Can Lithuania’s New Government Meet the Economic Challenges Ahead?

Commentators often portray the Baltic countries as laboratories for testing the effects of austerity under fixed exchange rates. Although they share many common traits, Lithuania, Latvia, and Estonia have each followed distinctive paths during the global economic crisis. Estonia maintained tighter fiscal discipline going into the crisis, helping it to win entry into the Euro. Latvia suffered the deepest slump, but it has stuck with its austerity program for better or worse and has recently recorded some of the fastest quarterly growth rates in the EU. This post examines the distinctive elements that Lithuania has added to the Baltic saga. >>>Read more

What is the Liquidity Coverage Ratio for Banks and why should we Care that it has been Watered Down?

“Massive softening of Basel bank rules” read the headline in the print edition of Monday’s Financial Times. “Betrayed by Basel,” wrote Simon Johnson in a blistering post on his New York Times blog. At issue was a rule called the liquidity coverage ratio promulgated by the Basel Committee on Banking Supervision. If you are a banking wonk, the headlines would have been enough, but in case you are among those who are hazy on just what the liquidity coverage ratio is, what the Basel Committee does, and why we should care, read on. >>>More

Note to econ instructors: Check out these two slideshows on Basel III capital regulations and liquidity regulations for additional classroom-ready material.

Inflation Expectations are at a Record Low—or are they Soaring?

Both private investors and policymakers pay close attention to estimates of expected inflation. If investors expect inflation to be high, long-term, fixed-rate securities become less attractive, and market prices of those securities fall. If central bankers see that investors’ inflation expectations are high, they may decide to tighten policy. The trouble is, neither investors nor central bankers can observe inflation expectations directly, and not all methods for inferring expectations from market data give the same result. Sometimes, as at present, different estimation methods even point in opposite directions.>>>Read more

What is Holding Back Natural Gas as the Transportation Fuel of the Future?

The natural gas revolution has brought big changes to the U.S. energy scene. Natural gas prices, which used to move closely together with oil prices, have plunged in the last five years, as the following chart shows. One result has been the rapid displacement of coal by natural gas in electric power generation. According to a recent report from the Union of Concerned Scientists, some 100 gigawatts of coal-fired electric plants, representing more than a quarter of coal capacity and nearly a tenth of total U.S. electric capacity, have either been closed or are likely soon to be closed because they have become uncompetitive with natural gas. Natural gas has also been displacing oil at a rapid rate as a home heating fuel. In transportation, however, the use of natural gas is spreading more slowly.

Transportation ranks second only to electric power generation in total energy use. There are at least three ways to use natural gas to power transportation. One is to generate electricity with natural gas, which can then power electric cars or electrified rail lines. Another is to convert natural gas to liquids like methanol or synthetic gasoline. However, as I discussed in this post two years ago, the biggest potential lies in the direct use of compressed natural gas (CNG) or liquid natural gas (LNG) as a fuel for natural gas vehicles (NGVs). >>>Read more

Long-term Unemployment Falls as Labor Market Ends 2012 on a Quiet Note

The Bureau of Labor Statistics reported on Friday that the U.S. job market ended 2012 on a quiet note. Both the narrow and the broad unemployment rates were the same in December as in November. The economy added 155,000 payroll jobs, almost exactly equal to the month before. A jump of 30,000 in construction jobs suggested that Superstorm Sandy may have had an impact on the numbers, but there was no indication that the labor market was affected either for better or worse by uncertainty surrounding negotiations over the fiscal cliff.

The most significant change was a drop in the percentage of unemployed who had been out of work for 27 weeks or more, from 40 percent to 39.1 percent (see attached slideshow). That is the lowest level since October 2009. Long-term unemployment has been far higher throughout the recent recession and recovery than during earlier post-World War II contractions. >>>Read More

Follow this link to view or download a classroom-ready slideshow with charts of the lastest job market data.

The Not-so-Simple Economics of Right to Work Laws

There was much hand wringing and an equal amount of triumphant cheering last month, when Michigan became the twenty-fourth state to adopt a right to work (RTW) law. It joined Indiana, which went RTW last February, as only the second major industrial state with such a policy. Much of the commentary portrayed the spread of RTW as a victory for corporate power over working America, but do we really know what the effects will be? The rhetoric surrounding the passage of Michigan’s law has shed more heat than light on the matter. A less impassioned review of the issues suggests that the effects of RTW on labor markets are not as simple as supporters and opponents make them out to be. >>>Read more

The Budget Deal: What We Have Left Undone

Making fiscal policy is never going to be easy, but it would be easier if we broke the process down into a logical sequence of steps. Here are those steps, as I see them:

1. Decide how large a government we want in terms of government purchases and transfer payments. Any such number will necessarily have to be a political compromise, because not everyone will agree, but the result should be consistent with inescapable realities such as demographic trends.
2. Agree on a set of budget procedures for prioritizing line items within the constraint imposed by (1), and then follow the agreed procedures.
3. Determine the tax revenue needed to support the desired level of spending. This amount should be consistent with long-term considerations of sustainability.
4. Agree on a set of rules for adjusting spending and revenue over the business cycle. The rules should allow for a prudent amount of cyclical stimulus and restraint as appropriate, while maintaining consistency with decisions (1) and (3).
5. Agree on a tax structure that collects the amount of revenue required by (1), (3), and (4) in a way that is consistent with efficiency (broadest feasible base, lowest feasible marginal rates) and fairness (another political compromise).

Which of these five steps did Congress accomplish in 2012? Not one of them.  That conclusion will hold whether or not the House approves the last-minute stopgap measure passed by the Senate on New Year’s Eve.

In the consensus view, two things are holding back the recovery. One is the fear of an “austerity bomb”—a dose of British-style front-loaded austerity early in 2013, when what the economy really needs is a fix for its long-run inability to manage its budget. The other is sheer uncertainty—how many kilotons of fiscal TNT? Will it be all cuts? If so, which programs will be hit? If revenue is to rise, how much will come from structural tax reform and how much from increases to marginal rates? The New Year’s deal does nothing to answer these questions. All it does is to ensure that we go through the whole exercise again at another midnight a couple of months from now.

So here’s a resolution for the Honorable Members of the incoming Congress: Let’s do in the New Year those things which we left undone in the old. All five of them.

Originally posted on Economonitor.com. Reposted with permission.