Commentary

Nervous financial markets and waves of fiscal austerity spreading across Europe raise an important question: when does a country’s budget deficit become a problem? The easy answer, of course, is that a deficit is too large when it can no longer be financed. But by that time it’s too late, so it’s important to ask if there is a good way to tell before things get that bad. Carmen Reinhart and Kenneth Rogoff, in a recent paper called Growth in a Time of Debt, found that when government debt reaches 90 percent of GDP, economic growth is seriously retarded. But rules of thumb are by their nature imperfect, and it’s difficult to apply the 90 percent formula across the board. The U.S., for example, is not Greece—it’s closer to being the anti-Greece, in fact. Greece is a tiny, uncompetitive country that does not control its own currency. The business climate there is terrible. America is a vast, competitive, adaptable nation that not only controls its own monetary policy, but is blessed with the world’s reserve currency. The climate for business is favorable, abetted by large reserves of cultural and intellectual capital. So we shouldn’t conclude that just because the Europeans are suddenly cutting public spending, we ought to as well. Since deflation looks more threatening than inflation, it seems sensible,…more

The Germans too are embarking on a fiscal austerity program, and consumers aren’t spending there either.

David Cameron, the new PM, warns that the nation’s fiscal hole is even deeper than it seemed, and that savage spending cuts will be required. An important union leader calls Cameron’s speech “a chilling attack on the public sector, public sector workers, the poor, the sick and the vulnerable.” The full (and sobering) story is here.

The Bureau of Labor Statistics released its May employment situation report today and the news was mostly grim. Sure, unemployment dropped to 9.7 percent from 9.9 percent. But don’t get too excited, because almost all the new jobs created in May were for census-takers, and these folks will be unemployed again soon. In more bad news masquerading as good, the so-called mancession appears to be easing. Most developed countries are beset by one of these male recessions, with men suffering the brunt of job losses due to their much greater representation in construction and manufacturing—both of which are hard-hit almost everywhere. In this country, at least, the mancession looks like it’s easing—until you look a little closer and realize that this is only the case because men leaving the labor force increased by 4.7 percent over last year, an increase twice that of women. In other words, men aren’t gaining jobs. They’re giving up. What shall we do with the horrendous number of idle men? Their skills may not be valued in industries that have done better than traditional men-industries. Training for new kinds of work is one possibility, but demand for new workers may not be there yet; relocation to other states may be out of the question if your mortgage is underwater; and the Euro crisis is a…more

The world has its usual cornucopia of troubles, but if you were worried about federal deficits, you can at least set those aside and focus on unemployment, oil spills and other here-and-now concerns. That’s the message of Levy Senior Scholar James K. Galbraith in this lively interview with Ezra Klein. Galbraith offers this historical perspective: Since the 1790s, how often has the federal government not run a deficit? Six short periods, all leading to recession. Why? Because the government needs to run a deficit, it’s the only way to inject financial resources into the economy. If you’re not running a deficit, it’s draining the pockets of the private sector.

As the European financial crisis continues to percolate, by now a few irreducible facts are distressingly clear: First, Greece has no hope of repaying its debts as they are now constituted. Thus, the much-contested 110 billion euro bailout plan and the wider subsequent trillion-dollar bailout proferred by the Eurozone countries and the IMF are doomed to fail for the simple reason that they offer only more lending to countries already drowning in debt. Greece has a primary deficit (meaning one that would persist for a number of years unless the country experiences spectacular economic growth) exceeding 6% of GDP and a budget deficit due to financing of the accumulated debt of at least another 4%, in addition to which it faces a GDP contraction for at least three years. Simple math shows that to have a stable debt/GDP ratio Greece must generate a budget surplus of at least 10%, which is basically impossible. A rising debt/GDP ratio together with contracting economy will make financing from private investors very doubtful. Second, although Greece can default on most of its public debt with a unilateral act of parliament—and the political and economic realities to do this may yet prove irresistible—it would be much better for Greece, the IMF and the rest of the Eurozone if it avoided this. For Greece to give…more

The Financial Times reports that the European Central Bank (ECB) has warned of a “financial contagion” risk from concerns about the debt of some European governments. Many readers of this blog will recall that a similar concern was important in the late 1990s, when debt and currency problems seemed to spread among Asian and Latin American countries. Financial contagion can occur in many ways. A modern financial system is highly interdependent, with financial corporations holding the liabilities of other financial corporations, often in foreign countries. Also, perceptions that a particular debtor might default on some of its debt can quickly lead to worries about similar debtors and financial instruments. For example, after the Penn Central Railroad went bankrupt in 1970, there was panic selling of commercial paper, leading to a near-collapse of the commercial paper market. There are grounds for fears that the crisis that began in Greece could grow much further through some such contagion effect.  Indeed, another article in today’s FT describes how spreads between interest rates on the debt of financial and nonfinancial corporations and rates for government debt have generally widened in the past month in the United States and Europe. Draconian measures aimed at closing budget gaps could exacerbate the contagion effect, since they increase fears of sharply reduced growth around the world.

The Economist has published this obituary of the late economist, whose career included a lengthy stint as head of the Levy Institute’s Macro-Modeling Team. In the small world dept.: After a spell in business and a few years at the Treasury, he was enticed to King’s College, Cambridge, which 61 years earlier another economist-aesthete, John Maynard Keynes, had joined as a lecturer, writing (with his mother’s help) a letter of resignation from the civil service to his boss, a Sir Arthur Godley. This man was to become the first Lord Kilbracken and eventually grandfather of Wynne.

In a paper called “Gender Segregation by the Clock,” Casey B. Mulligan of the University of Chicago has come out with some interesting new research on gender inequality in the labor market. It is a fascinating study showing that women are more likely to choose a regular 9 to 5 job. Prof. Mulligan says this may contribute to women’s lower earnings. But did women really choose the work schedule that offers less pay? I am not sure. In our daily routine we have tons of household duties called unpaid work: cooking, cleaning, helping with homework, catching up with children, and perhaps most challenging of all, getting the little ones to bed. Kids often seem to have their strict schedule that parents have to follow (when they have to go, they have to go!). And moms happen to do most of the work at home. Who pays mom for this work? Nobody. Similarly, who compensates the women who forgo higher earnings from longer hours, irregular hours and overtime?  I wonder why one should be punished for investing her time in raising productive workers for all of us. PS–It would be interesting to compare the earnings of women who chose 9 to 5 jobs with the earnings of men who made the same choice.

A new report from the International Monetary Fund has turned attention, at least temporarily, from Greece to the larger potential problem of Spain, where unemployment is roughly 20 percent. A nice (if unsettling) summary: Spain’s economy needs far-reaching and comprehensive reforms. The challenges are severe: a dysfunctional labor market, the deflating property bubble, a large fiscal deficit, heavy private sector and external indebtedness, anemic productivity growth, weak competitiveness, and a banking sector with pockets of weakness. Ambitious fiscal consolidation is underway, recently reinforced and front-loaded. This needs to be complemented with growth-enhancing structural reforms, building on the progress made on product markets and the housing sector, especially overhauling the labor market. A bold pension reform, along the lines proposed by the government, should be quickly adopted. Consolidation and reform of the banking system needs to be accelerated. Such a comprehensive strategy would be helped by broad political and social support, and time is of the essence. The report, along with the government takeover of a faltering savings bank, seemed to get investors worried, even though neither was all that much of a surprise. Nonetheless, the cost of insuring Spanish debt rose, albeit to levels still far below that of Greece. On the other hand, Spain was able to sell three- to six-month T-bills today, attracting bids worth more than twice…more

From today’s NY Times: The cost of public pensions has been systemically underestimated nationwide for more than two decades, say some analysts. By these estimates, state and local officials have promised $5 trillion worth of benefits while thinking they were committing taxpayers to roughly half that amount. As Dimitri Papadimitriou said on this blog recently, we are facing a multidimensional pension crisis in this country. A coherent national retirement system–truly comprehensive Social Security obviating private pensions–might have avoided these runaway state and local pension obligations, which may yet end up on the federal balance sheet.

The International Policy Centre for Inclusive Growth has issued a report on an unintended consequence of women-empowering microfinance: an increase in child labor. The report underscores the importance of unpaid work–work performed mostly by women. A development program, small or big, should consider the constraint that unpaid care duties impose on women, and provide assistance through a social care system. As a saying goes, “It takes a village to raise a child.”