The State of Higher Ed Funding [feedly]

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The State of Higher Ed Funding
// Center on Budget: Comprehensive News Feed

With a new academic year approaching, we've updated our major report on state funding trends for public colleges and universities, which shows that 46 states are spending less per student than they did before the recession.  While most states have boosted per-student funding in the last year, 12 states cut it. Overall, funding for public two- and four-year colleges is almost $10 billion below its pre-recession level, after adjusting for inflation.

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Expansionary Fiscal Consolidation Myth [feedly]

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Expansionary Fiscal Consolidation Myth
// TripleCrisis

Anis Chowdhury and Jomo Kwame Sundaram

The debt crisis in Europe continues to drag on. Drastic measures to cut government debts and deficits, including by replacing democratically elected governments with 'technocrats', have only made things worse. The more recent drastic expenditure cuts in Europe to quickly reduce public finance deficits have not only adversely impacted the lives of millions as unemployment soared. The actions also seem to have killed the goose that lay the golden egg of economic growth, resulting in a 'low growth' debt trap.

Government debt in the Euro zone reached nearly 92 per cent of GDP at the end of 2014, the highest level since the single currency was introduced in 1999. It dropped marginally to 90.7 per cent at the end of 2015, but is still about 50 per cent higher than the maximum allowed level of 60 per cent set by the Stability and Growth Pact rules designed to make sure EU members "pursue sound public finances and coordinate their fiscal policies". The debt-GDP ratio was 66 per cent in 2007 before the crisis.

High debt is, of course, of concern. But as the experiences of the Euro zone countries clearly demonstrate, countries cannot come out of debt through drastic cuts in spending, especially when the global economic growth remains tepid, and there is no scope for the rapid rise of export demand. Instead, drastic public expenditure cuts are jeopardizing growth, creating a vicious circle of low growth-high debt, as noted by the IMF in its October 2015 World Economic Outlook.

Deficits, debt and fiscal consolidation

Using historical data, a number of cross-country studies claimed that fiscal consolidation promotes growth and generates employment. Three have been the most influential among policy makers dealing with the economic crisis unleashed by the 2008-2009 global financial meltdown.

First, using data from advanced and emerging economies for 1970-2007, the IMF's May 2010 Fiscal Monitor claimed a negative relationship between initial government debt and subsequent per capita GDP growth as a stylized fact. On average, a 10 percentage point increase in the initial debt-GDP ratio was associated with a drop in annual real per capita GDP growth of around 0.2 percentage points per year. By implication, a reduction in debt-GDP ratio should enhance growth. Released just before the G20 Toronto Summit, it provided the ammunition for fiscal hawks urging immediate fiscal consolidation. The IMF has since admitted that its fiscal consolidation advice in 2010 was based on an ad-hoc exercise.

Using a different methodology, the IMF's 2010 World Economic Outlook reported that reducing fiscal deficits by one per cent of GDP "typically reduces GDP by about 0.5% within two years and raises the unemployment rate by about 0.3 percentage point". Domestic demand—consumption and investment—falls by about 1%". Similarly, a 2015 IMF research paper concluded that "Empirical evidence suggests that the level at which the debt-to-GDP ratio starts to harm long-run growth is likely to vary with the level of economic development and to depend on other factors, such as the investor base".

The second study, of 107 episodes of fiscal consolidation in all OECD countries during 1970-2007 by Alberto Alesina and Silvia Ardagna, found 26 cases (out of 107) of fiscal consolidation associated with resumed growth, probably influenced policy makers most. This happened despite the actual finding that "… sometimes, not always, some fiscal adjustments based upon spending cuts are not associated with economic downturns."

Yet, in Harvard Professor Alesina's public statement, "several" became "many" and "sometimes" became "frequently", and mere "association" implied "causation". In April 2010, Alesina told European Union economic and finance ministers that "large, credible and decisive" spending cuts to rescue budget deficits have frequently been followed by economic growth. Alesina was even cited in the official communiqué of an EU finance ministers' meeting.

Jonathan Portes of the UK Treasury has acknowledged that Alesina was particularly influential when the UK Treasury argued in its 2010 'Emergency Budget' that the wider effects of fiscal consolidation "will tend to boost demand growth, could improve the underlying performance of the economy and could even be sufficiently strong to outweigh the negative effects". Christina Romer, then Chair of the US President's Council of Economic Advisors, also acknowledged that the paper became 'very influential', noting exasperatedly that "everyone has been citing it".

Researchers have found serious methodological and data errors in this work. Historical experience, including that of current Euro zone economies, suggests that the probability of successful fiscal consolidation is low. These successes depended on factors such as global business cycles, monetary policy, exchange rate policy and structural reforms.

Drawing on the IMF's critique of Alesina and his associates, even the influential The Economist (30 September, 2010) dismissed the view that fiscal consolidation today would be "painless" as "wishful thinking". Nevertheless, the IMF's policy advice remained primarily in favour of fiscal consolidation regardless of a country's economic circumstances or development level. There seems to be a clear disconnect between the IMF's research and its operations.

The third study, by Harvard Professors Carmen Reinhart and Kenneth Rogoff on the history of financial crises and their aftermaths, claimed that rising government debt levels are associated with much weaker economic growth, indeed negative rates. According to them, once the debt-to-GDP exceeds the threshold ratio of 90 per cent, average growth dropped from around 3 per cent to -0.1 per cent in the post-World War II sample period. Since then, however, significant data omissions, questionable weighting methods and elementary coding errors in their original work have been uncovered. Nevertheless, the Reinhart-Rogoff findings were seized upon by the media and politicians around the world to justify austerity policies and drastic public spending cuts.

Bill Clinton, fiscal hawk?

Supporters of austerity based fiscal consolidation often cite President Bill Clinton's second term in the late 1990s. However, the data shows that fiscal consolidation was achieved through growth, contrary to the claim that austerity produced growth. Clinton broke with the traditional policy of using the exchange rate to address current account or trade imbalances, opting for a strong dollar. Thus, the US dollar rose against major currencies from less than 80 in January 1995 to over 100 by January 2000.

The strong US dollar lowered imported inflation, allowing the Fed to maintain low interest rates even though unemployment fell markedly. The low interest rate policy not only boosted growth, but also helped keep bond yields close to nominal GDP growth rates. Thus, the interest burden was kept under control, with primary balances stable at close to zero.

Originally published by Inter Press Service.

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Retail Sales Show No Growth for July 2016 [feedly]

Retail Sales Show No Growth for July 2016
http://www.economicpopulist.org/content/retail-sales-show-no-growth-july-2016-6000

July 2016 retail sales were a real Wall Street let down as there was no change from June.  Gasoline sales plunged by -2.7%, yet most retailers had declining sales.  Auto sales and Amazon prime day were not enough to salvage overall retail sales.  Without autos & parts sales, retail sales would have dropped by -0.3% for the month.  Retail sales without gasoline station sales considered would have been a 0.2% monthly increase.  Retail sales overall have increased 2.3% from a year ago.

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Eichengreen: Airing the IMF’s Dirty Laundry [feedly]

Airing the IMF's Dirty Laundry
https://www.project-syndicate.org/commentary/imf-self-assessment-eu-crisis-by-barry-eichengreen-2016-08

Airing the IMF's Dirty Laundry

Barry Eichengreen

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BERKELEY – Following the International Monetary Fund's controversial actions in the Asian financial crisis of 1998, when it conditioned liquidity assistance to distressed countries on government belt-tightening, the IMF established an Independent Evaluation Office (IEO) to undertake arm's-length assessments of its policies and programs. That office has now issued a comprehensive critique of the Fund's role in Europe's post-2008 crisis.

Many of the IEO's conclusions will be familiar. IMF surveillance, intended to detect economic vulnerabilities and imbalances, was inadequate. While staff sometimes pointed to booming credit, gaping current-account deficits, or stagnant productivity, they downplayed the implications.

The Putin Question

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This reflected a tendency, conscious or not, to think that Europe was different. Its advanced economies did not display the same vulnerabilities as emerging markets. Strong institutions like the European Commission and the European Central Bank had superior management skills. Monetary union, for some less-than-fully articulated reason, changed the rules of the game.

Such self-serving claims were in the interest of European officials, but why was the IMF prepared to accept them? One answer is that European governments are large shareholders in the Fund. Another is that the IMF is a predominantly European institution, with a European managing director, a heavily European staff, and a European culture.

The report, still on familiar ground, then goes on to criticize the Fund for acquiescing to European resistance to debt restructuring by Greece in 2010. It criticizes the IMF for setting ambitious targets for fiscal consolidation– necessary if debt restructuring was to be avoided – but underestimating austerity's damaging economic effects.

More interestingly, the report then asks how the Fund should coordinate its operations with regional bodies like the European Commission and the ECB, the other members of the so-called Troika of Greece's official creditors. The report rejects claims that the IMF was effectively a junior member of the Troika, insisting that all decisions were made by consensus.

But that is difficult to square with everything we know about the fateful decision not to restructure Greece's debt. IMF staff favored restructuring, but the European Commission and the ECB, which put up two-thirds of the money, ultimately had their way. He who has the largest wallet speaks with the loudest voice. In other words, there are different roads to "consensus."

The Fund encountered the same problem in 2008, when it insisted on currency devaluation as part of an IMF-EU program for Latvia. In the end, the Fund felt compelled to defer to the EU's opposition to devaluation, because it contributed only 20% of the funds.

The implication is that the IMF should not participate in a program to which it contributes only a minority share of the finance. But expecting the IMF to provide majority funding implies the need to expand its financial resources. This is something that the IEO report evidently regarded as beyond its mandate – or too sensitive – to discuss.

And was the ECB even on the right side of the table in these European debt discussions? When negotiating with a country, the IMF ordinarily demands conditions of its government and central bank. In its programs with Greece, Ireland, and Portugal, however, the IMF and the central bank demanded conditions of the government. This struck more than a few people as bizarre.

It would have been better if, in 2010, the IMF had demanded of the ECB a pledge "to do whatever it takes" and a program of "outright monetary transactions," like those ECB President Mario Draghi eventually offered two years later. This would have addressed the contagion problem that was one basis for European officials' resistance to a Greek debt restructuring.

One objection to imposing conditions on the ECB is that the eurozone, as a regional entity, is not an IMF member. Only countries, not regions, are entitled to draw IMF resources. But nothing prevents the IMF from demanding policy commitments from regional bodies when lending to their member governments. This has been done before when African and Caribbean monetary unions and central banks were involved.

Finally, the report criticizes IMF management for failing to ensure adequate involvement by the Executive Board, its oversight committee of 24 national representatives. Board approval was sought, but only after the key decisions were already made. Moreover, the Board was forced to act under intense time pressure and lacked the information needed to challenge management recommendations.

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The IEO's report suggests involving the Board more meaningfully, in order to provide a counterweight to political pressure from regional stakeholders. But this merely threatens to substitute one form of political influence for another.

It would be better to allow an independent management team to make decisions free of political interference, in the manner of a central bank policy committee. But this presupposes freeing the IMF from dependence on financial contributions from its regional stakeholders. And it requires IMF management to demonstrate that it can consistently make decisions based on program countries' economic interest, not on the political preferences of powerful national shareholders.

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A Tale of Two Speeches [feedly]

A Tale of Two Speeches
http://www.epi.org/blog/a-tale-of-two-speeches/

This post originally appeared in Democracy.

This election will be different, not only because of the stark departure of Donald Trump's candidacy from any usual political convention, but also because the current economic debate is unlike any in recent memory. This was further elucidated by the plans each candidate laid out in Michigan this week. It is noteworthy, first of all, that both candidates have joined in calling for greater infrastructure spending, have abandoned the traditional approach toward trade and opposed the Trans-Pacific Partnership (TPP), have proposed subsidizing child care expenses, have highlighted wage stagnation, and have each claimed to be able to provide faster economic growth than the other.

It would be pointless, however, to delve into precise policy details without first commenting on the disturbing nature of the Trump candidacy. Among the least of his campaign's problems is that it fails to elaborate on any of its positions or provide any kind of science or data, that would allow a proper assessment of its proposals. Trump has offered many broad ideas about taxes, but the details are strikingly few. Similarly, Trump's budget plans just don't add up: He wants more military spending, more infrastructure spending, and no cuts to Medicare or Social Security, along with huge tax cuts—all while claiming he would still move toward a balanced budget. Of course, most problematic is Trump's bigotry and misogyny, and the egregious character flaws he displays almost daily: authoritarianism, dishonesty, volatility, and a lack of compassion.

But setting all that aside for the moment…

The inherent contradictions in Trump's rhetoric highlight the fact that the major, traditional divide between the parties is still present in this election. While the GOP candidate claims to offer more growth, he is, in reality, seemingly unconcerned about distributional questions (despite his claims to the contrary). Trump's growth agenda comes straight from the classic Republican or Chamber of Commerce playbook: tax cuts for corporations and the wealthy, along with deregulation of the economy, and a laissez-faire energy plan. Some populist. We know this will not actually generate better growth because it has failed to do so for the last four decades—otherwise, we would remember George W. Bush for the economic boom he created with his deep income, capital gains, and dividend tax cuts. We also know that growth, in and of itself, has not been associated with rising wages for most workers; these traditional GOP policies will, evidently, provide neither economic growth nor wage gains for the vast majority of workers.

Clinton, meanwhile, made it clear that she is actually both pro-growth and in favor of greater economic fairness. Clinton's plan is based, firstly, on job creation—through investments in infrastructure, help for small businesses, and "new market tax credits" to create jobs in high unemployment communities. In the past, she has also made it clear that she supports maintaining low interest rates and changing the composition of key Federal Reserve Board positions to ensure greater diversity, and make sure less bank industry insiders are represented—which would hopefully mean a stronger commitment to job growth. She has also promised to subsidize her proposed investments by making business and the wealthy pay their fair share of taxes. (Trump actually calls for even larger expenditures, claiming he will borrow to do so, which is actually a better approach than Clinton's. But it is difficult to take this stance seriously given that it is not embedded within any coherent budget plan.)

Clinton also promises a range of worker-friendly policies. She's called for stronger collective bargaining, higher minimum wages, equal pay for women, stronger overtime protections, and so on. And I've personally appreciated her emphasis on the essential role of strong unions for all workers. This is at the heart of Clinton's "fairness" agenda, and is critical for ensuring that growth actually yields results for the majority. Trump, on the other hand, is mostly silent on labor policy—though he's positioned himself on the opposite end of the spectrum with his endorsement of right-to-work laws, while he has taken every position imaginable on the minimum wage. His stance opposing any new form of regulation also contradicts all notions that he will foster fairness in his economic agenda.

Clinton took the opportunity on Thursday to challenge Trump, particularly on trade, pointing out that his bluster will not provide better policy results. Clinton highlighted a more vigorous trade enforcement plan, reiterated her opposition to the TPP ("I oppose it now, I'll oppose it after the election, and I'll oppose it as President"), and emphasized the need to address currency manipulation. It is refreshing that both candidates have departed so vigorously from the policies of corporate America and of Presidents Reagan, Bush, Clinton, W. Bush, and even Obama.

For example, on Monday, when Trump announced his support for a large income tax deduction for child care expenses, he was, at the very least, furthering the major debate regarding how to help working people balance both work and family. This will be the first time the major parties' candidates have focused on this issue. It should be noted that Trump's policy would not actually help the bottom forty-five percent who pay no income taxes and cannot benefit from more deductions—his plan is really geared toward the needs of high-income families. Clinton's plan, on the other hand, would limit child care costs to 10 percent of income and provide support to all families.

Restraining the incomes of the top 1 percent is essential for facilitating wage and income growth for all. Clinton's tax policies, along with her plans to further restrict Wall Street, would be an important step toward doing so. Trump would simply shovel more money to those at the top and further deregulate Wall Street. Despite his populist rhetoric, his policy proposals stand little chance of translating into any tangible gains for those Americans in need of a truly fairer economy.

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Dani Rodrik: The False Economic Promise of Global Governance

I have to confess that Rodrik's argument below is a compelling rebuke to my own leanings toward "global governance" as the "only remedy" for the perils of globalization. My take: the requirement to perfect democracy at home -- the more perfect union -- cannot be bypassed. The interaction of interests will tend over the long run to enforce this code: Good will beget good, on yourself, and others. Bad will beget bad, on  yourself, and others.

The False Economic Promise of Global Governance

CAMBRIDGE – Global governance is the mantra of our era's elite. The surge in cross-border flows of goods, services, capital, and information produced by technological innovation and market liberalization has made the world's countries too interconnected, their argument goes, for any country to be able to solve its economic problems on its own. We need global rules, global agreements, global institutions.

This claim is so widely accepted today that challenging it may seem like arguing that the sun revolves around the earth. Yet what may be true for truly global problems such as climate change or health pandemics is not true when it comes to most economic issues. Contrary to what we often hear, the world economy is not a global commons. Global governance can do only limited good – and it occasionally does some damage. 

What makes, say, climate change a problem that requires global cooperation is that the planet has a single climate system. It makes no difference where greenhouse gases are emitted. So national restrictions on carbon emissions provide no or little benefit at home.

By contrast, good economic policies – including openness – benefit the domestic economy first and foremost, and the price of bad economic policies is primarily paid domestically as well. Individual countries' economic fortunes are determined largely by what happens at home rather than abroad. If economic openness is desirable, it is because such policies are in a country's own self-interest – not because it helps others. Openness and other good policies that contribute to economic stability worldwide rely on self-interest, not on global spirit.

Sometimes domestic economic advantage comes at the expense of other countries. This is the case of so-called beggar-thy-neighbor policies. The purest illustration occurs when a dominant supplier of a natural resource, such as oil, restricts supply on world markets to drive up world prices. The exporter's gain is the rest of the world's loss.

A similar mechanism underpins "optimum tariffs," whereby a large country manipulates its terms of trade by placing restrictions on its imports. In such instances, there is a clear argument for global rules that limit or prohibit the use of such policies.

But the vast majority of the issues in world trade and finance that preoccupy policymakers are not of this kind. Consider, for example, Europe's agricultural subsidies and ban on genetically modified organisms, the abuse of antidumping rules in the United States, or inadequate protection of investors' rights in developing countries. These are essentially "beggar thyself" policies. Their economic costs are borne primarily at home, even though they may produce adverse effects for others as well.

For example, economists generally agree that agricultural subsidies are inefficient and that the benefits to European farmers come at large costs to everyone else in Europe, in the form of high prices, high taxes, or both. Such policies are deployed not to extract advantages from other countries, but because other competing domestic objectives – distributional, administrative, or related to public health – dominate economy-wide motives.

The same is true of poor banking regulations or macroeconomic policies that aggravate the business cycle and generate financial instability. As the 2008 global financial crisis showed, the implications beyond a country's own borders can be momentous. But if US regulators fell asleep on the job, it was not because their economy benefited while everyone else paid the price. The US economy was among those that suffered most.

Perhaps the biggest policy letdown of our day is the failure of governments in advanced democracies to address rising inequality. This, too, has its roots in domestic politics – financial and business elites' grip on the policymaking process and the narratives they have spun about the limits of redistributive policies.

To be sure, global tax havens are an example of beggar-thy-neighbor policies. But powerful countries such as the US and European Union members could have done much on their own to limit tax evasion – and the race to the bottom in corporate taxation – if they so desired.

So the problems of our day have little to do with a lack of global cooperation. They are domestic in nature and cannot be fixed by rule making through international institutions, which are easily overwhelmed by the same vested interests that undermine domestic policy. Too often, global governance is another name for the pursuit of these interests' global agenda, which is why it ends up mainly furthering globalization and harmonizing domestic economic policies.

An alternative agenda for global governance would focus on improving how democracies function at home, without prejudging what the policy outputs ought to be. This would be a democracy-enhancing rather than globalization-enhancing model of global governance.

What I have in mind is the creation of global norms and procedural requirements designed to enhance the quality of domestic policymaking. Global disciplines pertaining to transparency, broad representation, accountability, and use of scientific or economic evidence in domestic proceedings – without constraining the end result – are examples of such requirements.

Global institutions already use disciplines of this type to some extent. For example, the World Trade Organization's Agreement on Application of Sanitary and Phytosanitary Measures (the SPS Agreement) explicitly requires the use of scientific evidence when health concerns are at issue for imported goods. Procedural rules of this kind can be used much more extensively and to greater effect to improve domestic decision-making.


Problems rooted in failures of domestic deliberation can be solved only through improved democratic decision-making. Global governance can make only a very limited contribution here – and only if it focuses on enhancing domestic decision-making rather than constraining it. Otherwise, the goal of global governance embodies a yearning for technocratic solutions that override and undercut public deliberation.Anti-dumping rules can also be improved by requiring that consumer and producer interests that would be adversely affected by import duties take part in domestic proceedings. Subsidy rules can be improved by requiring economic cost-benefit analyses that incorporate potential consequences for both static and dynamic efficiency.

John Case
Harpers Ferry, WV

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