Is High Productivity Growth Compatible With Employment Growth?

CRS_October_2004_Is_High_Productivity_Growth_Compatible_with_Employment_Growth.pdf: 795 downloads, before Oct. 1, 2020

A Changing Natural Rate of Unemployment: Policy Issues

CRS_March_2004_Changing_Natural_Rate_of_Unemployment.pdf: 4154 downloads, before Oct. 1, 2020

Systemically Important or “Too Big to Fail” Financial Institutions

Although “too big to fail” (TBTF) has been a perennial policy issue, it was highlighted by the near-collapse of several large financial firms in 2008. Large financial firms that failed or required extraordinary government assistance in the recent crisis included depositories (Citigroup and Washington Mutual), government-sponsored enterprises (Fannie Mae and Freddie Mac), insurance companies (AIG), and investment banks (Bear Stearns and Lehman Brothers).1 In many of these cases, policy makers justified the use of government resources on the grounds that the firms were “systemically important” or “too big to fail.” TBTF is the concept that a firm’s disorderly failure would cause widespread disruptions in financial markets that could not easily be contained. While the government had no explicit policy to rescue TBTF firms, several were rescued on those grounds once the crisis struck. TBTF subsequently became one of the systemic risk issues that policy makers grappled with in the wake of the recent crisis. This report discusses the economic issues raised by TBTF, broad policy options, and policy changes made by the relevant Dodd-Frank provisions. This report also discusses recent legislation addressing the TBTF issue in the 113th Congress. The report ends with an Appendix reviewing the historical experience with TBTF before and during the recent crisis

The Size and Role of Government Economic Issues

[Excerpt] The size and role of the government is one of the most fundamental and enduring debates in American politics. Economics can be used to analyze the relative merits of government intervention in the economy in specific areas, but it cannot answer the question of whether there is “too much” or “too little” government activity overall. That is not to say that one cannot find many examples of government programs that economists would consider to be a highly inefficient, if not counterproductive, way to achieve policy goals. Reducing inefficient government spending would benefit the economy; however, reducing efficient government spending would harm it, and reducing the size of government could involve either one. Government intervention can increase economic efficiency when market failures or externalities exist. Political choices may lead to second-best economic outcomes, however, and some argue that, for that reason, market failures can be preferable to government intervention. In the absence of market failures and externalities, there is little economic justification for government intervention, which lowers efficiency and probably economic growth. But government intervention is often based on the desire to achieve social goals, such as income redistribution. Economics cannot quantitatively value social goals, although it can often offer suggestions for how to achieve those goals in the least costly way. The government intervenes in the economy in four ways. First, it produces goods and services, such as infrastructure, education, and national defense. Measuring the effects of these goods and services is difficult because they are not bought and sold in markets. Second, it transfers income, both vertically across income levels and horizontally among groups with similar incomes and different characteristics. Third, it taxes to pay for its outlays, which can lower economic efficiency by distorting behavior. Not all taxes are equally distortionary, however, so there are ways of reducing the costs of taxation without changing the size of government. Furthermore, deficit spending does not allow the government to escape the burden of taxation since deficits impose their own burden. Finally, government regulation alters economic activity. The economic effects of regulation are the most difficult to measure, in terms of both costs and benefits, yet they cannot be neglected because they can be interchangeable with taxes or government spending. There are many different ways to measure the size of the government, making its economic effects difficult to evaluate. Budgeting conventions are partly responsible: tax expenditures, offsetting receipts and collections, and government corporations are all excluded from the budget. But some governmental functions, like regulation, simply cannot be quantified robustly. Discussions about the overall size of government mask significant changes in the composition of government spending over time. Spending has shifted from the federal to the state and local level. Federal production of goods and services has fallen, while federal transfers have grown significantly. In 2008, nearly two-thirds of federal spending is devoted to Social Security, Medicare, Medicaid, and national defense. Thus, there is limited scope to alter the size of government without fundamentally altering these programs. The share of federal spending devoted to the elderly has burgeoned over time, and this trend is forecast to continue. The size of government has increased significantly since the financial crisis of 2008 as a result of the government’s unplanned intervention in financial markets and subsequent stimulus legislation. Much of this increase in government spending could be reversed when financial conditions return to normal, although critics are skeptical about how easy it will be for the government to extricate itself from the new commitments its made

U.S. Economy in Recession: Similarities To and Differences From the Past

[Excerpt] According to the National Bureau of Economic Research (NBER), the U.S. economy entered a recession in December 2007. It is now the longest recession of the post-World War II era. The recession can be separated into two distinct phases. During the first phase, which lasted for the first half of 2008, the recession was not deep as measured by the decline in gross domestic product (GDP) or the rise in unemployment. It then deepened from the third quarter of 2008 to the first quarter of 2009. The economy continued to contract slightly in the second quarter of 2009, before beginning to grow in the third quarter. This recession features the largest decline in output, consumption, and investment, and the largest increase in unemployment, of any post-war recession. Previously, the longest and deepest of the post-war recessions were those beginning in 1973 and 1981. Both of those recessions took place in a context of high inflation that made the Federal Reserve (Fed) hesitant to aggressively reduce interest rates to stimulate economic activity. The Fed has not shown a similar reluctance in the current recession, bringing short-term rates down to zero. Although inflation exceeded the Fed’s “comfort zone” in 2007 and 2008, it was not nearly as high as it was in the 1970s or 1980s recessions, and it began decelerating in the second half of 2008. Economists are divided over whether inflation or deflation (falling prices) is a bigger threat going forward. Both the 1973 and 1981 recessions also featured large spikes in oil prices near the beginning of the recession—as did the current one. Oil markets’ disruptions and recessions have gone hand in hand throughout the post-war period. The previous two recessions (beginning in 1991 and 2001) were unusually mild and brief, but subsequently featured long “jobless recoveries” where growth was sluggish and unemployment continued to rise. Since this recession has been neither brief nor mild (since the third quarter of 2008), it is unclear whether another jobless recovery should be expected. A decline in residential investment (house building) during a recession is not unusual, and it is not uncommon for residential investment to decline more sharply than business investment and to begin declining before the recession. The current contraction in residential investment is unusually severe, however, as indicated by the atypical decline in national house prices. One unique characteristic of the current recession is the severe disruption to financial markets. Financial conditions began to deteriorate in August 2007, but became more severe in September 2008. While financial downturns commonly accompany economic downturns, financial markets have continued to function smoothly in previous recessions. This difference has led some commentators to instead compare the current recession to the Great Depression. While the onset of both crises bear some similarities, to date, the effects on the broader economy have little in common. In the first year of the Great Depression, GDP fell by almost 9%, prices fell by 2.5%, and unemployment rose from 3.2% to 8.7% (eventually peaking at 24.9%). The change in GDP, prices, and unemployment in the current recession to date has not been significantly different from other deeper post-war recessions. Most economists blame the severity of the Great Depression on policy errors—notably, the decision to allow the money supply to contract and thousands of banks to fail. By contrast, policymakers have aggressively intervened to ease monetary policy and provide direct assistance to the financial sector in the current recession

Job Loss: Causes and Policy Implications

CRSJobLoss.pdf: 1064 downloads, before Oct. 1, 2020

Returning to Full Employment: What Do the Indicators Tell Us?

[Excerpt] The unemployment rate declined markedly in 2013, to 6.7% in December from 7.9% in January, seeming to signal that the labor market is approaching full employment. Other economic and labor market indicators paint a more pessimistic picture, however. For example, the decline in the unemployment rate was caused in part by workers dropping out of the labor force. The labor force participation rate has fallen to under 63% at the end of 2013 from 66% before the recession. Understanding this divergence is crucial for an accurate assessment of the current state of the economic recovery and of how close the economy is to full employment. This report analyzes recent trends in labor market indicators during the current economic recovery, with a particular focus on the contrast between the unemployment rate and other labor market indicators. It reviews studies that have sought to determine how much of the decline in the labor force participation rate is caused by the recession and how much is caused by structural factors, such as the aging of the labor force. It then considers whether the economy might reach full employment at a higher rate of unemployment compared to recent expansions. It concludes by analyzing the implications of these developments for macroeconomic stabilization policy, as policy makers grapple with the transition from the expansionary fiscal and monetary policy put in place during the “Great Recession.” If the labor market has experienced structural changes, it would also have implications for labor market and other microeconomic policies (e.g., spending or tax provisions that increase the incentives to hire, seek work, delay retirement, or train), which are beyond the scope of this report

The Economics of Corporate Executive Pay

[Excerpt] In the past ten years, the pay of chief executive officers (CEOs) has more than doubled, and the ratio of median CEO to worker pay has risen to 179 to 1. High and rising executive pay could be an issue of public concern on two different grounds. First, it is contributing to widening income inequality that may be of concern from an equity perspective. Second, it could be the result of economically inefficient labor markets. It is difficult to determine whether executive pay is excessive across the board since executives’ marginal product cannot be directly observed. An upward trend in pay over time is not sufficient proof that the market is not efficient since factors determining supply and demand, such as the skills required of the position, can change over time. To show that pay is excessive from an economic perspective, one must first demonstrate that there is a market failure that is preventing the market from functioning efficiently. The market failure could originate in the division in large modern firms between management and ownership, which is typically dispersed among millions of shareholders. Shareholders’ interests are represented by a board of directors. Critics of executive pay have argued that boards have all too often been “captured” by the executive and are no longer negotiating pay packages that are in the shareholders’ best interests. They point to a number of common practices that they call “stealth compensation” which are inconsistent with arm’s length contracting. These include “golden parachutes,” generous severance packages, company-provided perks, and bonuses that are unrelated to firm performance. Stock options have been the fastest growing portion of executive pay since the 1990s, and critics believe this pattern can also be explained through the prism of stealth compensation. Rewarding executives with employee stock options was often justified in terms of the “pay for performance” mantra, but options are usually designed to reward absolute, not relative, performance. This means that in the bull market of the 1990s, when virtually all stock prices were rising, a company could fall behind its competitors and its executives could still receive handsome options payouts. Indeed, a sizeable portion of the increase in executive pay in the 1990s was likely due to options that turned out to be much more valuable than expected because of the unprecedented price increases of the bull market. Many of the recent corporate scandals appear consistent with stealth compensation as well. Stock options backdating, earnings manipulation, and accounting fraud might have been motivated by attempts to covertly increase executive pay. If short-term fluctuations in the stock price are not good proxies of firm performance, then tying compensation to the stock price can create incentives for executives to engage in activities that are detrimental to shareholders. Policy proposals mostly focus on improving transparency, increasing board independence, and strengthening shareholder control rather than attempting to curb pay directly. S. 1181 (Obama) and H.R. 1257 (Frank), which the House approved on April 19, 2007, would give shareholders a non-binding vote on executive pay. Another proposal would modify the limit on deductibility of executive pay from corporate taxation. More broadly, income inequality could be reduced by increasing the progressivity of the tax system. For current developments and legislation, see CRS Report RS22604, Excessive CEO Pay: Background and Policy Approaches

The “Jobless Recovery” from the 2001 Recession: A Comparison to Earlier Recoveries and Possible Explanations

CRS_August_2004_Jobless_Recovery_From_the_2001_Recession.pdf: 1819 downloads, before Oct. 1, 2020

China’s Currency: An Analysis of the Economic Issues

[Excerpt] This report provides an overview of the economic issues surrounding the current debate over China’s currency policy. It identifies the economic costs and benefits of China’s currency policy for both China and the United States, and possible implications if China were to allow its currency to significantly appreciate or to float freely. It also examines proposed legislation in the 111th Congress that seek to address China’s currency policy