Guess who doesn't care that its election day?

The Supreme Court.

I might be making too much of this, but they always seem to argue cases on election day. I take it as a sign that they present themselves as immune to politics. The cases they are hearing touch on issue we will raise in the sections on economic and social welfare policymaking (specifically the Fair Housing Act) - as well as items we covered in civil rights and the equal protection clause.

From ScotusBlog:

- Bank of America Corp. v. City of Miami
- Wells Fargo & Co. v. City of Miami

And a description of the case, also from ScotusBlog:

This one from the Washington Post might be more accessible.

- To recoup losses from the housing collapse, Miami pursues a novel suit.

The housing collapse of 2008 nearly broke the city of Miami. Now, its leaders have embarked on a novel and aggressive legal strategy to recoup losses from the big banks they say created the crisis with discriminatory and predatory lending practices.

It is a high-stakes effort that is being encouraged by many cities, and the banks Tuesday will ask the Supreme Court to stop it before it takes root.

Miami sued Bank of America, Wells Fargo and Citigroup under the 1968 Fair Housing Act, which bars discrimination in the sale, rental and financing of housing. The law states its purpose as providing for fair housing “throughout the United States.”

The city says that it can prove the lending institutions discriminated against Hispanic and African American residents by directing them into high-interest, risky loans. The resulting defaults destabilized Miami’s poorest neighborhoods, and the resulting loss of tax revenue sent the city to the brink of bankruptcy, they say.

In Miami’s Liberty City neighborhood, another vacant property is torn down. (Angel Valentin/For The Washington Post)

“It took us three years to really start recovering,” said Miami Commissioner Francis Suarez. “We decided unanimously as a commission that we wanted to hold the banks responsible for their lending practices, which we learned were discriminatory in nature.”

Banks have been sued by individuals and taken to task by the federal government for lending practices, but these new cases are the first in which cities are the plaintiffs and are demanding that banks be held accountable for harming their communities.
The banks counter that there is a reason such Fair Housing Act suits are novel: Congress never intended for the law to be used for such purposes.

“Municipal suits like this one were unheard of until recently, when enterprising contingency-fee counsel began pushing them,” Bank of America told the court in its brief.
The banks warn of a “trickle-down” approach that would let anyone affected by a neighborhood in decline — from the next-door neighbor to the corner dry cleaner — to sue under the act.

From the Atlantic: How Wall Street’s Bankers Stayed Out of Jail The probes into bank fraud leading up to the financial industry’s crash have been quietly closed. Is this justice?

More on white collar crime - and the ability of white collar criminals to avoid jail - along with trials and convictions.

- Click here for the article.

Since 2009, 49 financial institutions have paid various government entities and private plaintiffs nearly $190 billion in fines and settlements, according to an analysis by the investment bank Keefe, Bruyette & Woods. That may seem like a big number, but the money has come from shareholders, not individual bankers. (Settlements were levied on corporations, not specific employees, and paid out as corporate expenses—in some cases, tax-deductible ones.) In early 2014, just weeks after Jamie Dimon, the CEO of JPMorgan Chase, settled out of court with the Justice Department, the bank’s board of directors gave him a 74 percent raise, bringing his salary to $20 million.

[After the savings-and-loan crisis of the 1980s, more than 1,000 bankers were jailed.]

The more meaningful number is how many Wall Street executives have gone to jail for playing a part in the crisis. That number is one. (Kareem Serageldin, a senior trader at Credit Suisse, is serving a 30-month sentence for inflating the value of mortgage bonds in his trading portfolio, allowing them to appear more valuable than they really were.) By way of contrast, following the savings-and-loan crisis of the 1980s, more than 1,000 bankers of all stripes were jailed for their transgressions.

At an event at the National Press Club last February, Holder said the virtual absence of convictions (or even prosecutions) this time around did not result from a want of trying. “These are the kinds of cases that people come to the Justice Department to make,” he said. “The inability to make them, at least to this point, has not been as a result of a lack of effort.” Preet Bharara, the U.S. attorney for the Southern District of New York, made a similar argument to me. The evidence, he said, does not show clear misconduct by individuals. It’s possible that Bharara is correct about that: Wall Street bankers make it their daily business to figure out ways to abide by the letter of the law while violating its spirit. And to be sure, much of the behavior that led to the crisis involved recklessness and poor judgment, not fraud. But even so, in light of various whistle-blower allegations—and the size of the settlements agreed to by the banks themselves—this explanation strains credulity. The Justice Department’s ethos regarding Wall Street, and the way the department went about its business, appear to be a large part of the story.

States experiment on cutting jobless benefits

We introduced the phrase "laboratories of democracy" in 2306 and mentioned that it is considered to be one of the benefits of granting the states leeway in implementing different policies. State experimentation with policy proposals allows for a pragmatic evaluation of those proposals. Instead of resting opinions on ideological assumptions, they can be based on facts.

As Congress considers cutting unemployment insurance - which has been expanded considerably following the financial crash of 2008 - and legislators debate the consequences of doing so, North Carolina went ahead and did it this past July.

Wonkblog analyses the consequences, but points out that the data does not tell a clear story:

So what happened in North Carolina? As it turns out, the data is still fairly ambiguous and there are two conflicting interpretations here:

1) Many workers may have dropped out of the labor force. Everyone agrees that North Carolina's unemployment rate kept dropping, much as it did in the rest of the country, after benefits got cut.

But that might have been a bad omen: According to data from the Bureau of Labor Statistics, the number of people in the labor force has plummeted in North Carolina since last summer (even as it rebounded slightly in the rest of the nations).

. . . some people who saw their jobless benefits lapse may well have found jobs — perhaps they decided to take a lower-paying gig than they otherwise would have, out of desperation. But a greater number of workers appeared to have simply given up looking altogether, possibly because jobs are still extremely difficult to come by, and they no longer have to keep searching to qualify for benefits.

2) ...or perhaps employment actually increased. Yet other data sets seem to tell a different tale. A more optimistic view of what happened in North Carolina comes from a new paper (pdf) led by Marcus Hagedorn of the University of Oslo. He and his three co-authors sifted through the Census Bureau's "household survey" and the "establishment survey" for the same period. And the results were striking.

What they found is that overall employment has actually gone up in North Carolina since benefits got cut in June of 2013. The household survey in particular showed a big increase in both employment and labor force participation. But both surveys suggested that North Carolina's labor force is growing, not shrinking.

Hagedorn's paper suggests that, by and large, workers in North Carolina do seem to be finding jobs ever since unemployment insurance got cut. And it's not clear that these are lesser jobs or lower-paying jobs: The data suggests that overall hours in North Carolina went up, and there was little change in wages and earnings.

Evaluating the outcomes of a policy change seems to be trickier than one would expect. Does this throw cold water on the "states as laboratories of democracy" thesis?  

From the Fiscal Times: Why the Income Gap is Widening

The gap has become more pronounced since the housing crash of 2008.

Here's a look at why - which might help determine whether raising the minimum wage might be an effective way to address this problem.

This growing inequality is being exacerbated by policy failures – more specifically, by decreasingly progressive tax, transfer, regulatory, and full-employment policies in recent decades.

Financial deregulation has contributed to the rising share of national income going to investment income and compensation of financial professionals — with the latter being a significant driver of rising income share of the top 1 percent, as analyzed in a recent paper by Larry Mishel and Josh Bivens of the Economic Policy Institute.

There is also compelling evidence that reductions in top marginal tax have exacerbated the growth in market-based income inequality. Essentially, a lower top tax rate makes efforts by executives to demand greater compensation more rewarding. Successful such efforts will come out of workers’ paychecks, not shareholders’ portfolios.

Political inaction, or “political drift,” on the minimum wage — allowing the real minimum wage to be eroded by inflation — or unionization policy is certainly part of the story. Globalization and international trade have exerted downward domestic wage pressure while increasing returns to wealth, with pressures on inequality growth stemming both from irreversible market forces and certain trade policy choices.

Inequality would have risen sharply absent these influences of budget policy. But while market-based income inequality, as measured by the “Gini” index, rose 23 percent between 1979 and 2007, post-tax, post-transfer inequality rose 33 percent.

This means that roughly a third of the rise in post-tax, post-transfer inequality is attributable to erosions in the redistributive nature of tax and budget policy.

There are limits to how much redistributive policies can temper inequality (though we are far from those limits), but tax and budget policy should have been serving as a tempering influence rather than exacerbating market-based inequality growth.

Beyond these better-understood forces and policy levers, the disparate nature of the recovery from the Great Recession is both fueling inequality and is squarely in the hands of U.S. policymakers.

Has austerity hampered economic growth?

Here is an argument that it has.

In recent recessions, government spending has increased. Not in the current recession. Here's one factoid. Government jobs have been cut, which keeps the unemployment rate high. In previous recessions they increased.



A CBO report argues that austerity has cut GDP growth by .8 percent.

From the Atlantic: The States That Have Already Recovered From the Great Recession—and the States That Won't Until 201

Texas, New York, and a few others already recovered. Nevada and Michigan wont until 2018.

The oil and finance industries have done well, and the housing boom didn't hit these states as hard as others.

The author draws an interesting comparison between the governing system of the United States and that of the European Union in explaining how a federal system works better than a confederacy in speeding recovery along:

Okay, this is obviously horrible for Nevada, Michigan, and Rhode Island — but so what? It's good when people move from where the jobs aren't to where they are. It's part of what makes a currency union work. See, we don't usually think of it this way, but we live in something called the dollar zone. We have 50 states that share the same language and fiscal policy — and monetary policy too. But, as the euro zone amply shows, the monetary policy that makes sense for one member of a currency union might not make sense for others. So what do you do if one country (or state) is stuck in a depression, and the other is booming? Well, in Europe, nothing. Or, more accurately, blame the country stuck in a depression for being stuck in a depression — and demand that it cut spending like you'd always wanted it to.  

But, in the U.S., states have a few escape hatches from a slump. Or, more accurately, the people do. People can more readily move from a depressed state to a booming one than people can move from, say, Portugal to Germany (although that has happened to an extent). And, remember, the federal government will keep sending out Social Security checks to retirees in Nevada regardless of how many young workers leave the state. That isn't true when young Portuguese workers leave; that just makes its pension picture uglier. It's actually the same problem that U.S. state and municipalities face over state and municipal pensions — losing too many people for too long can leave state and municipal governments staring into too deep budget holes. But, again, at least people don't have to worry about their federal benefits.

What is the Fed doing to pump up the economy and why?

More from Wonkblog:

The Fed is doing two things right now to stimulate the economy. One is holding their interest rates pretty much at 0%. The other is buying $85 billion in housing and treasury bonds each month in order to try and pump money into the economy.

At some point, the Fed intends to begin backing off these policies. But they only want to do it once the economy is strong enough, and even then, they want to do it slowly, so the economy has time to adjust.

To put it differently, rather than cut off their support, they want to "taper" it.

We will discuss both the Federal Reserve and monetary policy on 2305 in a few weeks. Monetary policy refers to - according to Wikipedia -

". . . the process by which the monetary authority of a country controls the supply of money, often targeting a rate of interest for the purpose of promoting economic growth and stability. The official goals usually include relatively stable prices and low unemployment.

Here's a secondary definition:

Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest to attain a set of objectives oriented towards the growth and stability of the economy.

The setting of interest rates is a standard part of the fed's toolkit, the purchasing of bonds is not. The purchasing of the bonds has a fancy name: quantitative easing. It means:

. . . an unconventional monetary policy used by central banks to stimulate the national economy when standard monetary policy has become ineffective. A central bank implements quantitative easing by buying specified amounts of financial assets from commercial banks and other private institutions, thus increasing the monetary base. This is distinguished from the more usual policy of buying or selling government bonds in order to keep market interest rates at a specified target value.

The big news this week is that the Fed decided not to cut back on the amount of bonds it is purchasing - that is what "the taper" refers to.

Why? Here's one answer: Because Congress is horrible.

Which fits a theme in 2305 so far - 2306 too, sort of. One of the major differences between the design of the legislative and executive branches in the US Constitution is that Congress' design lends itself to stalemate and dysfunction. This is due to its democratic nature, which is why Congress has done an awful job handling the economy.

The executive has more of an autocratic design, and many of its agencies - the Federal Reserve included - are designed to be able to act swiftly to address problems they have been designated to address. For that reason the Federal Reserve has been in a much better position to grow the economy than Congress. Its the nature of the beast.

What's fixed and what isn't five years after the crash?

Wonkblog reminds us that the fifth anniversary of the crash of Lehman Brothers is looming. The Treasury Department has issued a slew of graphs showing what has happened since.

- The Financial Crisis Five Years Later.

There's good news and bad of course.

Here's a couple years worth of the crisis in one graph:

Two theories about what's ailing the US economy

Both look at factors that retard the ability of people to spend, whcih is critical in a consumer based economy like ours.

1 - It's high student debt:

Nowadays, younger Americans are becoming less likely to take out loans to buy a house or a car. One possible reason? They’re too overloaded with student debt.

. . . student debt has grown dramatically over the last decade — some 43 percent of Americans under the age of 25 had student debt in 2012, with the average debt burden now $20,326. By contrast, back in 2003, just 25 percent of younger Americans had debt, and the average burden was $10,649.

What’s particularly notable is that these student loans appear to be crowding out other types of borrowing. For a long time, younger Americans with student debt were more likely to own homes than those without — largely because college grads are likelier to have higher earnings. But that trend has reversed . . .

2 - It's underwater mortgages:

It is widely recognized that the fall in housing prices had a “wealth effect” that led homeowners across the country to cut back on spending. In the updated paper, Mian, Sufi and Rao measured how much more underwater borrowers probably cut back on spending compared to borrowers without an overhang of mortgage debt. (More precisely, they measured how much homeowners cut back on auto spending for each dollar loss of housing wealth. But that’s important; the decline in auto sales was a significant part of the economic contraction.)

The authors found that being underwater makes a big difference. . . Zip codes with fewer than 15 percent of homeowners only cut back only a little – spending only half a cent less for every dollar their home fell in value. But in Zip codes where more than 50 percent of homeowners were underwater, borrowers cut back five times as much – spending 2.5 cents less on car purchases for each dollar of reduced housing wealth.

What's driving youth unemployment?

Adding to the posts below about the causes of high unemployment - and whether it might stick around for a while - here's detail on job prospects for young Americans with and without college diplomas:

Here's a tiny little graph from the Wall Street Journal showing the number of college grads with minimum wage jobs. What's more troubling is that they are crowding out less educated workers from those jobs. So a college dregree does not guarantee a good job, but it seems required in order to get a bad one - or at least a sub-par one.

The Prospect picks up that idea:

People between the ages of 18-24 without a high school degree face an unemployment rate of 27.4% and an underemployment rate of 41.7%. Those in the same age group with only high school degrees face an unemployment rate of 19.7% and an underemployment rate of 34.6%.

In the 25-34 age group, the numbers are somewhat better, but still bad. Those between the ages of 25-34 without a high school degree have an unemployment rate of 15.4% and an underemployment rate of 29.2%. Those with only high school degrees have an unemployment rate of 11.2% and an underemployment rate of 19.9%. In short, it's terrible to be young in this job market, and really terrible to be in it without a degree.

These job problems heavily fall upon Black and Hispanic youth as well. Black youths between the ages of 18-24 and 24-35 face unemployment rates of 25.4% and 14.8% respectively, while Hispanic youths between the ages of 18-24 and 24-35 face unemployment rates of 16.3% and 9.2% respectively. These statistics are made worse when you consider the number of incarcerated youth of color, which are not counted in the BLS data used for this report.

If you are feeling ambitious, here's a link to a study which attempts to get to the root of the jobs crisis among the young.

From IBT: Technology Rapidly Making Clerical Jobs Obsolete, Driving Inequality, US Reports

Here's another article helping us understand what's keeping the unemployment rate up. Automation means that employers don't need actual people to perform more and more tasks.

This is kinda scary:

The United States has gained 387,000 managers but lost almost 2 million clerical jobs since 2007, as new technologies replace office workers and further squeeze the American middle class, government figures show.

Data from the Bureau of Labor Statistics, reported Monday by the Financial Times, divide the U.S. workforce into 821 jobs from dishwasher to librarian. They show rapid structural shifts amid the Great Recession that are likely to further increase income inequality, which has already been growing for decades.

Another BLS report, released last week, showed that employment rose in the nation’s major counties from September 2011 to September 2012, but average hourly wages fell.

The figures help explain why the U.S. median household income has fallen 5.6 per cent since June 2009 to $51,404, even as the economy – as measured by traditional yardsticks -- recovers. The top 10 per cent of earners, meanwhile, are reaping most benefits of the recovery.

One likely driver of inequality is new computing technologies that destroy some middle-class occupations even as they create jobs for highly skilled workers who can exploit them, as the FT notes.

The number of such clerical workers as bookkeepers, bank tellers, data entry keypunchers, file clerks and typists has been falling, pointing to a broad, structural decline. The number of retail cashiers has also dropped as online shopping and self-checkout systems erode another entry-level, low-wage occupation.

The New Unemployables

I'll post a few items that try to help explain why the unemployment rate is so high, especially since corporate profits are up, and the stock market returned to record territory once again.

Older workers - those in their 50s and above - "were less likely to lose their jobs during the recession, but those who were laid off are facing far tougher conditions than their younger colleagues. Workers in their fifties are about 20% less likely than workers ages 25 to 34 to become re-employed."

Reports show they are actively seeking work, but find themselves less employable than younger, recent graduates.

Is age discrimination a factor?

Older workers also have the longest bouts of unemployment. The average duration of unemployment for workers ages 55 to 64 was 11 months as recently as January, according to the Labor Department. That's three months longer than the average for 25- to 36-year-olds.
Given these circumstances, many workers can't help but think age discrimination is a factor. AARP's Public Policy Institute surveyed unemployed baby boomers in 2010 and 2011. While 71% blamed their unemployment on the bad economy, almost half also said they believed age discrimination was also at play.
About 23,000 age discrimination complaints were filed with the Equal Employment Opportunity Commission in fiscal 2012, 20% more than in 2007.
Proving discrimination is next to impossible, though, unless it's blatant.
"It's very difficult to prove hiring discrimination, because unless somebody says, 'you're too old for this job,' you don't know why you weren't hired," said Michael Harper, a law professor at Boston University.

Here are two studies that try to get to the bottom of what;s driving this:

- The New Unemployables.
- Age Disparity in Unemployment and Reemployment During the Great Recession and Recovery.

David Stockman thinks the economy is doomed, but not everyone is convinced

Stockman was once Ronald Reagan's head of the Office of Management and Budget and became a firece critic of the administration - along with most others - after he left office.

He recently wrote an opinion piece in the NYT where he lays out his multiple issues with the US's economic history since the early 1930s. He thinks the current - limited - recovery will end in a crash, and this time there will be little we can do to dig ourselves out of it.

There's been quite the backlash against it however, which allows us a preliminary look at debate over the state of the economy - and our economic policies in general - prior to digging into it later this semester.

Some of the commentary:

- 'David Stockman Goes Way, Way Over the Top'

- The nihilism of David Stockman.
- David Stockman's Delusions:
- It Wasn't David Stockman Who Wrecked the Economy

An inside look at the rulemaking process

When we covered the executive branch in both 2305 and 2306 we discussed the rulemaking process, which is the way that executive agencies charged with implementing the law are able to clarify the meaning of legislation in order to facilitate implementation.

In this discussion we mentioned that interest groups try to - actually must - intervene in this process in order to ensure that their interests are served by those rules, in the same way that they intervene in the legislative process in order to make sure that the law itself reflects their interests.

Here's an inside look at how representatives of the major commodities exchanges in the nation worked to influence how the U.S. Commodity Futures Trading Commission interpreted a simple sounding phrase in the Dodd-Frank bill passed in 2011.

This story also applies to our discussion of interest groups.

Interview with Timothy Geithner

The New Republic has an interview with the outgoing Treasury Secretary.

Worth a quick read to get an inside look at how the financial crash was averted and how the Obama Administration works from the inside.

Wonkblog writes up his farewell to the President and the Treasury Department staff.

The Federal Reserve to Hold Interest Rates Down Until the Unemployment Rate Goes below 6.5%

Story in the NYT and Washington Post.

This marks a significant shift for the Fed. It will no longer focus strictly on inflation. It will also now take unemployment into account. This was part of its original mandate.

Interview with Paul Volcker

Volcker was chair of the Federal Reserve from 1979 - 1987 and is credited with bringing down high rates of inflation during that time.

In this Daily Beast interview he discusses the transformation of the banking sector and the increased difficulty of regulating the financial sector in a dynamic environment.

A choice bit: :

- I am struck by the number of not just friends but other observers who share the belief that there has been a real change in the mental approach of people in markets. They used to be more customer-oriented, with some sense of fiduciary responsibility that’s been very much reduced into an impersonal, “you’re a counterparty, you’re not a customer” caveat emptor.

That attitude lies behind a lot of these difficulties and has been spurred by enormous changes in compensation practices that have tempted people to cut corners. I’m afraid that the temptation now becomes greater—that if I can, as they say, cut some corners, maybe I’ll get some of this magic dust myself in proportions that seemed unimaginable a few years ago.

From Jeffery Sachs: Economic Policy Beyond Gimmicks

A noted economist takes the president and Congress to task for pursuing short terms fixes to the economy when the problems we face - in his mind - are structural. Part of his criticism should sound familiar to students who just finished reading Fed 10. Interests who are now benefiting from existing policies are resistant to any change that might undermine those benefits. This is what Jonathan Rauch referred to as Demosclerosis. He calls for policies that focus on investments, not temporary boosts to consumer spending:

The big mistake of Obama and his economic team from the start was to treat the downturn as a temporary recession, albeit a very big one. A temporary recession requires a temporary fix. A structural crisis requires long-term strategies. Here we are in 2012 without any long-term strategies except to wait out the crisis.

Real solutions require fresh strategies to break free of vested interests in energy, healthcare, education, and infrastructure. In other words, in today's political environment, real solutions won't happen any time soon. We are stuck.

.... The question for America is how we are going to break free of this low-level trap. First, we will need a government that is not subservient to the status-quo corporate interests blocking innovation in key sectors such as health, transport, and energy. Second, we need a government that can strategize, not just improvise. Third, we need to end the nonsensical bluster against government. Our specialist scientific agencies are still doing amazing things right before our eyes this year: exploring Mars and unlocking the complex mysteries of the human genome. We could be doing a lot more to solve our social and economic problems and to re-establish our prosperity if we put our confidence back into science, technology, advanced training, and public-private partnerships.

Some random links regarding QE3

For various points of view about the feds recent decision (see post below):

- Wonkbook: Everything you need to know about the Fed's big move.
- The Dish: Bernanke Goes Big, Bernanke Goes Big, Ctd.

QE3 announced

Federal Reserve Chair Ben Bernacke announced that the Fed will begin a third round of "quantitative easing." This means that they will purchase bonds (mortgage bonds specifically) in the open market in order to keep interest rates low - the theory being that doing so boosts the economy by making it cheaper for people to borrow money.

They also announced a change in priorities. Among the goals of the Fed is to maintain stable inflation rates and help attain maximum employment. These goals can conflict, so a choice generally has to be made, and usually the Fed has looked primarily at maintaining law interest rates. In their announcement they suggested that they will now begin to also look at the unemployment rate and try to reduce it.

From the NYT:

The Federal Reserve opened a new chapter Thursday in its efforts to stimulate the economy, saying that it intends to buy large quantities of mortgage bonds, and potentially other assets, until the job market improves substantially.

This is the first time that the Fed has tied the duration of an aid program to its economic objectives. And, in announcing the change, the central bank made clear that its primary reason was not a deterioration in its economic outlook, but a determination to respond more forcefully — in effect, an acknowledgment that its incremental approach until now had been flawed.

The concern about unemployment also reflects a significant shift in the priorities of the nation’s central bank, which has long focused on inflation. Inflation is now running below the Fed’s 2 percent annual target. But with the unemployment rate above 8 percent, the Fed’s policy-making committee suggested Thursday that it might tolerate a period of somewhat higher inflation, promising to maintain stimulus efforts “for a considerable time after the economic recovery strengthens.”
Click here for:

- The press release announcing the decision.
- Story from Bloomberg.
- Quantitative Easing and Bank Lending.
- QE1: financial crisis timeline.
- QE2 was a bust.