Unemployment and Labour Force Participation in the US – Reliable Statistics?

The unemployment rate in the United States is currently 4.4 percent and is at a ten-year low. Naturally, the Trump administration has been trying to interpret low unemployment numbers as a sign of their successful job-creating policy. This stands in strong contrast to comments that Trump made during his election campaign, alleging that the “real unemployment rate” was as high as 42 percent. But pre-inauguration Trump is not the only one who is concerned that the official unemployment rate does not fully capture the gap between the US economy’s current state and its full potential, often refered to as “slack”. Despite low unemployment numbers and a still very low interest rate, inflation has been timid, giving rise to theories that the slack in the US economy is higher than the unemployment rate might suggest. I take a brief look at falling labour force participation rates and underemployment to investigate the amount of truth in these theories and discuss implications and some potential remedies. Continue reading “Unemployment and Labour Force Participation in the US – Reliable Statistics?”

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Do Pay Caps for CEOs Make Sense?

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The question whether CEO pay is excessive or adequate often leads to heated discussions. In an election year in Germany, the Social Democratic Party of Germany has recently made this topic the subject of headlines with their plan to cap CEO salaries. The argument that is usually brought forward in favour of CEO pay caps is a push toward “social justice”. This poses four important, consecutive questions: First, how can it be determined how much pay a manager deserves for his work? Second, do CEOs currently earn more than they deserve? Third, if so, at the expense of whom does this rent extraction occur? And fourth, would a cap on CEO salaries resolve potential issues? Continue reading “Do Pay Caps for CEOs Make Sense?”

Tax Evasion and Tax Avoidance – A Multi-Trillion-Dollar Business

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The topic of income and wealth inequality is closely linked to the practice of tax avoidance and evasion, both by international corporations and by wealthy individuals. For example, it is often argued that an increase in top-income taxes and capital taxes intended to mitigate economic inequality will only end up scaring off investors and high-skilled workers or encouraging them to circumvent the law and ultimately hurting national prosperity. The related difficulties of implementing national policies in a globalised world have been highlighted by the recent disclosures of the Panama Papers and the European Comission’s decision to hit Apple with a tax bill of €13 billion after years of paying an effective corporate tax below one percent due to a deal with the Irish government. Unfortunately, any discussion about tax avoidance and evasion is seriously constrained by the opacity of tax havens and the global financial system and its laws and the lack of robust data. Recent research may help to shed some light on the issue at hand. But while there has been made some progress on the international level recently, it remains highly doubtful whether the gigantic globalised financial shadow economy can be tamed. Continue reading “Tax Evasion and Tax Avoidance – A Multi-Trillion-Dollar Business”

Some New Insights on Inequality

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This week, international leaders from business and politics meet for the 47th World Economic Forum in Davos, Switzerland, to discuss pressing global issues (and improve their networks). In the face of inequality, one of the topics that is on top of this year’s agenda is to design new economic systems that ensure more equally distributed and inclusive economic growth. The organisers of the forum have recognised the disrupting role that the Fourth Industrial Revolution will play in these developments. The importance of issues of inequality has been emphasised by new findings and data that have been published in recent weeks, although situations differ substantially between countries and available data is still highly imperfect. Recent political developments might spell trouble for any collective international efforts to curb inequality. Continue reading “Some New Insights on Inequality”

The Financial Cycle Around the World in 2016

As the year is coming to a close, the financial economy in large parts of the world is characterised by high levels of uncertainty and central banks navigating through widely unknown territory. In this article, I want to take a brief look at the state of affairs in a few different economic areas and analyse potential implications for monetary policy decisions. For this purpose, a proxy for the financial cycle as developed by Drehmann et al. (2012) from the Bank for International Settlements (BIS) is presented as a visualisation tool. This concept captures cyclical fluctuations in both private credit and house prices. A high point represents above-trend volume of credit to the private non-financial sector and elevated asset prices. A low point on the other hand indicates a contracted credit and housing market (You can find a very brief description how the financial cycle is derived at the end of this article). Additionally, I consider some other important developments throughout the global financial economy. Continue reading “The Financial Cycle Around the World in 2016”

Aurora – A Short History of Gold and a Brief Look at Its Investment Opportunities

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Thank you for more than 1000 views in the first five months of this blog. I appreciate everyone who takes some of their precious time to read one of my articles and am especially grateful for all the comments and suggestions that I have received so far.

When uncertainty about the economic future and the perceived probability of market downturns rise, investors often turn to so-called “safe havens” to protect their savings. Especially when these factors are combined with concerns about increasing inflation, gold often gains centre stage in safe haven consideration. In the aftermath of the Financial Crisis and during the Euro Crisis, the gold price surged to levels not seen since the beginning of the 80s (in real terms). However, although uncertainty arguably has not decreased after the Brexit referendum in June and the election of Trump in November and with the referendum on constitutional reform in Italy this Sunday (December 4) looming, gold prices have been falling since July of this year. What is driving these developments? What are the reasons for and against investing in gold? Does it make sense to invest in gold at the moment? Before I investigate these questions, let us take a brief look at the history of gold as a financial tool. Continue reading “Aurora – A Short History of Gold and a Brief Look at Its Investment Opportunities”

Inflation, Growth and Monetary Policy – A Case Study of the United States

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Central bank target rates (%); data sources: FRED, ECB, Bank of England

Ever since the Great Recession, central bank rates in all major developed economies have been on historic lows. The European Central Bank (ECB), whose official sole mandate is to maintain price stability, has lowered its rate even further to 0.00 percent in March in response to consistently low inflation rates across the Euro area, and the Bank of England (BoE), whose mandate combines maintaining price stability and supporting economic growth, has lowered its rate down to 0.25 percent in August, in response to the Brexit decision. Meanwhile, the Federal Reserve of the United States (Fed), whose objectives are maximum employment and stable prices, has increased its target rate to 0.375 percent in December for the first time in several years. However, at its most recent meeting in mid-September , the Fed has been reluctant to further increase its target rate due to an ongoing slow economic recovery and inflation rates below its 2-percent target (Inflation measures the yearly increase in consumption good prices). Consistently low inflation rates despite lengthy phases of expansionary monetary policy, even in countries that appear to be back on economic growth paths, are a concern for central bankers around the globe and puzzle many observers. In this article, I take a look at the case of the United States (simply because it provides by far the best data), derive the main two possible causes and argue in favour of a rate hike in combination with additional monetary and fiscal measures. Continue reading “Inflation, Growth and Monetary Policy – A Case Study of the United States”