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Guest post: How wages in services vs. goods-producing jobs explain relative GDP growth during Recoveries (Hint: producing goods is better)

by New Deal democrat (Bondaddblog)

How wages in services vs. goods-producing jobs explain relative GDP growth during Recoveries (Hint: producing goods is better)

This week I will put up several posts discussing the relative impact of goods-producing vs. service jobs in the economy, prompted by an article by Kevin L. Kliesen and Lowell R. Ricketts of the St. Louis Federal Reserve entitled “Faster GDP Growth during Recoveries Tends To Be Associated with Growth of Jobs in ‘Low-Paying’ Industries” (pdf), which was subsequently picked up by Prof. Mark Thomas at Economist’s View.

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America’s Current Accounts Deficits: Not Quite Déjà Vu

by Joseph Joyce

America’s Current Accounts Deficits: Not Quite Déjà Vu

The U.S. current account deficit has narrowed since 2006, when it reached $807 billion, which represented 5.8% of U.S. GDP. By 2013 the deficit had fallen to $400 billion, worth 2.4% of GDP. But the IMF last October projected it would reach $484 billion in 2015, 2.6% of GDP, and would continue rising after that. Are we headed for a return to the global imbalances of the last decade?

Part of the rationale for the expected rise in the deficit is the strength of the U.S. economy. The U.S. recovery (finally) appears robust, particularly compared with those of Japan and the Eurozone. This relative strength of the U.S. economy has stimulated an appreciation of the trade-weighted exchange rate. The combination of increased expenditures and a currency appreciation will fuel a decline in net exports, although the drop will be cushioned by a decline in oil imports.

This development benefits those countries where domestic demand remains weak. In January the IMF lowered its forecasts for global growth in 2015 and 2016 to 3.5% and 3.7% based on reassessments of the prospects for China, Russia, the Eurozone and Japan (although recent reports see some improvements in Europe and Japan). The U.S. was the only major economy with better growth projections. Martin Wolf of the Financial Times points out that current account surpluses would help out these countries.

But which countries would absorb their goods and services? The emerging markets and developing economies will not be able to finance current account deficits through capital inflows if a rise in U.S. interest rates brings about capital outflows from these countries.  This leaves the U.S. as the residual deficit country. Wolf concludes “…U.S. spenders will, once again, have to pull not only their own economy but much of the rest of the world.”

There is another factor contributing to the U.S. deficits: the continuing acquisition of dollars by central banks. Joseph Gagnon of the Peterson Institute for International Economics attributes the purchases to the desire of government to maintain their own current account surpluses.Andreas Steiner of the University of Osnabrueck investigated balance of payments data and found that the demand for dollar reserves lowered the U.S. current account balance by 1-2% relative to GDP. Similarly, Stephen Cecchetti of the Brandeis International Business School and Kermit Schoenholtz of NYU’s Stern School estimate that the foreign official demand for U.S. assets results in a continuing current account deficit of 2% of GDP.

A rise in U.S. interest rates will lead to an increase in private capital inflows that could further increase the current account deficit. The impact on the U.S. economy depends in part on the composition of these capital flows. Eduardo Olaberría of the OECD has studied the impact of capital inflows, and reported that debt-based flows are more likely to be associated with increases in asset prices than equity flows.

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Greek Deal

I am trying to understand what, if anything, was agreed by Greece and the rest of the EU yesterday. I’m not sure they even agreed to kick the can down the road.

update 11:00 AM EST Tuesday 2/24/2015: It’s a deal. Greece has four more months without promising a 4.5% of GDP primary surplus.

I think Matt O’Brien wrote a very good explainer for wonkblog at the Washington Post (as usual — he is well worth following). His bottom line seems to be that, while the agreement presents itself as a Greek surrender, they haven’t conceded the key point.

Greece got Europe to concede that it “will, for the 2015 primary surplus target, take the economic circumstances of 2015 into account.” In other words, Greece won’t have to do the austerity it was supposed to this year.

However, the rest of Europe hasn’t conceded yet either, since they have not agreed to rollover any loans Liz Aderman and James Kanter report for the New York Times

On Monday, Greece must send its creditors a list of all the policy measures it plans to take over the next four months. If the measures are acceptable, European finance ministers could sign off on an extension of the bailout agreement on Tuesday.

So the result of the dramatic agreement is that Greece hasn’t promised further austerity in exchange for a bailout and the rest of Europe hasn’t promised a bailout. They have delayed for four more days deciding whether to delay for four more months the inevitable concession that Greece will not pay its foreign debts.

So all in all the best that could be hoped.

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Shocking incentive failure rate in North Carolina

@sandymaxey points me to a new report from the North Carolina Justice Center that is making my head spin. Picking Losers shows that the state’s flagship development program, the Job Development Investment Grant (JDIG), has seen 62 of its 102 projects fail in the period from its inception in 2002 until 2013. That is, 60% of the projects failed to meet either their job, investment, or wage goals, and had to have their awards canceled.

60%! This isn’t baseball, where a .400 batting average is outstanding, a feat that hasn’t been accomplished since Ted Williams in 1941. Let me tell you about a different failure rate: Investment Quebec takes equity stakes in a number of tech start-ups and other new companies. When I interviewed the director in Montreal in 2007, their failure rate was only 20%, a figure he considered needed to be reduced. In North Carolina, we are talking about a failure rate three times as high, despite giving the awards to firms that should not be nearly so risky.

One such firm was Dell Computers. In 2004, the company conducted a bidding war for a new computer manufacturing plant between Virginia and North Carolina. But North Carolina’s analysis of the project was so out of whack that in nominal dollars it offered almost $300 million ($174 million present value) compared to Virginia’s offer of $37 million. The plant shut down completely in 2010.

Here’s the paradox: North Carolina has some of the best taxpayer protections in the country; indeed, state and local governments lost only a few million dollars when Dell failed. The state is rigorous about canceling awards and clawing back monies already paid out. But the problem is that the state’s economic analysis of potential projects is simply atrocious. The 60% failure rate is one sign of this. The Dell fiasco, analyzed by the NC Justice Center and the Corporation for Enterprise Development in 2007, shows another aspect of fanciful economic modeling.

What can be done? I’ve written before about the weakness of economic development cost-benefit analysis. Even by that low standard, North Carolina’s performance is breathtaking. Report author Alan M. Freyer suggests that the Legislature needs to resist calls to expand JDIG or create another fund with the same purpose, maintain its jobs standards, focus on expanding industries, vastly improve its evaluation of potential projects, and focus help on rural counties. I would add that the state should reverse its cuts to education, one of North Carolina’s economic development crown jewels to date, and restrict its subsidies only to those types shown to have a positive national impact, primarily customized training for companies and generalized training for individual workers. Improving skills increases workers’ income, and it also strengthens the U.S. economy as a whole, as opposed to simply building up a company’s bottom line.

Cross-posted from Middle Class Political Economist.

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