Jeff Madrick

I have written about the deep and misleading flaws inherent in Congressional Budget Office (CBO) forecasts before. But given last week’s projections of job losses due to a proposed minimum wage hike, the inadequacy and misleading character of CBO pronouncements needs addressing again.

What particularly provokes me now is a quasi-debate between economist Jared Bernstein, former economic adviser to Vice President Joseph Biden, and Republican economist Douglas Holtz-Eakin, former head of the CBO, on CNBC. The CBO had issued its customary over-simplified statement that “Once fully implemented in the second half of 2016, the $10.10 [per hour minimum wage] option would reduce total employment by about 500,000 workers, or 0.3 percent, CBO projects.” They next point out that this is merely the midpoint of a range of possibilities they derive from existing research on the relationship between the minimum wage and jobs.

But why make the declarative statement in the first place? The damage is done. Politicians and the media pick it up as if it is a forecast, not a midpoint based on a wide range of conflicting research.

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Sara Hsu, Guest Blogger

In China, things are not looking pretty. Debt is high among corporations and local, provincial, and state governments—up to more than 25 trillion RMB among governments in 2012 and 60 trillion RMB among corporations in 2012. Some say debt is also high among households, but let’s face it: households still have a hell of a time borrowing from banks. Their debt load comprised close to 10 trillion RMB in 2012, and most of their income is put into savings as a cushion against adverse conditions.

Much of the debt that has gone to governments and corporations has been extended through loans, “entrusted loans,” or “trust loans.” Entrusted loans are loans from one party to another that use a bank as an intermediary, while trust loans are loans from trusts to one or multiple parties. Both of these types of loans can be securitized and sold off to bank customers, which they have been, in spades, as wealth management products.

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Mark Blyth

“Growth in a Time of Debt,” the much-touted paper by economists Carmen Reinhardt and Kenneth Rogoff, that suggested economic growth stalls once a nation’s debt hits 90 percent of its gross domestic product, has been debunked. But the austerity policies that this research helped undergird are still alive and well. Despite the on-going austerity-driven economic meltdown in Europe, and despite the International Monetary Fund’s recanting of the supposedly positive benefits of cuts, austerity continues, as John Maynard Keynes once put it, “to dominate the economic thought, both practical and theoretical, of the governing and academic classes of this generation.” Why is it so hard to shuck this notion that governments should cut spending and/or raise taxes in times of economic slack?

Two answers present themselves to us.

The first is politics. Few of the Republicans who fret so much about today’s allegedly crushing debt burden did so in 2006, at the height of the boom, when the U.S. debt to GDP ratio was steadily climbing above 60 percent and the deficit was at then-all-time high – and when a Republican was in the White House.

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C.P. Chandrasekhar

If the international media are to be believed the world, still struggling with recession, is faced with a potential new threat emanating from China. Underlying that threat is a rapid rise in credit provided by a “shadow banking” sector to developers in an increasingly fragile property market. Efforts to address the property bubble or reduce fragility in the financial system can slow China’s growth substantially, aggravating global difficulties.

The difficulty here is that the evidence is patchy and not always reliable. According to one estimate, since the post-crisis stimulus of 2008, total public and private debt in China has risen to more than 200 per cent of GDP. Figures collated by the World Bank show that credit to the private sector rose from 104 per cent of GDP in 2008 to 130 per cent in 2010, before declining marginally in 2011. The evidence suggests that 2012 has seen a further sharp increase.

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Arjun Jayadev

One of my favorite lines from recent economics papers is the following one from this paper by Thomas Phillipon, who in talking about the performance of the financial sector suggests that “the unit cost of intermediation is higher today than it was a century ago, and it has increased over the past 30 years. One interpretation is that improvements in information technology may have been cancelled out by increases in other financial activities whose social value is difficult to assess.”

The claim that the financial sector has been ‘functionally inefficient’ was made 30 years ago by James Tobin, and it’s great to have a quantitative basis to make this sort of judgment. Another way to have some sort of handle on the degree to which intermediation has become more expensive is to look at the spread between funding costs and lending rates.

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C.P. Chandrasekhar

Early February, the Department of Justice (DoJ) of the US government—represented by the United States attorney general and supported by attorneys general from 16 states—filed civil fraud charges against the ratings giant Standard & Poor’s (S&P). S&P is the largest of the big three agencies—the other two being Moody’s and Fitch—which, for a fee, take on the task of assessing how risky and robust securities of different kinds issued by financial firms are.
The charges were not minor. The DoJ argues that for more than three years between September 2004 and October 2007, S&P “knowingly and with the intent to defraud, devised, participated in, and executed a scheme to defraud investors” in mortgage-related securities. This was the period when S&P was raking in huge earnings by granting high ratings to complex and opaque derivatives named “collateralised debt obligations” (CDOs) based on mortgage bonds. The DoJ’s case reportedly focuses on 40 such CDOs created at the height of the US mortgage bubble, the rating of which gave S&P $13 million in fees. These bonds went bust, resulting in losses to investors. The DoJ not only claims that S&P knew this could happen when it gave them high ratings or left them unrevised, but also that it misinformed investors by arguing that its ratings “were objective, independent, uninfluenced by any conflicts of interest.”

Progress on punishing institutions seen as responsible for the 2008 crisis has been slow. So it has not just been business as usual for these firms, but license to do things that seem substantially aimed at regaining the credibility they lost in the aftermath of the crisis. The most controversial of these was its decision to downgrade the long-term credit rating of the United States from AAA to AA+ in August last year during the standoff between the Democrats and Republicans over ratifying an increase in the prevailing ceiling on US public debt.

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Erinc Yeldan, Guest Blogger

Two Latin American style economies, Argentina and Turkey, shared a common history until very recently.  This “commonness” included a prolonged history of import substitution industrialization (ISI) with inward-looking, state-led development paths.  Both economies had relatively high rates of growth during their respective stages of ISI and yet, found out that these paths reached their limits by late 1970s (Argentina perhaps half a decade earlier than Turkey).

Both countries had also witnessed a lost decade, respectively; Argentina the 1980s, Turkey 1990s.  For both countries the period after was one of active reform.  Both countries suffered from an almost identical type of financial crisis in 2001, while both of them were following an IMF-led disinflation programme that rested on exchange rate-based stabilization adventures.  The contraction of the GDP and the burden of adjustment through rapid currency depreciation, banking collapses, and a severe rise of unemployment were also at comparable scale across the two countries.  However, the two had divergent paths of adjustment subsequently. Turkey followed a strict orthodox adjustment programme under the auspices of the IMF, while Argentine chose to set its own course with debt default and an adherence to what is commonly referred to as a heterodox adjustment programme, while maintaining a strong anti-poverty and pro-employment stance.

Almost a decade into this divergence, Argentina was in the international news once again, now with a ruling by the district court of New York that the Argentinian government ought to pay $1.3 billion to a “vulture fund”: Elliott Capital Management.  The ruling further contained a statement that prohibited third parties to aid Argentina in its efforts of debt re-structuring.

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Kevin Gallagher and Estefanía Marchán

China’s presence grows ever larger in Latin America. Yet it is still unclear whether the Asian giant’s expanding influence will favor sustainable development in the region.

Latin America’s abundance of oil, minerals, and other natural resources attract China to the region and the numbers prove it: our study “The New Banks in Town: Chinese Finance in Latin America,” estimates that, since 2005, China has provided approximately $86 billion in loan commitments to Latin American countries. Sixty-nine percent of these loans were loans in exchange for oil.

Putting the data in context, in 2010, for example, China offered more loans to Latin America than the World Bank, the Inter-American Development Bank, and the Export-Import Bank of the United States combined. What does this deepening of ties with China mean for the region?

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Robert Guttman, Guest Blogger

A strange calm has settled over Europe. Following Mr. Draghi’s July 2012 promise “to do whatever it takes” to save the euro, which the head of the European Central Bank followed shortly thereafter with a new program of potentially unlimited bond buying known as “outright monetary transactions,” the market panic evaporated. Since then super-high bond yields have come down to more reasonable levels, allowing fiscally and financially stressed debtor countries in the euro-zone to (re)finance their public-sector borrowing needs a lot more easily than before. Even Greece has been able to borrow in the single-digits for the first time in three years.

This calming of once-panicky debt markets has led to optimistic assessments that the worst of the crisis has passed. Draghi himself declared at the beginning of the new year that the euro-zone economy would start recovering during the second half of 2013. He talked of a “positive contagion” taking root whereby the mutually reinforcing combination of falling bond yields, rising stock markets and historically low volatility would set the positive market environment for a resumption of economic growth across the euro zone. Christine Lagarde, as the head of the IMF part of the “troika” (i.e. ECB, IMF, and European Commission) managing the euro-zone crisis, declared at the World Economic Forum in Davos a few weeks ago that collapse had been avoided, making 2013 a “make-or-break year.”

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Martin Khor

For many years after independence, developing countries made use of development planning as a major tool of getting their economies going.

But this stopped in the 1980s and 1990s for many countries, especially in Africa, that fell under the influence of the International Monetary Fund and the World Bank.  Under their structural adjustment programme, planning or any kind of development strategy involving a leading role of the state was taboo.

As a result, many African countries fell behind in their economic growth and social development.  Governments gave up planning, withdrew their leading role in the economy, cut jobs, gave up on subsidies and other methods of helping local firms and farmers.  The new order was to privatise, liberalise imports and rely on foreign investments for growth.

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