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June 6, 2009

Economist's View - 5 new articles

Uneven Unemployment Rates

Stratified unemployment rates reveal substantial differences by race, gender, education, and occupation:

16.4%, by Richard Florida: That's the overall rate of unemployment, according to the Bureau of Labor Statistics' newly released U-6 measure which includes "marginally attached workers" as well as those who work part-time for economic reasons. That's quite a bit higher than the widely reported 9.4 percent figure...

And, unemployment continues to fall unevenly by gender, race, class, and occupation.

Race: The unemployment rate for whites was 8.6 percent compared to 12.7 percent for Hispanics, 14.9 percent for blacks, and 16.8 percent for black men.

Gender: Men continue to experience higher rates of unemployment than women, with the gap widening to three full percentage points - 10.5 percent vs. 7.5 percent (for those over 16 years of age) - due to the concentration of men in manufacturing jobs. Human Capital/Education: Unemployment is even more uneven by education or human capital level. The unemployment rate for college graduates is 4.8 percent, half that for high school (only) graduates (10 percent), and one-third of the 15.5 percent rate facing those without a high school diploma.

Class: And there remain huge differences in unemployment by occupation. The highest rates of unemployment remain concentrated in working class occupations. For production, transportation, and moving occupations overall, the rate is 13.7 percent, up from 6.3 percent last year. For production workers it's 15.6 percent; movers and transportation workers, 11.8 percent; and construction and extraction jobs, 19.7 percent. For service occupations, the unemployment rate is nearly 10 (9.4) percent.

Unemployment is significantly lower for the creative class. For management and business occupations - including hard-fit financial jobs - overall the unemployment rate is 4.6 percent, up from 2.7 percent last year; and for professional and technical occupations it is 4.2 percent, up from 2.5 percent a year ago.

I suppose the financial innovation that led to the crisis can be termed "creative," but the social utility of the products that were created is doubtful. People outside of the financial sector are paying a high cost for that creativity, and that inequity is one reason to support social insurance and other programs that dampen the effects of the financial meltdown. In that regard, here's Brad DeLong:

Fiscal Policy in the Second Half of 2009: A DRAFT of a letter I might send next week:

Dear President Obama--

At the end of 2008, when your incoming administration was preparing your recession-fighting strategy, your forecasts were that the recession would bottom out in August of 2009, with a peak unemployment rate of 7.9%. The unemployment rate in May was already 9.4%. 10% unemployment this year is a nearly foregone conclusion. 11% unemployment--a recession twice as deep as the one your incoming administration was forecasting at the end of 2008--is not unlikely.

An 11% unemployment rate would carry along with it an underemployment rate--a U-6--that would kiss 20%.

Even had the fiscal expansion plans of your administration not been cut back by roughly a quarter in their employment-generating effectiveness by the Congress, fiscal stimulus plans that appeared to be adequate and appropriate at the turn of the year now appear to be inadequate.

Compounding the problem of inadequate fiscal expansion at the federal level is the problem of inappropriate and substantial fiscal contraction at the state level. Last fall Nobel Prize-winning Princeton economist Paul Krugman feared "fifty Herbert Hoovers"--fifty states each trying to balance its budget year-by-year and each one delivering a substantial drag on employment and income in its and its neighbors' economies.

I therefore believe:

  • That it is past time for you to seek from the Congress for authority to guarantee the debt of states that, in response to the current recession, (a) seek to conduct their own state-level fiscal expansions, and (b) devise plans and strategies for the long-term repayment of the debt the federal government guarantees that the Secretary of the Treasury certifies as prudent and sustainable.
  • That it is time for you to seek from the Congress an amended Budget Resolution: to include in this year's forthcoming Reconciliation process an additional $500 billion of federal aid to states, distributed per capita and conditioned on their maintaining effort at the provision of public services--on their not repeating the mistake of Herbert Hoover of cutting government employment and spending in a downturn.

Sincerely yours,

J. Bradford DeLong


Gorbachev: The US Needs a Perestroika

Mikhail Gorbachev says change is coming, and that "Washington will have to play a special role in this new perestroika":

We Had Our Perestroika. It's High Time for Yours, by Mikhail Gorbachev, Commentary, Washington Post: ...In recent years,... during speaking tours in the United States..., I have often told listeners that I feel Americans need ... a perestroika, not like the one in my country, but an American perestroika... Halls filled with thousands of people have responded with applause. ...

In the West, the breakup of the Soviet Union was viewed as a total victory that proved that the West did not need to change. Western leaders were convinced that they were at the helm of the right system and of a well-functioning, almost perfect economic model. Scholars opined that history had ended. The "Washington Consensus," the dogma of free markets, deregulation and balanced budgets at any cost, was force-fed to the rest of the world.

But then came the economic crisis of 2008 and 2009, and it became clear that the new Western model was an illusion that benefited chiefly the very rich. ...The current global crisis demonstrates that the leaders of major powers, particularly the United States, had missed the signals that called for a perestroika. The result is a crisis that is not just financial and economic. It is political, too.

The model that emerged during the final decades of the 20th century has turned out to be unsustainable. It was based on a drive for super-profits and hyper-consumption for a few, on unrestrained exploitation of resources and on social and environmental irresponsibility.

But if all the proposed solutions and action now come down to a mere rebranding of the old system, we are bound to see another, perhaps even greater upheaval down the road. The current model does not need adjusting; it needs replacing. I have no ready-made prescriptions. But I am convinced that a new model will emerge, one that will emphasize public needs and public goods, such as a cleaner environment, well-functioning infrastructure and public transportation, sound education and health systems and affordable housing.

Elements of such a model already exist in some countries. Having rejected the tutorials of the International Monetary Fund, countries such as Malaysia and Brazil have achieved impressive rates of economic growth. China and India have pulled hundreds of millions of people out of poverty. By mobilizing state resources, France has built a system of high-speed railways, while Canada provides free health care. Among the new democracies, Slovenia and Slovakia have been able to mitigate the social consequences of market reforms.

The time has come for "creative construction," for striking the right balance between the government and the market, for integrating social and environmental factors and demilitarizing the economy.

Washington will have to play a special role in this new perestroika ... because America was the main architect, and America's elite the main beneficiary, of the current world economic model. That model is now cracking and will, sooner or later, be replaced. That will be a complex and painful process for everyone, including the United States. ...

In our time, we faced up to the main tasks of putting an end to the division of the world, winding down the nuclear arms race and defusing conflicts. We will cope with the new global challenges as well, but only if everyone understands the need for real, cardinal change -- for a global perestroika.


Snowe's Public Option "Trigger"

Robert Reich says the public option is slipping away:

The Public Option, Smokescreens, Olympia Snowe, and What You Need to Do Right Now, by Robert Reich: I'ved poked around Washington today, talking with friends on the Hill who confirm the worst: Big Pharma and Big Insurance are gaining ground in their campaign to kill the public option in the emerging health care bill. ...

You know why, of course. They don't want a public option that would compete with private insurers and use its bargaining power to negotiate better rates with drug companies. ... To Pharma and Insurance, "unfair" is anything that undermines their profits. So they're pulling out all the stops...

Enter Olympia Snowe. Her move is important, not because she's Republican (the Senate needs only 51 votes to pass this) but because she's well-respected and considered non-partisan, and therefore offers some cover to Democrats that may need it. Last night Snowe hosted a private meeting between members and staffers about a new proposal Pharma and Insurance are floating, and apparently she's already gained the tentative support of several Democrats (including Ron Wyden and Thomas Carper). Under Snowe's proposal, the public option would kick in years from now, but it would be triggered only if insurance companies fail to bring down healthcare costs and expand coverage in he meantime.

What's the catch? First, these conditions are likely to be achieved by other pieces of the emerging legislation... If it ever comes to it, Pharma and Insurance can argue that their mere participation fulfills their part of the bargain, so no public option will need to be triggered. Second, as Pharma and Insurance well know, "years from now" in legislative terms means never. There will never be a better time than now to enact a public option. ...

Much the same dynamic is occurring in the House. Two members who had originally supported single payer told me that Pharma and Insurance have launched the same strategy there, and many House members are looking to see what happens in the Senate. Snow's "trigger" is already buzzing among members.

All this will be decided within days or weeks. And once those who want to kill the public option without fingerprints converge on a proposal -- Snowe's "trigger" or any other -- it's going to be very hard to undue. The White House must insist on a genuine public option. And you ... must insist as well. ...


Medical Bankruptcies and Changes in Bankruptcy Law

The study of medical bankruptcies has been under attack for not taking proper account of the effects of the change in bankruptcy law in 2005. The authors are accused of leaving this out of the article, or at least obscuring its effects, and the suggestion is that this has been intentional. However, reading the study I find that they deal directly with this issue:

Changes in the Law Between our 2001 and 2007 surveys, Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA), which instituted an income screen and procedural barriers that made filing more difficult and expensive.

The number of filings spiked in mid-2005 in anticipation of the new law, then plummeted. Since then, filings have increased each quarter. They are likely to exceed one million households in 2008, representing about 2.7 million people.

BAPCPA's effects appear nonselective. Current filers differ from past ones mainly in having struggled longer with their debts.[7] New restrictions fall equally on medical and nonmedical bankruptcies, with no preferences for medical debts or sick debtors. It is implausible to ascribe the growing predominance of medical causes of bankruptcy to BAPCPA.

Conversely, there is ample evidence that the financial burden of illness is increasing. The number of under-insured increased from 15.6 million in 2003 to 25.2 million in 2007.3 Of low- and middle-income households with credit card balances, 29% use credit card borrowing to pay off medical expenses over time.[8] Collection agencies contacted 37.2 million Americans about medical bills in 2003.[9] Between 2005 and 2007, the proportion of nonelderly adults reporting medical debts or problems paying medical bills rose from 34% to 41%.[10]

You can disagree with their methodology, e.g. I have questions about how causality is measured among other things, but I don't see how you can accuse them of ignoring the issue when they say, plainly, that "It is implausible to ascribe the growing predominance of medical causes of bankruptcy to BAPCPA."

It's also important to take some time to read the references before issuing sweeping indictments of the research, people are expected to read the cited references when they have questions. In footnote 7 above, the issue of how the sample changed due to the law and what difference that might have made is discussed in great detail. For example, here are a few graphs from the paper (and this is just one of the many references they include, note also that Elizabeth Warren is one of the authors of the paper cited in this footnote):

Bankruptcy1

Bankruptcy3

Bankruptcy3

Bankruptcy10

Bankruptcy12

There are additional figures showing how secured and unsecured debt, assets, and other measures relative to bankruptcy changed over the 2001-2007 time period. Here's the conclusion from this paper:

VI. CONCLUSION The Consumer Bankruptcy Project is the first random national sample of families that filed for bankruptcy after the 2005 amendments. Our initial findings should dampen the enthusiasm with which some trumpet BAPCPA's success in reducing the number of bankruptcies. The principal feature of the amendments was an income-based screen that was supposed to differentiate can-pay debtors from their can't-pay counterparts. The data suggest that this failed: there is no differentiation based on income, either for the sample as a whole or for the division of families into Chapter 7 and Chapter 13. Instead, the data suggest that the incomes of the families filing for bankruptcy after the amendments are indistinguishable from the incomes of the families filing for bankruptcy before the amendments.

By its own design, the means test focused on income. It did not take account of the overall financial condition of debtors; net worth and debt-to-income ratios were irrelevant to the new law. While secured debt received some favored treatment,[125] the size and impact of unsecured debt loads, such as credit card and medical debt, were largely ignored. With only slight exceptions, [126] families that owe a little and families that owe a lot of unsecured debt are equally eligible for Chapter 7 relief once they have survived the income-based means test. Yet this is where our additional findings reveal important differences with the 2007 filers. After the amendments, families filing for bankruptcy owe more debt, particularly more unsecured consumer debt, than their counterparts from 2001 and are having a much harder time servicing that debt with disposable income.

The higher debt-to-income ratios among the families that filed bankruptcy in 2007 suggest that Americans are struggling harder than ever before they collapse into bankruptcy. Whether they are discouraged by the negative publicity surrounding the 2005 amendments, concerned about the stigma associated with bankruptcy, or dissuaded by aggressive debt collectors who bully them into believing they can no longer file for bankruptcy, it is clear that families are not turning to bankruptcy even when they have great need. This is a result Congress neither intended nor promised.

They did not ignore the issue of the change in the composition of the sample, and suggestions that they did are dishonest. They are saying clearly that there are no important changes in the composition of the sample that can explain the differences in the proportion of medical filings, i.e. statements such as that "BAPCPA's effects appear nonselective. ... New restrictions fall equally on medical and nonmedical bankruptcies..."


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