Economic Policy :US vs EU

 America has yet to achieve a full recovery from the effects of the 2008 financial crisis. Still, it seems fair to say that we’ve made up much, though by no means all, of the lost ground.

But you can’t say the same about the eurozone, where real G.D.P. per capita is still lower than it was in 2007, and 10 percent or more below where it was supposed to be by now. This is worse than Europe’s track record during the 1930s.

Why has Europe done so badly? In the past few weeks, I’ve seen a number of speeches and articles suggesting that the problem lies in the inadequacy of our economic models — that we need to rethink macroeconomic theory, which has failed to offer useful policy guidance in the crisis. But is this really the story? I’ve been revisiting economic policy debates since 2008, and what stands out from around 2010 onward is the huge divergence in thinking that emerged between the United States and Europe. In America, the White House and the Federal Reserve mainly stayed faithful to standard Keynesian economics. The Obama administration wasted a lot of time and effort pursuing a so-called Grand Bargain on the budget, but it continued to believe in the textbook proposition that deficit spending is actually a good thing in a depressed economy. Meanwhile, the Fed ignored ominous warnings that it was “debasing the dollar,” sticking with the view that its low-interest-rate policies wouldn’t cause inflation as long as unemployment remained high.No, it isn’t. It’s true that few economists predicted the crisis. The clean little secret of economics since then, however, is that basic textbook models, reflecting an approach to recessions and recoveries that would have seemed familiar to students half a century ago, have performed very well. The trouble is that policy makers in Europe decided to reject those basic models in favor of alternative approaches that were innovative, exciting and completely wrong.

In Europe, by contrast, policy makers were ready and eager to throw textbook economics out the window in favor of new approaches. The European Commission, headquartered here in Brussels, eagerly seized upon supposed evidence for “expansionary austerity,” rejecting the conventional case for deficit spending in favor of the claim that slashing spending in a depressed economy actually creates jobs, because it boosts confidence. Meanwhile, the European Central Bank took inflation warnings to heart and raised interest rates in 2011 even though unemployment was still very high.

But while European policy makers may have imagined that they were showing a praiseworthy openness to new economic ideas, the economists they chose to listen to were those telling them what they wanted to hear. They sought justifications for the harsh policies they were determined, for political and ideological reasons, to impose on debtor nations; they lionized economists, like Harvard’s Alberto Alesina, Carmen Reinhart, and Kenneth Rogoff, who seemed to offer that justification. As it turned out, however, all that exciting new research was deeply flawed, one way or another.

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And while new ideas were crashing and burning, that old-time economics was going from strength to strength. Some readers may recall that there was much scoffing at predictions from Keynesian economists, myself included, that interest rates would stay low despite huge budget deficits; that inflation would remain subdued despite huge bond purchases by the Fed; that sharp cuts in government spending, far from unleashing a confidence-driven boom in private spending, would cause private spending to fall further. But all these predictions came true.

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The point is that it’s wrong to claim, as many do, that policy failed because economic theory didn’t provide the guidance policy makers needed. In reality, theory provided excellent guidance, if only policy makers had been willing to listen. Unfortunately, they weren’t.

And they still aren’t. If you want to feel really depressed about Europe’s future, read the Op-Ed article by Wolfgang Schäuble, the German finance minister, that was published Wednesday by The Times. It’s a flat-out rejection of everything we know about macroeconomics, of all the insights that European experience these past five years confirms. In Mr. Schäuble’s world, austerity leads to confidence, confidence creates growth, and, if it’s not working for your country, it’s because you’re not doing it right.

But back to the question of new ideas and their role in policy. It’s hard to argue against new ideas in general. In recent years, however, innovative economic ideas, far from helping to provide a solution, have been part of the problem. We would have been far better off if we had stuck to that old-time macroeconomics, which is looking better than ever.(Paul Krugman NYT)

Behind the slow pace of wage growth

                                                                               Comments due by April 18, 2015

Despite continued progress in the labor market, wages have been rising slowly. In 2014, total nonfarm payroll employment rose by 3.1 million and the unemployment rate declined by 1.1 percentage points to 5.6 percent, indicating that the labor market was improving. Meanwhile, average hourly earnings and compensation per hour rose only by 1.8 percent and by 2.5 percent, respectively, a smaller increase than one might expect after 5 years of economic recovery. In this article, we look at some factors behind the slow pace of wage growth, including slow productivity growth and labor’s declining share of income.

One reason wages have been rising slowly is that prices have been rising slowly. Low inflation, however, does not explain the trend in wages completely. Even after subtracting the effect of inflation, wages have been rising slowly. In 2014, real average hourly earnings and real compensation per hour rose, respectively, by only 1.2 percent and 1.3 percent.

In fact, real wages have been rising slowly for several years. Measuring from the end of the Great Recession, real wages have barely risen—real compensation per hour has risen only by 0.5 percent, much less than at this point in past recoveries. The lack of strong wage growth has been one factor that has held down the growth of income, consumer spending, and the recovery.

Some temporary factors may explain, in part, weak real wage growth during the recovery. For instance, Daly and Hobijn (2015) suggest that many firms were not able to reduce wages during the Great Recession, so they compensated by not raising wages as fast during the recovery. This factor, however, became less and less important over time as the recovery continued to progress.

Another factor that may have held down wage growth during the recovery is a change in the composition of jobs and hours—a relative increase in  lower-paid jobs and hours may have depressed the average wage. Data, however, suggests that a change in the composition of occupations did not have a strong effect on the average wage: The employment cost index for total compensation—an index that tracks the cost of labor for a fixed composition of occupations—has risen by 11.5 percent during the recovery, which is similar to the growth in average hourly earnings and compensation per hour, which have risen, respectively, by 11.3 percent and by 11.5 percent. Also, Elvery and Vecchio (2015 , Table 2) find that the effect of the change in the mix of occupations on the change in the average wage between 2010 and 2013 was small (and actually positive). Similarly, Mancuso (2015) finds that shifts in industry composition do not explain much of the weakness in wage growth during the recovery.

Some longer-term changes in the economy have likely played a larger role in depressing real wage growth. The first is the slowdown of labor productivity in the last decade. Productivity growth in the nonfarm business sector has averaged only 1.46 percent since 2004 and 0.85 percent since 2010. As the growth of labor productivity is a key determinant of real wage growth in the long run, the slowdown of productivity has probably helped to depress wage growth.

Other long-term changes in the economy, including the evolution of the technology used to produce goods and services, increased globalization and trade openness, and developments in labor market institutions and policies, have caused labor’s share of income to decline at a faster pace since 2000 than in previous years, and in doing so they have likely held down real wage growth. After declining at an average rate of 0.1 percent per year from 1960 to 2000, the labor share has declined more rapidly since 2000, on average about 0.5 percent per year (see Jacobson and Occhino, 2012). In an accounting sense, the faster decline since 2000 has subtracted about 0.4 percentage points per year from average real wage growth relative to the period before 2000.

Going forward, wage growth will likely pick up in the short run, as inflation rises and labor market conditions strengthen further. In the longer run, whether average real wage growth remains lower than in the past will depend on whether trend productivity growth continues to be low and whether other fundamental economic forces cause further declines in the labor share of income.(The Big Picture)

EU Targets US Tech Giants.

                                                                   Comments due April 11, 2015.

The European antitrust investigation into Google appears to be heating up. More European countries are looking into Facebook’s privacy settings. And Apple, which already is under scrutiny for its low corporate tax arrangements in Ireland, is now facing potential antitrust questions from the European Commission about the company’s new music streaming service expected this year. The new developments offer the latest and perhaps clearest sign yet that American tech giants face intensifying scrutiny in Europe — pressure that could potentially curb their sizable profits in the region and affect how they operate around the world. It is unclear what exactly set off the recent flurry of moves. But many local lawmakers have long been wary of the dominance of American tech companies, and those politicians have become increasingly outspoken about how the companies have used their financial deep pockets and ability to innovate quickly to outmuscle European rivals. “It’s no wonder Europe is going after these companies,” said Luca Schiavoni, a regulatory analyst at the technology research company Ovum in London. “They are the biggest fish in the pond and have become very  powerful. That inevitably means regulators are going to get involved.” Europe’s willingness to police tech companies’ activities contrasts with a relatively hands­off approach favored by United States authorities, which have so far refrained from widespread antitrust lawsuits and privacy investigations into how tech companies use people’s online data. In recent years, however, American tech companies have become the central target for Europe’s antitrust officials. Advocates say this approach is aimed at limiting the dominance of a small number of companies, though industry executives say Europe is using the investigations to promote the region’s own tech companies, which often have been unable to compete with their United States rivals. On Thursday, Apple became the latest West Coast company to face this scrutiny after it was revealed that European competition officials had sent questionnaires to several music labels and rival music streaming companies, according to several people with direct knowledge of the interactions who spoke on the condition of anonymity. The questions are part of attempts by European authorities to gather evidence to decide whether an official antitrust investigation into Apple’s new music service will be needed, the people added. News of the questionnaires sent to music industry executives was earlier reported by The New York Post. An official investigation by the European Commission, the executive arm of the European Union, could lead to big fines against Apple and other restrictions on its activities if the company is found to have broken antitrust rules. In a previous antitrust case, for example, Microsoft agreed to pay fines totaling $1.8 billion for breaking European competition rules. The most recent concerns focus on whether Apple, a crucial partner for the music industry, may try to persuade labels to favor its new paid streaming service over those of rivals like Spotify, which have free tiers, according to one executive at a major label, who declined to speak publicly. Europe’s antitrust officials want to ensure that Apple’s new subscription service does not gain an unfair advantage over rivals like Spotify, the music executive added. Representatives of Apple, the European Commission, Spotify and the major record companies all declined to comment. Perhaps no company is in European regulators’ cross hairs more than Google, whose search engine holds roughly a 90 percent share of the region’s online search market. As part of its five­year antitrust investigation into whether Google used its dominant position to favor its own services over rivals, the European Commission has now asked several companies that had filed complaints against the search giant to make their confidential submissions public, according to several people with direct knowledge of the matter who spoke on the condition of anonymity. By asking several of these companies to make their submissions public, the European Commission can ask Google to respond to the companies’ claims and bring the case closer to resolution, according to several of the people. News of the requests to companies to make their submissions public was earlier reported by The Wall Street Journal. Officials and analysts warned, however, that it was still unclear whether the European Commission would file charges against Google. Yet by pushing ahead with their investigation, Europe’s antitrust officials have gone beyond efforts by the Federal Trade Commission, which is under renewed scrutiny over how it handled its own investigation into Google. A recently released internal report by the agency suggested that some officials had recommended that Google should have been sued for antitrust practices, though the F.T.C. decided in 2013 not to bring charges. If Google is found to have broken European antitrust rules, the financial penalties could be substantial. Officials have the power to fine Google up to 10 percent, or roughly $6.5 billion, of its most recent annual sales and to place restrictions on the company’s operations in Europe. A spokesman for Google declined to comment. “Everyone is very aware that this case has to come to some sort of conclusion,” said Mario Mariniello, a researcher at the think tank Bruegel in Brussels and a former antitrust official. “The pressure is rising. They will have 4/4/2015 Antitrust and Other Inquiries in Europe Target U.S. Tech Giants ­ NYTimes.com http://www.nytimes.com/2015/04/03/technology/europe­regulators­apple­google­facebook.html 4/5 to come to some sort of decision soon.” European lawmakers have also paid increasing attention to the tax activities of the likes of Apple, Facebook and Amazon, many of which have used complicated accounting structures to reduce their tax burdens across the region. In the last 12 months, countries like France and Britain have criticized companies like Google for not paying enough tax on their operations in those countries. And in a sign that European regulators’ interest in American tech companies has continued to expand despite industry efforts to appease local authorities, several European data protection regulators are now questioning how companies like Facebook and Google protect the online data of the region’s more than 500 million people. Many of the region’s data protection watchdogs are reviewing whether Facebook’s new privacy policy, which went into effect from Jan. 1, broke the region’s tough privacy rules, which offer people greater control of how companies can use their data than is currently offered in the United States. On Thursday, French, Italian and Spanish privacy officials said they had opened investigations into the social network’s privacy policies; similar inquiries have already been started by Dutch, Belgian and German officials. The regulators are asking whether Facebook gained sufficient approval from users when the company gained access to their online data. “We’re not afraid of scrutiny,” a Facebook representative said in a statement. “We have been responsive to local regulators and stand ready to respond to additional questions.” The move by regulators comes less than a week before the first hearing in a separate class­action lawsuit against Facebook in Austria, in which roughly 25,000 claimants are arguing that the social network misused their online data. In response, Facebook contends that it has complied with the region’s data protection rules. “This is just the beginning of our investigation,” said Mathias Moulin, deputy director of enforcement at the French data protection regulator, who is 4/4/2015 Antitrust and Other Inquiries in Europe Target U.S. Tech Giants ­ NYTimes.com http://www.nytimes.com/2015/04/03/technology/europe­regulators­apple­google­facebook.html 5/5 overseeing the watchdog’s review of the company’s activities. “Facebook affects millions of people across Europe. There are a lot of privacy issues to look at.”