-0.3	-0.1	0.2	0.3
Real average weekly earnings(2)	0.2	-0.6	0.2	-0.2
Consumer Price Index for Urban Wage Earners and Clerical Workers	0.6	0.3	0.1	0.0
Average hourly earnings	0.3	0.2	0.3	0.4
Average weekly hours	0.6	-0.6	0.0	-0.6
Average weekly earnings	0.8	-0.3	0.3	-0.2
OVER-THE-YEAR PERCENT CHANGE
Real average hourly earnings(2)	0.1	0.8	0.8	1.5
Real average weekly earnings(2)	0.4	0.2	0.4	0.0
Consumer Price Index for Urban Wage Earners and Clerical Workers	1.9	1.5	1.6	0.9
Average hourly earnings	2.0	2.3	2.3	2.5
Average weekly hours	0.3	-0.6	-0.3	-1.5
Average weekly earnings	2.3	1.7	2.0	1.0

Source: Bureau of Labor Statistics (link above), footnotes omitted

First of all, we should remember that a couple months' trend is not really equal to a 41-year trend. That kind of error we'll leave to Reinhart and Rogoff.

Second, we can see the "scary" number: nominal hourly earnings increased from $20.00 in February 2013 to $20.50 in February 2014, or 2.5%.

Third, we know that we actually want to adjust that for inflation; hence we find that real hourly earnings went from $8.73 in February 2013 (1982-84 dollars) to $8.86 in February 2014, or just 1.5%,

Fourth, what Krugman appears to miss is that average weekly hours have fallen substantially since 1972. In fact, as the BLS table shows, they fell by half an hour, from 33.8 to 33.3 hours, from February 2013 to February 2014, or 1.5%.

You can see where this is going now: Real weekly earnings went up by 0. More precisely, 0.04%. And you'll note that the February 2014 figure is lower than the full-year 2013 level. So there is actually no increase to explain in the production/non-supervisory workers series.

But Krugman does hit the nail on the head: "What's so bad about rising wages?" And the answer, of course, is "Absolutely nothing." ("Say it again!")

Cross-posted at Angry Bear.

Basics: Let's Debase the Dollar!

A lot of people, especially conservatives, complain about the so-called debasement of the U.S. dollar. For example, Craig R. Smith, who is apparently important enough to be interviewed by "FOX News, CNN, CNBC, ABC, NBC, CBS, PBS, CBN, TBN, Time, The Wall Street Journal, The New York Times, and Newsweek," wrote a book last year that claims the value of the dollar has fallen by 98% in the 100 years since the income tax and Federal Reserve were established in 1913. He predicts terrible economic calamity will be the result of this debasement. Smith is not alone in this view; evidently Rep. Paul Ryan shares it, too (h/t Paul Krugman).

Mind you, this is a slight overstatement according to Bureau of Labor Statistics (BLS) inflation data (www.bls.gov, series CUUR0000SA0, set date range for 1913 to 2013). This shows that the Consumer Price Index has increased from 9.8 in January 1913 to 233.5 in June 2013, which implies a decline in the dollar's purchasing power of only 96%. To put it another way, according to the BLS, today's dollar is worth 4 1913 cents, while Smith says it only worth half as much, 2 1913 cents. Either way, sounds pretty awful, right?

Of course not. This is another example of something I wrote almost two years ago: "When someone tries to get you to focus on only one part of a complicated picture, it's a safe assumption they are trying to mislead you." The most obvious omission of the "debasement lobby" is the fact that pay levels have risen a lot since 1913. A single dollar does not buy as much as it did in 1913, but people get paid a whole lot more dollars per hour/week/year than they did, then, too!

What actually matters is not how much the dollar is worth, but the ratio of what people get paid to what the dollar is worth. If your dollars earned rise faster than the value of the dollar falls, that is the very definition of rising real wages! And the Lord knows I'm well aware of falling real wages for the majority of workers since 1972; a post I did on that subject is my second-most read of all time.

Ultimately, what the debasement lobby is mad about is inflation. Smith claims that "real everyday price inflation is running at 7 percent or more per year..." Krugman has been doing yeoman's work on this issue. We should note that the BLS has been calculating the consumer price index since 1919 and probably knows a little bit about what it's doing. If you want to doubt its validity anyway, Krugman points us to MIT's Billion Prices Project, which comes up with results very similar to those of the BLS.

So high inflation is not the problem we face. Low inflation is. With inflation so low, people get no relief from their debts, and have to reduce their debt as much as possible. When that happens, they buy fewer goods and services, so unemployment gets worse, and it's already bad enough at 7.4% in July. Government could offset weak private spending with jobs programs, but Republicans have made it clear that they aren't going to pass any jobs bills, so that route is shut off for now.

As a result, millions of people are needlessly unemployed, still at near-record levels of long-term unemployment, and states like North Carolina are cutting unemployment benefits sharply. Shameful.

Let's debase the dollar!

Cross-posted at Angry Bear.

Is the Growth of Manufacturing Production a Mirage?

A lot of people lament the decline in manufacturing employment, which has fallen by about 1/3 since 2000. As Upjohn Institute economist Susan Houseman points out in the linked article, we're talking about 5.5 million lost manufacturing jobs in that time frame. Here's what it looks like in long perspective

Instead of recovering as it did in previous recessions, after the 2001 recession manufacturing employment continued to fall, as Houseman points out.

But a number of commentators, including Matthew Yglesias and some more conservative ones cited by Houseman, have argued that what we really ought to be looking at is manufacturing output, which has risen steadily except for small blips during recessions.

What's wrong with needing fewer people in manufacturing due to greatly increased productivity?

Houseman argues that the increased productivity is a mirage, due to a single industry, computers. She writes:

Real value added in the computer industry grew at a staggering rate of 22 percent per year from 1997 to 2007 and 16 percent per year from 2000 to 2010. In contrast, average growth of real value added in the rest of manufacturing was just 1.2 percent per year from 1997 to 2007; real value added in the rest of manufacturing was actually about 6 percent lower in 2010 than at the start of the decade.

With that kind of growth, many multiples of GDP growth, we must be an export powerhouse in computers and electronics, right? (Insert joke here.)*

Of course we aren't, so where does that gigantic growth rate come from? If you remember the debates over inflation that gave us the Boskin Commission, you will recall that one of its criticisms of Bureau of Labor Statistics Consumer Price Index (CPI) data was it did not adequately account for improvements in quality over time. Houseman argues that the huge increases in computer power and semiconductor processing speed are what are beneath the apparently massive growth in productivity in the industry. In other words, the price deflators used to calculate real growth are the real reason productivity is apparently growing so rapidly in computers.

If Houseman is right, it means that falling manufacturing employment really is a problem; we have not become so productive that we simply need fewer manufacturing workers. And the fact that productivity is growing by leaps and bounds, yet our trade deficit in electronics keeps getting worse, seems to me to be strong evidence that she is on to something.


* From the Austin Lounge Lizards song, "The Drugs I Need."

Cross-posted with Angry Bear.

The Best Data on Middle Class Decline (Updated)

The flurry of posts earlier this month on middle class decline (me, Lane Kenworthy, Matthew Yglesias, Kevin Drum) made me think some more about what the best way is to show what's happened since the peak of real wages in the early 1970s. While in my opinion there is no perfect measure, there are a lot of choices to be made, and I argue below why real wages for production and non-supervisory workers, with an adjustment for non-wage compensation, is the best single measure.

Choice 1: Household/family vs. individual

While we all live in households or families, over the past 40 years, there has been a decline in persons per household (see Kenworthy) and an increase in incomes per household as women's labor force participation has increased. The decline in persons per household means that a household needs less income than in the past to have a fixed per capita income. The increase in incomes per household has meant that households have had higher real income even as real individual income has fallen, as pointed out by commenter peggy_Boston in the comments thread of Drum's article. To my mind, this is partly causal; that is, because real wages have fallen, families have had to have more incomes in order to maintain their living standards. Indeed, falling real wages have forced families to run up high levels of debt, with non-mortgage debt reaching 1/3 of family income by 2005. Therefore, I think individual data is the right choice here.

Choice 2: Median income vs. production and non-supervisory workers' income

The median (middle value, with an equal number of observations above and below it)  has big advantages over the arithmetic mean in trying to show the typical situation in a distribution of values. It is especially useful for income distributions, where the presence of very high incomes means that the mean is much higher than the median. In fact, the literature on "decoupling" (see Kenworthy above) demonstrates just how much this is the case. But I think that "production and non-supervisory workers" captures our intuition about who is in the middle class even better than the median does. This series, in Table B-47 of the Economic Report of the President, is an average of the earnings of employed persons in private (non-government), non-agricultural jobs. It includes about 80% of the private workforce and 64% of the total non-agricultural workforce. Despite being an average, its exclusion of supervisory workers means that virtually all of the extremely high values that distort the mean of the entire workforce are eliminated. It is, essentially, the mean income of the bottom 80% of private workers. The biggest drawback to this dataset is that it does not include non-supervisory government workers, but I think that is outweighed by its broader coverage of the middle class than the pure median income (or middle quintile, as in Kenworthy's post).

For the counterargument, that changes in composition of production & non-supervisory workers can cause distortions that the median wage is not subject to, see Dean Baker (p. 9).

Choice 3: Weekly vs. hourly

Baker mentions hourly earnings rates in some cases. As I discussed in the comments section of my March 11 post, the decline in hours worked per week (from 36.9 hours in 1972 to 33.6 hours in 2011) suggests to me that we need weekly, not hourly, wages.

Choice 4: Which inflation data to believe?

Shortly after President Clinton's first election, I predicted to my students that, because his message of middle-class stagnation ("It's the economy, stupid") was dependent on how inflation was measured, that conservatives would soon attack the official Bureau of Labor Statistics inflation data. The issue is, if inflation is overstated, then the decline in real wages reported by the BLS could be overstated or even non-existent. Conversely, if BLS data understates inflation, then real wages have fallen even faster than shown in Table B-47.

Unfortunately, I did not publish this prediction, so you'll have to take my word for it that I predicted the attack on inflation data that culminated in the Boskin Commission in 1995. I always took this to be a political attack rather than a scientific one. My attitude has always been that trade theory (i.e., the Stolper-Samuelson Theorem; see Ronald Rogowski's great book Commerce and Coalitions for an explanation of this topic, which I intend to discuss in a later post) predicts that real wages in a relatively labor-scarce country like the United States will fall as trade expands, and the data shows that real wages indeed fell: so what reason do we have to question the data? In the end, though, the Commission concluded that inflation was being overstated by about 1.1 percentage points a year, and the BLS was mandated to adjust its methodology.

Barry Ritholtz takes an even more jaundiced view of the Boskin Commission than I do. Paul Krugman, on the other hand, is not convinced that inflation is now significantly underreported, citing the work of the Billion Prices Project. For the moment, I do not see reason enough to toss out the BLS data, despite the possibility that the Boskin Commission may have introduced distortions into it.

Choice 5: Wages vs. compensation

Martin Feldstein and other economists argue that it is not sufficient to look at wages alone, because the non-wage share of compensation has been growing over the past few decades. As I posted before, total employee compensation includes everyone from the CEO to the janitor, so it overlooks the fact that the top 1% have made almost all the gains from decades of economic growth. Nevertheless, it is clearly true that non-wage compensation has grown faster than wages, as we will see below. In fact, Yglesias suggests that the 2000s actually saw real compensation growth at the median, but it was all in the form of health insurance benefits. Of course, there is some debate over how much value actually comes from extra employer payments for health insurance, as Baker's paper (p. 10) details

A different way to factor in compensation that I had seen before on the Economic Policy Institute's website was explained to me in an email by Jared Bernstein and is documented in the footnote of his blog post here. It takes the ratio of total compensation to total wages, both of which are in National Income and Product Accounts Table 1.12 (you can set it to a wider range of years, as I did). Whereas he applies it to median wages, I apply it to Table B-47 and get the following results:

Year          Weekly Real Earnings     Comp/Wages     Weekly Compensation
                  (1982-84 dollars)                                     (1982-84 dollars)

1972          $341.83                         1.14                   $388.01
1975          $314.75                         1.16                   $366.63
1980          $290.86                         1.20                   $348.93
1985          $285.34                         1.22                   $347.10
1990          $271.12                         1.21                   $328.99
1995          $267.07                         1.22                   $326.23
2000          $284.79                         1.20                   $341.49
2005          $284.99                         1.24                   $352.87
2010          $297.67                         1.24                   $370.28
2011          $294.78                         1.24                   $365.77

Note: Last two columns rounded from spreadsheet calculations

Sources: Economic Report of the President 2012, Table B-47, National Income and Product Accounts, Table 1.12, and author's calculations

 By this measure, compensation in 2011 for most workers was still almost 6% below its 1972 peak. The advantage of this adjustment over Feldstein's procedure is it strips out the wage inequality of the compensation data, although there is still some overstatement based on inequalities in non-wage compensation. Still, I think this gives us our most accurate picture of what's happening to the bottom 80% of workers.

That is not to say that this is a perfect measure even with those caveats. It matters what is happening at the top, too. If high wage earners were seeing their income fall faster than middle-class workers, then inequality would be falling and we would probably object less to what would then look like the much-vaunted "shared sacrifice." But of course, as Kenworthy notes, the share of the top 1% more than doubled from 1979 to 2007, from 8% to 17%. With inequality rising as it is, we now seem to be in danger of a consequent sharp shift of political power to the 1%, as MIT economist Daron Acemoglu told Think Progress' Pat Garofolo.

I look forward to your comments, especially if I've gotten something wrong.


UPDATE: By way of comparison, here is Lane Kenworthy's chart.

 

In it, you can see that by either median family income or 3rd quintile household income, incomes started rising shortly after 1980, whereas in my table compensation-adjusted real wages continued to fall until 1995. You can also see the divergence in median family income and Q3 household income between 2000 and 2007, as noted by Yglesias. Whereas the increase is made up entirely of nonwage compensation in the Q3 household income series, in my table at the individual level we have an increase made up partly of wages and partly of nonwage compensation.

Inflation is Neither as Boring Nor as Simple as it Seems

One nice thing about Dean Baker's new book, The End of Loser Liberalism, is that it puts the Federal Reserve Bank and inflation under the microscope. This is important and valuable, because too many people wrongly take it for granted that inflation is always a bad thing. To give an example, one graduate level textbook in international political economy that I use (Ravenhill, ed., Global Political Economy) has a chapter discussing theories of how different actors form their preferences about free trade (for or against), exchange rates (fixed or floating, high or low), etc. Notably missing is any discussion of why different people might favor higher or lower rates of inflation. The chapter author simply presumes that inflation is bad.

Yet once upon a time, average middle class people understood the significance of international monetary arrangements and inflation on their lives. These were the people to whom William Jennings Bryan's famous 1896 “Cross of Gold” speech was addressed. Farmers understood that the gold standard was harmful to their interests because it forced low inflation and even deflationary policies that made their debt burden worse. They wanted the dollar backed by both gold and silver (“bimetallism”) in order to have a larger money supply and higher inflation.

The first modern work of which I am aware that discusses who wins and who loses from inflation is William Greider's Secrets of the Temple. (For a fairly recent interview with Greider, see here.) The first level of the story is the easiest. It's hard to see how hyperinflation benefits anyone (though the historical memory of Germany's hyperinflation gave us the Bundesbank with its constitutional mandate to control inflation with no reference to unemployment and ultimately gave us a European Central Bank blindly following deflationary policies). Extremely rapid increases in the price level are so destructive that they outweigh the second factor, which holds in normal times: inflation benefits debtors, who get to pay their debts with cheaper dollars; and it conversely harms creditors, who receive those cheaper dollars.

But who are the debtors and creditors? In general, of course, lenders are wealthier than borrowers. Broadly speaking, older people lend to younger people. Thus, moderate levels of inflation transfer wealth from richer to poorer and older to younger. They make it easier for the middle class to build up assets like home ownership, and more generally for the economy to expand to full employment.

As Greider argued and Baker agrees, the decision to target a particular inflation rate is a highly political one with Fed decisions making it generally more difficult to reach full employment or the bargaining power full employment would give to workers. While the Federal Reserve Board officially has a dual mandate to promote both employment and price stability (in contrast with most central banks which, Baker points out, are responsible for price stability alone), in practice it has done little to promote employment even in the current jobs crisis, whereas it has frequently moved to raise interest rates when unemployment rates were quite high. Baker, as did Greider before him, argues that it is crucial to bring the Fed under more democratic control. Baker concedes that institutional reform of the Fed is a long way off, but argues that in the meantime progressives need to step up public pressure on the Fed to do something about unemployment, comparable in volume to the non-reality-based screams from the Right that what little the Fed was doing would set off massive inflation.

What was news to me, though, is that the Fed refunds to the U.S. Treasury the interest it earns on its assets (primarily “government bonds and mortgage-backed securities”), to the tune of $80 billion in fiscal year 2010. Baker suggests that if, instead of selling these assets off as planned over the next 10 years, the Fed holds on to them, the Treasury will save about $600 billion in interest payments over the period. This is almost equal to the revenue that will be gained by letting the Bush tax cuts for the wealthiest 2% of Americans expire.

Baker's main point is quite sound: progressives need to pay a lot more attention to the Fed than they have, and they have to amplify the voices of the few economists who have called for the Fed to announce that it wants a higher rate of inflation than 2%. The stakes are too high, and the general lack of knowledge means that there is quite a bit of room for organizing to make progress if the information gap is closed.