News & EventsNewsletterApril 2015 Newsletter
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In this Issue:
Gerald Epstein Delivers Distinguished Faculty Lecture
Capital Flight from Africa: A New Collection
Raising the Minimum Wage to $15 an Hour, Without Losing Jobs or Profit
An Unexpected Cost of War: Fewer Jobs
Does Earned Income Tax Credit Improve Health Outcomes?
PERI Alumni Spotlight: Manisha Pradhananaga on Commodities as Financial Assets
Additional Recent PERI Research
PERI Commentary and News Coverage
Gerald Epstein Delivers Distinguished Faculty Lecture
On March 24, Professor Gerald A. Epstein, Co-Director of PERI, presented “When Big is Too Big: Do the Financial System's Social Benefits Justify Its Size?” in a Distinguished Faculty Lecture at the University of Massachusetts, Amherst.
In his lecture, available to watch in full here, Epstein outlined his recent research on the massive growth of financial markets and institutions in relation to the economy, and their correspondingly small contrbutions to society—especially given the resources they capture, and the risks they impose on society. 
In Epstein’s words: “The financial system, standard economic theory tells us, encourages productive investment, provides mechanisms for households to transfer income, helps families and businesses reduce risk, provides stable and elastic liquidity to households and businesses, and develops powerful financial innovations. The Great Financial Crisis of 2008, however, brought these assumptions into doubt and raised a key question: just what are the financial sector’s contributions to society?”
Epstein argues that since 1980, the financial sector has increasingly failed to promote social well-being. He proposes proactive measures to redirect financial activity in order to achieve key social goals, such as employment generation and a successful transition to a fossil fuel limited economy.
>>Watch Gerald Epstein’s Distinguished Faculty Lecture here
Capital Flight from Africa: A New Collection
Capital flight is a critical challenge to economic development in African countries. While Africa receives a substantial amount of capital inflows in the form of official development assistance, external borrowing, and foreign direct investment, it also suffers a heavy financial hemorrhage through capital flight.
Capital flight is defined as unaccounted-for money leaving a country. “Most often, it is leaking out of the country because owners are unwilling to disclose the sources of the funds, which may have been acquired illicitly; it’s also because the owners do not want to disclose how much they are holding abroad, so they can avoid paying taxes,” says Léonce Ndikumana, Director of PERI’s African Development Policy program, in an interview on The Real News Network. “Capital flight is a net loss to the country. These are resources that could have been invested in the country to promote investment, employment creation, and economic growth.”
Ndikumana and S. Ibi Ajayi (University of Ibadan) have edited Capital Flight from Africa: Causes, Effects, and Policy Issues, published by Oxford University Press. The collection is the most comprehensive thematic analysis of capital flight from Africa to date. It provides the most recent data on the magnitude of capital flight from 39 African countries, and detailed analyses of the impact of capital flight on economic development—with a specific look at poverty reduction—and macroeconomic outcomes with a focus on growth. The collection also examines the linkages between capital flight and monetary policy, financial liberalization, and the global financial system, and ends with suggestions for strategies to address capital flight, co-authored by Ndikumana and fellow PERI economist James K. Boyce.
As Ndikumana says, “The more money you make, the more you lose. That is the story of Africa over the past two decades. Along with the impressive record of economic growth acceleration spurred by primary commodity exports, the continent has experienced a parallel explosion of capital flight.”
Select chapters are available now as PERI Working Papers. Read them here:
>>“Capital Flight and Monetary Policy in African Countries,” by Hippolyte Fofack and Léonce Ndikumana 
>>“Capital Flight: Measurement and Drivers,” by Léonce Ndikumana, James K. Boyce and Ameth Saloum Ndiyae
>>“Governance and Illicit Financial Flows,” by Melvin D. Ayogu and Folarin Gbadebo-Smith
Raising the Minimum Wage to $15 an Hour, Without Losing Jobs or Profit
In a recent working paper, PERI Co-Director Robert Pollin and Assistant Research Professor Jeannette Wicks-Lim examine whether U.S. fast-food businesses could adjust to an increase in the federal minimum wage from its current level of $7.25 per hour to $15 an hour without having to lay off workers.
They found that American fast food restaurants could more than double the minimum wage of their lowest paid workers to $15 an hour over a four-year period without causing the widespread employment losses often cited by critics of such increases. The average profit rate for fast-food firms would also not have to fall as a consequence of the minimum wage increase to $15 an hour.
The authors used data gathered from previous studies and U.S. Economic Census reports. They found that at the standard rate of industry sales growth, the savings from a decrease in workforce turnover, added to revenue generated from moderate annual 3 percent price increases, could support a two-stage increase in the minimum wage from its current level of $7.25--first to $10.50, and three years later, to $15.
The working paper, “A $15 U.S. Minimum Wage: How the Fast-Food Industry Could Adjust without Shedding Jobs,” describes how fast-food firms would not need to lower their average profit rate during this adjustment period, nor would they need to reallocate funds generated by revenues away from any other area of their overall operations, such as marketing.
“In terms of policy implications, our results offer a straightforward conclusion,” they write. “Achieving a $15 federal minimum wage within the U.S., phased in over four years, should be seen as a realistic prospect. This specifically means that the intended consequence of the $15 minimum wage—to improve the living standards of low-wage workers in the U.S. and their families—can certainly prevail over the unintended consequence that low-wage workers and their families would suffer from widespread employment losses.”
>> Working Paper: “A $15 U.S. Minimum Wage: How the Fast-Food Industry Could Adjust without Shedding Jobs”
>> Press Coverage:
CBS News: “Why Fast Food Chains Can Afford to Double Pay”
PBS Newshour: “How to raise the minimum wage 107 percent without losing jobs or profit”
An Unexpected Cost of War: Fewer Jobs
There is a common perception that war is good for the economy. This is because, among other things, war is said to be a powerful engine of job creation. But in a paper for the Costs of War Project based at Brown University, PERI Assistant Research Professor Heidi Garrett-Peltier finds that the federal spending dedicated to fighting wars over the past 14 years has created significantly fewer jobs than would have resulted from other kinds of government spending.
Wars stimulate demand for various outputs such as aircraft, ammunition, and uniforms. Approximately 11,200 jobs are created by every $1 billion in military spending. Domestic industries that produce these goods may thrive during wartime, employing people who might otherwise be unemployed. Military spending by the federal government is therefore often considered not only a source of national security, but also a vital support to economic recovery and employment. 
But stimulating war-related activity, Garrett-Peltier writes in “The Job Opportunity Cost of War,” forgoes opportunities to stimulate other types of economic activities, including manufacturing clean energy, or expanding access to education.
She found that the same $1 billion of government spending would create 26,700 jobs in education, 16,800 jobs in clean energy (i.e., construction work to install solar panels on homes), and 17,200 jobs in health care. In other words, clean energy and health care spending create 50 percent more jobs than the equivalent amount of spending on the military, and education spending creates more than twice as many jobs.
Garrett-Peltier found that war spending over the past 14 years has resulted in lost opportunities of between one and three million jobs. An additional 2.2 million to 4.2 million jobs per year could have been created annually with alternative forms of investment, as opposed to 1.2 to 2.3 million jobs created through military spending.
>> Paper: “The Job Opportunity Cost of War”
>> The Costs of War Project
>> The Costs of War Project: Lost Jobs landing page
Does the Earned Income Tax Credit Improve Health Outcomes?
Poverty and health have a well-established relationship: lower socioeconomic status leads to worse health outcomes. Yet research has rarely tested the effectiveness of anti-poverty programs at improving health. In the PERI working paper “Improving Health by Reducing Poverty: New York’s Earned Income Tax Credit,” Assistant Research Professor Jeannette Wicks-Lim and Senior Fellow and Director of Health Policy Research Peter Arno examine the health effects of the Earned Income Tax Credit (EITC), the largest anti-poverty program for working families operating throughout the U.S.
The study examines how changes in New York State and New York City’s EITC program affected health outcomes in the city’s low income neighborhoods between 1997 and 2010. Between these years, the EITC in New York City rose from 20 percent to 35 percent of the federal benefit.
The study is the first to analyze EITC’s impact on neighborhoods, rather than households, and finds a concentrated health benefit in high poverty areas. EITC dollars flow into high poverty areas in a concentrated way. As a result, the EITC can expect to have a magnified impact, not only on EITC recipient households but also EITC non-recipient households living in the same neighborhoods.
The authors find that New York’s EITC program reduced the low birth weight rate—an important health indicator—in poor neighborhoods. For an EITC rate increase from 20 percent to 35 percent, low birth weight rates in the City’s low-income neighborhoods fall by 0.45 percentage points. The authors write, “An improvement of this size is substantial when we consider that low birth weight rates have only fluctuated between 9.0 percent and 9.8 percent in these neighborhoods over the years of this study. The size of this estimated health effect suggests that the EITC’s health benefits are amplified in high-poverty neighborhoods. The magnitudes of our estimates, from our preferred specifications, are about 50 percent larger than the only comparable estimates available to-date of how EITC benefits impact low birth weight rates among EITC recipients.”
>> Working Paper: “Improving Health by Reducing Poverty: New York’s Earned Income Tax Credit”
PERI Alumni Spotlight: Manisha Pradhananga on Commodities as Financial Assets
Manisha Pradhananga, Assistant Professor of Economics at Knox College, is the author of the PERI Working Paper: Financialization and the Rise in Comovement of Commodity Prices, which seeks to explain the factors behind a 96 percent rise in food prices between 2000 and 2008. Pradhananga completed her PhD in Economics at UMass in 2014, and was a PERI Research Assistant during her time in Amherst. Here, she speaks with PERI about her research on the financialization of commodities, in which she found that a substantial part of the explanation is tied to the concurrent rise in speculative trading of a wide range of commodities on financial markets.
What brought you to ask why and how unrelated commodity prices rose (and fell) together?
During my second year at UMass, Professor Jayati Ghosh gave a talk at PERI in which she discussed the then-ongoing food crisis, precipitated by a sharp rise in commodity prices that peaked in June 2008. Professor Ghosh suggested that speculation in the commodities futures market was a major cause for the rise in price, not rise in demand from emerging markets (India and China) and drought like others had claimed. Before her talk, I did not know how Big Finance is connected to commodity prices, and was shocked to discover that food and other commodities are now considered just another asset like stocks and bonds that you can add to your portfolio. Shortly after that I wrote a paper on the topic for my applied econometrics class with Bob Pollin and Michael Ash, which basically started my dissertation research. 
What are the ramifications of the comovement of these unrelated commodities? How do these price shifts affect producers, suppliers, and consumers?
Comovement of unrelated commodities point to a larger issue which we have termed “financialization of the commodities futures market.” As I mentioned before, futures contracts of commodities like oil, wheat, corn, soybeans, etc., are now considered a financial asset like stocks and bonds. Investors buy and sell commodity futures contracts as a group, not based on expectations of future demand and supply of the particular commodity, but based on other portfolio considerations. If a large portion of the futures market is controlled by such portfolio diversifying motives, then prices of commodities will be divorced from demand and supply fundamentals and will rise and fall at the whims of Wall Street. In my paper I provide evidence that financialization has led to synchronization of prices of unrelated commodities. Other researchers have also found evidence of increasing correlation between commodity prices and traditional assets, like stock. This financialization of commodity futures markets have ramifications for several groups of people.
First, commodities futures market have existed in the US since 1865, providing producers and consumers of commodities to hedge against unexpected changes in prices. But as futures market is taken over by Big Finance and prices become more volatile, the futures market may lose its usefulness for producers and consumers.

Second, as commodity futures market get financialized, prices will become more unstable, leading to price spikes like the ones we witnessed in June 2008 and February 2011. This will have huge impact on the most vulnerable population of the world, because they spend a higher proportion of their income on food and are unable to smooth consumption. According to the USDA, the 2008 price development was responsible for increasing the number of malnourished people by 80 million.
What do you see as next questions to spring from your research?
There are several possible directions to go with regards to my research. The nature of financialization is rapidly changing, as market participants churn out new financial instruments and trading strategies. For example, when I started my dissertation, most researchers focused on institutional investors like pension funds that use index trading as the primary way to expose themselves to commodity futures. However, recently second and third generation commodity indices and other instruments such as exchange-traded funds and notes have gained popularity. It is important that we keep up with the market and study how these new instruments and trading strategies may distort the market.  
I am also interested in understanding how futures prices in these large exchanges—such as the Chicago Board of Trade, and New York Mercantile Exchange—affect prices of commodities in developing countries. Currently, I am working on a project related to dependence of developing countries on commodity exports. High commodity prices may further increase the dependence of developing countries on commodity exports, which is problematic for several reasons from a development perspective.  
Additional Recent Research

PERI Working Paper: Hasan Comert and Mehmet Selman Colak
Can Financial Stability be Maintained in Developing Countries After the Global Crisis?: The Role of External Financial Shocks
Developing countries survived the recent financial crisis with less damage than advanced countries; the majority of developing countries did not experience a financial system collapse. Why not? This paper argues that financial account shocks were relatively moderate, both in terms of magnitude and duration. The authors warn that if returns in advanced countries become more attractive, developing countries may face larger external financial shocks and crises.
World Journal of Social Science Research: Peter Arno, Kenneth Knapp, Stephen Russo, Deborah Viola
Rising Food Insecurity and Conservative Policy in the U.S.: Impact on the Elderly
Food insecurity has been on the rise in the U.S., while social safety net programs have been targeted for cuts. This paper assesses the prevalence and impact of food insecurity in a survey of 500 elderly homebound meal clients in New York City. Their findings suggest that community-dwelling, homebound seniors have serious medical and health problems, multiple unmet social service needs, and often suffer from food insecurity.
PERI Working Paper: James K. Boyce, Klara Zwickl, and Michael Ash
Three Measures of Environmental Inequality
This paper computes three measures of environmental inequality at the national level and for the 50 states: the Gini coefficient of exposure to industrial air pollution, the ratio of median exposure of people of color to that of non-Hispanic whites, and the ratio of median exposure of poor households to that of nonpoor households. The appropriate policy response depends on whether the concern is equal fulfillment of the intrinsic right to a clean and safe environment, or interactions between environmental inequality and other socioeconomic disparities.
PERI Working Paper: Sara Hsu and Jianjun Li
The Rise and Fall of Shadow Banking in China
There is very little literature on Chinese shadow banking, examined from a political economic perspective. This paper discusses the economic and political conditions that gave rise to shadow banking in China and the relationship of those conditions to the financial crisis in the West.
PERI Working Paper: Adem Y. Elveren and Sara Hsu
Military Expenditures and Profit Rate: Evidence from OCED Countries
This paper provides evidence for 24 OECD countries for the period of 1963-2008 by employing a panel autoregressive distributed lag model for the first time. Findings show that while for the whole period there is a positive linkage between military expenditures and profit rates, in the post-1980 era, the impact of military expenditures is negative.
PERI Working Paper: Juan Antonion Montecino and Gerald Epstein
Have Large Scale Asset Purchases Increased Bank Profits?
This paper empirically examines the effects of the Federal Reserve’s Large Scale Asset Purchases (LSAP) on bank profits by using a new dataset from the Fed’s regulatory reports. The authors’ results suggest that banks that sold Mortgage-backed Securities to the Fed experienced significant profit increases. The paper’s findings are consistent with the hypothesis that the Federal Reserve undertook these policies, at least in part, to increase the profitability of their main constituency: the large banks.

PERI Working Paper: Stephen A. Marglin and Peter M. Spiegler
Did the States Pocket the Obama-Stimulus Money? Lessons from Cross-Section Regression and Interviews with State Officials
This paper deploys cross-section regressions and open-ended interviews to assess the impact of grants to the states under the Obama stimulus of 2009-2011. Contrary to John Taylor and John Cogan, who conclude that the states saved rather than spent the grants, the authors estimate that approximately two-thirds of every ARRA dollar was spent by the states and one-third saved. 
PERI Working Paper: Klara Zwickl and Mathias Moser
Informal Environmental Regulation of Industrial Air Pollution: Does Neighborhood Inequality Matter?
This paper analyzes if neighborhood income inequality has an effect on informal regulation of environmental quality, using data on industrial air pollution exposure from EPA's Risk Screening Environmental Indicators and income and demographic variables from the American Community Survey and EPA's Smart Location Database. The authors find evidence that overall neighborhood inequality increases local air pollution exposure, whereas a concentration of top incomes reduces local exposure.
PERI Working Paper: Léonce Ndikumana
Better Global Governance for a Stronger Africa: a New Era, a New Strategy
Policy recommendations to handle the enduring challenges facing Africa have typically focused on what African countries and their development partners should do to improve the continent’s economic fate. Less attention has been paid to the role of global governance in addressing these challenges, even though it continues to hamper efforts at the national, bilateral, and multilateral levels aimed at finding solutions to these development challenges.
PERI Working Paper: Simon Sturn and Klara Zwickl
A Reassessment of Intermediation and Size Effects of Financial Systems
This paper shows that the criticisms of Beck et al. (2014) of the “too much finance” literature depend on outliers, and their results are not robust against alternative specifications or estimation approaches. Further, a big financial sector and too many non-intermediation activities are found to reduce growth in some specifications. Our results suggest that Beck et al.’s criticisms are grounded on thin empirical evidence.
PERI Working Paper: James Crotty and Gerald Epstein
The Last Refuge of Scoundrels: Keynes-Minsky Perspectives on the Uses and Abuses of the “Liquidity Defense”
In this paper, the authors argue that the “liquidity defense” of banks is theoretically incoherent. The “liquidity defense” is set within, and only make sense within, the framework of neoclassical financial market theory because it assumes that more liquidity always leads to greater market efficiency, a proposition that is, in fact, wrong.
European Journal of Economics and Economic Policies: Gerald Epstein
Restructing Finance to Promote Productive Employment
Modern financial markets and institutions have grown massively in relation to the economy in the United States and elsewhere, and there is little evidence that in recent years their contributions to economic and social output justify the resources they capture and the risks they impose on society. Abandoning the embrace of speculative finance and promoting socially efficient finance is a key imperative.
PERI Working Paper: John Miller and Josh Mason
The Tax Adequacy Problem in the New England States: What Can Be Done About It?
The tax adequacy problem of state governments both predates the current fiscal crisis and will persist even as the economic trauma induced by the Great Recession subsides. This paper examines the tax adequacy problem — the failure of the tax base of state governments to generate revenues that keep pace with the growth of their economies — faced by the six New England state governments.
PERI Working Paper: Ignacio Perrotini and Santiago Capraro
Sterilized Interventions in an Inflation Targeting Regime: Two Instruments to Control Inflation. The Mexican Experience, 1996 - 2013This paper investigates the effectiveness of Banco de Mexico interventions to move the exchange rate in its desired direction. Banco de Mexico almost totally sterilizes its exchange rate interventions, which means that sterilization is an independent instrument of Banco de Mexico monetary policy. The authors find that interventions were effective in the period under study.
PERI Commentary and News Coverage 

Klara Zwickl on The Real News Network: Industrial Air Pollution and Environmental Injustice
Robert Pollin on Green Growth Series
Green Growth Strategy: A Realistic Response to Climate Change
Green Growth Strategy: Converting to Green Energy and Job Creation
Green Growth Strategy: Who Will Pay?
Green Growth Strategy: Can Underdeveloped Countries Reduce Emissions and Still Grow Their Economies?
Gerald Epstein comments in The Kansas City Star: Questions surround economists who assess Missouri legislation
Gerald Epstein on The Real News Network: Quantitative Easing Unlikely to Solve Europe's Economic Crisis
Jeannette Wicks-Lim on The Real News Network: $15 Minimum Wage is Affordable for Fast-Food Businesses
Robert Pollin and Jeannette Wicks-Lim in The Springfield Republican: Fast food industry can pay $15-an-hour minimum wage without loss of profit: UMass study
Gerald Epstein and Jessica Carrick-Hagenbarth in The Washington Post: Forget the McDonnells. We're ignoring bigger, more pernicious corruption right under our noses.
James K. Boyce writes an opinion piece in The Los Angeles Times: Amid Climate Change, What's More Important: Protecting Money or People?
Jeannette Wicks-Lim writes an opinion piece in Dollars and Sense: Why We All Need Affirmative Action

Gerald Epstein and Jane D’Arista in Global Finance Magazine: Are Banks Unsafe at Any Size?

Heidi Garrett-Peltier in The Brown Daily Herald: Watson project explores war's toll on economy and health

James Heintz on openDemocracy: "G20: can women's human rights and economic growth co-exist?"

James K. Boyce on the Institute for New Economic Thinking’s blog: "New Research Shows Pollution Inequality is Even Worse Than Income Inequality" in Rolling Stone: "Inside the Koch Brothers' Toxic Empire" by Tim Dickinson
Jeannette Wicks-Lim in The Press-Democrat: "Advocates unveil 'Living Wage' proposal for Sonoma County"
Robert Pollin on The Real News Network: Climate Change Buried in State of the Union
Robert Pollin on The Real News Network: Towards a Green Economy
Part 1: How Urgent Is It?
Part 2: Proposal for a Sustainable Plan
Part 3: Green Economy Models that Work
Part 4: Is Clean Coal and Carbon Capture an Option?
Part 5: Green Growth or No Growth?
Part 6: Fighting at the Local Level
Part 7: Tax, Trade, Cap, Deny?
Part 8: Private or Public?
Robert Pollin on Marketplace: Dynamic Scoring Easy to Manipulate
Léonce Ndikumana on The Real News Network: Scale and Consequence of Capital Flight
Robert Pollin Delivers The Harvey Goldberg Memorial Lecture: "The U.S. Green Energy Transformation: Controlling Climate Change and Expanding Job Opportunities"
Gerald Epstein on The Real News Network: Dodd-Frank's Final Rule
James Boyce on The Real News Network: Pollution Inequality Worse than Income Inequality
James Boyce on WHMP Radio: Carbon Dividends (Segment starts at minute 14.)
Gerald Epstein on The Real News Network: The Fed's Effort to Rein in Big Banks
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