The Financial Crisis

Economists at The New School bring a non-mainstream analysis – known within the field as 'heterodox' - to the fallout of the Great Recession. Their work focuses on the prospects for a more progressive economic order to emerge. This blog shares policy proposals to address short-term needs while placing current events in a long-term economic context. This includes an analysis of the monthly employment report by SCEPA Faculty Fellow Rick McGahey. 

Economic Shocks on the Financial Sector

A recent study by SCEPA Faculty Fellow Willi Semmler and the Centre for European Economic Research's Frauke Schleer analyzes dynamics between economic downturns and financial stress for several euro-area countries.


Using a newly constructed financial condition index that includes banking variables, the authors examine leadership changes in countries that have high and low levels of financial stability and the ripple effects on the economy. They found that strong rippling effects appear to be related to large, but rare events, such as the financial crisis, and to a short business cycle. Prior to the financial crisis, economic shocks could be self-adjusting, even if the financial sector shock took place during a time of instability. 

The Role of Financial Stress in Debt and Recovery

As countries continue to struggle with the consequences of the 2007-2008 recession, the debate surrounding national debt is at the forefront of economic and foreign policy discussions. What is too much debt? Does debt inhibit a state's ability to recover from the recession?

In a recent SCEPA Policy Note on the impact of national debt on economic growth, Economists Christian Proaño, Willi Semmler and Christian Schoder discovered that at low levels of financial stress, when investments in banks and stocks carry low risk and the financial market is stable, national debt does not impact economic growth. Rather, they found that debt impacts economic growth when there are high levels of risk and uncertainty in the financial sector. Therefore, economic growth depends first on financial market stability, and is only affected by debt if financial markets are unstable. These findings contradict the highly cited 2010 Reinhart and Rogoff study - now identified as having coding errors - which posited that despite all other factors, economic growth will decline if debt is 90% of a state's GDP.

The Unemployment Report: Moving Faster, But Too Slow For Takeoff

Rick McGaheyby Rick McGahey, SCEPA Faculty Fellow

After two months of very weak employment data, today’s report for February is a little more encouraging, or at least doesn’t continue the negative trend. The economy added 175,000 jobs, better than the consensus forecast of 149,000, and the unemployment rate bumped up slightly to 6.7 percent. The January jobs number also was revised upward, so the rolling average of the past three months now stands at 126,000 additional jobs per month.

But just to put these numbers in perspective, even we get 175,000 new jobs every month, it will take slightly over two years to reach a relatively full employment rate of 5.5 percent unemployment. And those 175,000 jobs in a month is lower than the average monthly figure for all of 2013, so it isn’t a number that should satisfy policy makers.

So this is not a strong employment report, especially at this stage of the business cycle. The bottom of the Great Recession was reached in June 2009, and we are now over four and a half years into a very weak and slow recovery.

One persistent factor that is holding growth back, and will continue to hold it back, is contracting government spending. The original federal stimulus in response to the Great Recession was never large enough to address the problem; at the time, several economists, including analysts at Goldman Sachs and elsewhere, were calling for a stimulus two to three times higher than we actually got. And even that federal spending was partly offset by state and local government budget cuts.

Throughout this anemic recover, the debate in Washington has been driven by the right-wing Tea Party faction of the Republicans, who insist on continuing budget cuts rather than stimulus and expansion. And they have been winning.

President Obama’s just-released budget for fiscal year 2015 starting in October noted that the budget deficit is coming down, to a projected 3.7 percent of GDP, the lowest figure in five years. But that deficit reduction is part of our economic problem, especially because it has been achieved mostly by cutting spending, which slows the economy.

Since 2009, federal spending has shrunk by 4.1 percent, while tax revenues increased by 2.2 percent from economic growth and some recapture of the Bush tax cuts for the wealthy. As the Washington Post points out, “To put it another way, there have been nearly $2 in spending cuts for every $1 in revenue increases. On the surface, it would appear that the Republicans won the budget wars.”

The Tea Party’s grip on policy isn’t just budgetary. Although Obama is now arguing strongly for federal policies to attack inequality, there is no prospect that he will get legislative support for those, whether it is significantly higher infrastructure spending, a long-overdue increase in the minimum wage, expanding the earned income tax credit for low-income people, or increase education aid from preschool to college. Paul Ryan, one of several potential Republican candidates for President, dismissed Obama’s budget as “a campaign brochure,” signaling another round of seemingly endless Washington budget battles.

While the Tea Party holds sway in Washington, the budget fight will continue to be about further reductions, not stimulus or investment. That means little or no federal stimulus for our anemic economy. And that very likely means slower economic growth, lost output, higher unemployment, slower wage growth, and unnecessary hardship for millions of Americans.

The Unemployment Report: Better Start Worrying

Rick McGaheyby Rick McGahey, SCEPA Faculty Fellow

The anti-austerity analysis of progressive economists, including the articles published last November by those affiliated with The New School, seems more prescient every day. Yet Washington continues to be deaf to our real economic needs. The President doesn’t propose budget stimulus, Congress insists on even more cuts, and the Federal Reserve is slowing its quantitative easing program under pressure from the financial industry. Another month like this, and we are in serious trouble.

When the employment data came in from December 2013, there was an extraordinarily weak jobs number—only 74,000 net new jobs created when analysts were predicting close to 200,000. I said last month “February will tell us whether this report is a one-month blip, or whether the economy is once again weakening.” Well, it’s weakening.

Yesterday’s release of the employment report for January tells us to worry—the consensus prediction for new jobs was 178,000, but we only got 133,000, making the rolling two-month average now down to 103,500 new jobs per month.

At that rate, we would virtually never get back to a full rate of employment for the economy (plugging that two-month job creation rate into the Atlanta Fed’s jobs calculator shows that we wouldn’t even get to full employment in six years or more.) True, the unemployment rate trended down slightly, to 6.6 percent, but labor force participation—the share of 16 to 64 year olds working and looking for work—essentially stayed stuck at 63 percent, a 35-year low

Was it the weather? As with December’s report, several analysts blamed the low number on bad winter weather. But that seems an inadequate explanation. The jobs number is very hard to reconcile with other economic data, especially gross domestic product growth (GDP) which rose by 3.6 percent in the second half of 2013.

But whatever the explanation—weather, changes in employer hiring preferences, getting more work from existing employees (although average weekly hours worked hasn’t gone up in the past year)—the U.S. policy of austerity and budget cutting continues to inflict unnecessary pain on working families, with lost economic output and income that we will never recover.

Is it About Inequality or Opportunity?

David Howellby David Howell, SCEPA Faculty Fellow
February 4, 2014

Bending to the polls, in his State of the Union Address President Obama veered away from his earlier attacks on rising inequality by focusing on "opportunity", mentioned ten times, rather than on "income inequality", which was mentioned only twice. Obama now speaks behind a banner that says OPPORTUNITY FOR ALL, and not, for example EQUITABLE GROWTH FOR ALL. In today's New York Times article "Obama Moves to the Right in a Partisan War of Words," Jared Bernstein, the progressive former advisor of Vice President Biden, is quoted as saying that "opportunity and mobility are the right things to be talking about."

Americans, and especially Republican Americans, don't like to openly discuss income and wealth outcomes. It smacks of "class consciousness." David Brooks has made that perfectly clear. Much better to talk about increasing opportunities for upward mobility by improving individual behavior. If "inequality" is acceptable for public discourse at all, polls show that it should be about "inequality of opportunity." And so we are back to the conservative virtues of more education, harder work, and more risk-taking in free markets with small government. Maybe things will get better with more virtuous behavior in a generation or two.

The problem, of course, is that we've experienced three decades of spectacular increases in income and wealth inequality, which only the most ideologically blind could believe have not tremendously disadvantaged economic opportunity for the bottom, say, half of American households. Does anyone really believe that there hasn't been a vast widening of the gap in educational and networking opportunities between young people raised in top 1% neighborhoods and schools and those in mere middle class neighborhoods and schools?

Conveniently for this view that what matters is increasing opportunity rather than decreasing inequality, a new study by leading progressive economists says that, despite sharply rising inequality, there has been no decline in mobility across the "rungs" of the distributional ladder. So sure, the payoffs to success are a lot greater, but we can be reassured now that everyone is still on the same playing field. There's nothing wrong with bigger payoffs to hard work and risk-taking. The American Dream is alive and well.

But the problem with this study, or rather with the way it's been interpreted, is that it's all about relative, not absolute, mobility. It measures the probability of moving from one rung of the income ladder to another between generations. Because the rungs are measured in percentiles – relative positions – it is as much a measure of downward as upward mobility. In a sense, it's a measure of churning. There are always 20% in the bottom quintile. More movement across rungs has no implication for overall well-being.

So why do we care about this kind of mobility? In terms of standards of living, it's the quality of the rung that matters, not the movement on and off it. Imagine the following: the nation's economic growth is captured entirely by the top 1% of households. Their rungs are leaping skywards. Those on the 80-95th rungs are breaking even, but households on the bottom half of the ladders are all on rungs that are losing ground. Indeed, they're getting closer to the ground. This is the "mobility" that matters: how families are doing in absolute terms. Rather than movement between rungs, it's how fast all the rungs (inflation-adjusted incomes) are rising from ground level, and how that increase compares to the growth of the top rungs.

The debate should be about equitable growth – the sharing of national growth so that all the rungs of the ladder start getting higher again, not just those at the top. If the discourse must be framed in terms of "opportunity" and "mobility", it should be about the opportunity of all households to experience upward mobility by sharing in national economic growth, no matter what rung of the ladder they're on.

Why Relative Mobility is a Side Show

David Howell

by David Howell, SCEPA Faculty Fellow

Two decades of research on cross-generational mobility have shown that America’s performance on this key dimension of the American Dream is among the worst in the affluent world. This means that the probability of children ending up on a higher rung of the income distribution than their parents is lower in the US than in most other rich countries. Indeed, the US is at the top of the “Great Gatsby Curve” with the UK, with both extreme income inequality and very low mobility.

So American mobility is remarkably low by international standards, but has it been rising or falling in recent decades? Is opportunity for upward mobility in America at least improving, as conservatives would like to believe, or is it just getting worse?

New findings by prominent inequality researchers Raj Chetty and Emmanuel Saez show that intergenerational mobility remained remarkably stable in the 1980s and 1990s. And based on earlier studies, this stability apparently extends back to the 1960s and 1970s. This could be seen as good news: as the US transitioned from high to extreme inequality in the post-1980 period, at least this indicator of social mobility hasn’t worsened.

But what does this mean for the actual welfare of American families? No doubt it’s bad for children to be locked into the same bottom rung as their parents, but what makes this particularly bad in the US is how poor families are in this lowest quintile.

Read more: Why Relative Mobility is a Side Show

The Republican Attack on the Inequality Debate

David Howellby David R. Howell, SCEPA Faculty Fellow

Last week two prominent Republicans lashed out against the growing outcry about American’s rising inequality and unshared growth. New York Times columnist David Brooks wrote that “Suddenly the whole world is talking about income inequality” and this debate “is confusing matters more than clarifying them, and it is leading us off in unhelpful directions.” A few days earlier, leading Republican economist Douglas Holtz-Eakin, the former chief of George W. Bush’s Council of Economic Advisors, dismissed the whole debate as “faulty” since “Inequality means little”.

For both Brooks and Holtz-Eakin, the only real distributional issue America faces is poverty, and the only solution is upward mobility, and that requires growth, skills and good behavior. At root, it’s about free markets for growth and individual productivity.

Each pushes a different strand of the conservative free market vision. Holtz-Eakin demands “sustained rapid economic growth” so that “the hardest working will rise upward in the roster of economic affluence with additional income.” Brooks demands that we confront the dysfunctional behaviors associated with a “frayed social fabric”. 

The facts fly in the face of these two strands of Republican apology for the rise of extreme inequality.

Read more: The Republican Attack on the Inequality Debate

The Unemployment Report: Statistical Quirk or Sign of Weakness?

by Rick McGahey, SCEPA Faculty Fellow

The employment report for December 2013 came out today, and what a shocker. Analysts were predicting continued job growth around 200,000 with a gradual reduction in the unemployment rate, but instead we got a sharp drop in the rate—from 7 to 6.7 percent—and a very weak jobs number—only 74,000 net new jobs added to the economy.

And the sharp drop in the unemployment rate provides no comfort—indeed, it seems strange when taken with the weak jobs number. But jobs aren't driving the unemployment rate in this report—labor force participation is. The rate is calculated by dividing the number of people with jobs by the total of those with jobs and those actively seeking work. If people stop looking for work, that brings the rate down, even with slow job growth.

And that's what happened in December. The number of people looking for work declined by 347,000, resulting in the lower unemployment rate. And the drop isn't due to older baby boomers retiring. Labor force participation among workers 45 to 54 years old dropped to 79.2 percent, the lowest rate in 25 years.

Some analysts were quick to blame the low jobs number on bad winter weather or an anomaly driven by the statistical procedures used to calculate the jobs numbers. And the Bureau of Labor Statistics (BLS) did increase the job gain number for November 2013 by 38,000; monthly job number often are revised upward as more data come in from smaller employers.

But even if December turns out to be a very weak month, employment in the U.S. is still weak. The average monthly job growth in the last quarter of 2013 was 172,000 and at that rate, it would take over two years for the economy to reach a full employment level of 5.5. percent. Even if job gains averaged 200,000 per month going forward (a monthly level rarely reached during 2013), it would take another year and a half to reach full employment.

February will tell us whether this report is a one-month blip, or whether the economy is once again weakening. Even if the projected jobs number had been reached, that would be a weak result. We should be investing more in job creation, unemployment benefits, and other social spending, not cutting government spending back.

The Unemployment Report: Baby Steps in the Right Direction

by Rick McGahey, SCEPA Faculty Fellow

This morning's November employment report has some welcome news, but let's not get too excited.

The unemployment rate moved down to 7 percent, the lowest level in five years. Unemployment was 7.3 last month, and 7.8 percent one year ago. The labor force increased slightly, so the dropping rate is due to increased employment.

On the jobs side, the economy added 203,000 net new jobs, and October numbers were revised upward to 200,000. These are net jobs. Direct federal government jobs fell again; direct federal employment has fallen by 92,000 jobs in the past year due to continuing budget cuts and austerity.

The job numbers come when other signs also point to a strengthening economy. Earlier this week, third quarter GDP was calculated at a 3.6 percent annual growth rate, well above the estimates of 2.8 percent. Are we finally seeing a stronger economy that doesn't need fiscal stimulus? Can the Federal Reserve start "tapering" its quantitative easing (QE) program?

While the numbers are welcome, we shouldn't get too excited about them, and certainly shouldn't ease off calls for more fiscal stimulus. Let's take the job gains in November. Is 203,000 a big number? Not especially. The average monthly job growth over the past year has been 195,000, and it would take almost two and one-half years at this rate to reach full employment. Jared Bernstein points out that the good numbers also are driven in part by an unusually large number of workers coming back from temporary layoffs largely due to the government shutdown.

How about the GDP increase? It is much stronger—double the 1.8 percent growth rate in the first half of 2013. But almost half of the third quarter increase is inventory buildup in anticipation of the holiday shopping season. It remains to be seen how strong sales will actually be, and if that inventory clears.

Will households buy that inventory? October's personal income numbers are a cause for concern. Real disposable personal income fell by 0.2 percent in October, after rising by 0.3 percent in September, and 0.4 percent in August. The October number may be a blip, but if real personal income stays down, then weak consumer demand will not lift the economy, clear the inventory gains, or contribute to growth.

All in all, November's employment report represents baby steps in the right direction. But the economy remains weak, and needs continuing government help, not increased austerity.

The Unemployment Report: Slightly Better, But Lots to Do

by Rick McGahey, SCEPA Faculty Fellow

Despite the mainstream interpretation that the October jobs report is a reason to ease off what little stimulus we are giving the economy, a broader view reinforces the fact that stimulus is the antidote for austerity policies that have failed to create prosperity.
While the report has some positives, the underlying economy is still weak, and we need sustained job creation through government spending and stimulus. Our goal must be full employment (defined as a 5.5 percent unemployment rate), and at current job creation rates it will take over two years to get there. In October, the monthly unemployment rate continued to hover above seven percent (7.3 in October, up from 7.2 percent), while jobs increased by 204,000.  That’s a slightly better jobs number than recent months, but not much above the rolling twelve-month average of 190,000.   
We see more cause for concern when we view the jobs report along with other economic data. Third-quarter GDP is estimated at 2.8 percent, which is above economists’ estimates, but almost one percent of that is inventory buildup.  At the same time, consumer spending showed its weakest quarterly growth in two years, and federal spending continues to fall, further reducing demand.
That fall in government spending does not include the impact of October’s shutdown, which the White House estimates cost 120,000 jobs and between $2 and $6 billion in lost output.  Meanwhile, Washington policy makers debate how much more to cut spending, which will further weaken the economy.
Admittedly, the U.S. looks better than the Eurozone, where there are actual fears of deflation, reflected in the European Central Bank’s surprise interest rate cut yesterday. Unemployment has risen for 29 straight months in the zone, and the 12.2 percent unemployment rate is the highest it has ever been since the European monetary union began.
This continued economic weakness in the U.S. and Europe - once again - shows that austerity policies in a weak economy don’t work.  This month, New School economists and colleagues released a volume of the university's Social Research journal that offers tools to escape austerity’s ill-advised vision and concrete policies to create economic growth and prosperity for all people, rather than just a wealthy few.