Economic Bulletins

Our new research shows that the housing market is not likely to recover until the unemployment rate improves.

In our study of 20 metropolitan areas for the years 1990-2009, we found that the linkage between the unemployment rate and housing market is more substantial than expected. Our analysis of the data shows that, on average, a decrease of 1 percentage point in the unemployment rate results in an increase of 3.7 percent in house prices. This suggests that the sluggishness of the housing market recovery is directly related to the slow improvement in unemployment.

This preliminary finding based on a price index with static weights comes from the Everyday Price Index (EPI). AIER developed the new proprietary index to measure the actual price experience of ordinary people.

Renewable Portfolio Standards require the electric power industry to include renewable sources of energy.

The United States’ dependence on energy imports of fossil fuels has resulted in political and economic insecurity, as well as the depletion of natural resources and increased pollution.

In 2009, fossil fuels accounted for 78.4 percent of the U.S. energy supply. Petroleum constituted 35.3 percent of the energy supply, while natural gas was 23.4 percent and coal was 19.7 percent. By contrast, nuclear power and renewable energy amounted to just 8.3 percent and 7.7 percent of the energy supply, respectively.

Proponents of the land value tax say it encourages business. Economic theory predicts another outcome.

In 2008, property taxes represented 28 percent of revenue for local governments in the United States, totaling $400 billion. These taxes are the principal source of local governments’ revenues, dwarfing income and sales taxes.

Most of the policy debate about property taxes is concerned with marginal, or incremental, changes to the status quo—for instance, whether the government should charge an additional 1 percent tax to pay for a new school. But in this time of extraordinary budget deficits for local governments, many enterprising politicians are considering fundamental changes to the ways taxes are assessed.

Lessons from the Great Depression can provide useful perspectives for judging the consequences of current monetary policy.

After several years of comparative inactivity, bank lending for commercial and industrial (C&I) loans increased moderately in 2011. (See Research Reports, Oct. 3.) That positive trend may be accelerating. Reversing a long series of negative quarterly numbers since the onset of the crisis, C&I loans have increased in each quarter of 2011 and grew at an annual rate of 4.3 percent in Sept. 2011, the latest month for which data is available.

Debt made the headlines. But gold’s soaring value underscores the threat of serious inflation.

At close to $1800 per ounce, the price of gold is more than double its Sept. 2008 price. But why are so many investors buying gold, driving its price through the roof? Uncertainty about the outcome of the debt ceiling talks has had some effect in recent weeks, but it can’t explain the three-year trend. Mounting concern over Federal Reserve policy can.

At a hearing in July, Rep. Ron Paul asked Federal Reserve Chairman Ben Bernanke whether he cared about the price of gold.

“I pay attention to the price of gold, but I think it reflects a lot of things. It reflects global uncertainties,” said Bernanke. “The reason people hold gold is its protection against what we call tail risk: really, really bad outcomes.”...

The downgrade has focused Chinese attention on policies that skyrocketed its reserve of dollars.

Standard & Poor’s downgrade of the United States’ debt will inevitably affect other countries’ willingness to hold U.S. Treasury bonds, including China—America’s largest overseas creditor. By the end of May 2011, China held $1.16 trillion of U. S. Treasurys, which accounted for 36.3 percent of its foreign exchange reserves.

But China is in a dilemma. Even before the downgrade, policy makers in Beijing had started to consider reducing the possession of U.S. Treasury bonds.

Putting more than one-third of its $3.2 billion foreign exchange reserves in one government bond creates a high risk. One way to alleviate the risk is to diversify. Diversification became even more attractive after the downgrade, which increased...

The downgrade of the once-unassailable U.S. debt will have ripple effects around the world. A team of AIER economists take a reading of the big picture.

In this special issue of the Economic Bulletin, we take a broad view of the impact of Standard and Poor’s recent downgrade of the United States’ long-term debt from AAA to AA+. A number of AIER research fellows, visiting research fellows, and other associates contributed to our assessment of the latest shot heard around the world issuing from the American economy.

As Professor Dominick Salvatore points out in the opening article, the chain of events that led to the present debt crisis began in 2007. That’s when problems in the subprime mortgage market threatened the U.S. financial system, bringing a collapse of the housing market, and ultimately a...

Response to the meltdown has brought a whole new set of problems for the U.S. and Europe.

In 2008-2009, advanced countries faced the most serious financial crisis and recession since the Great Depression of 1929. The crisis started in the U.S. housing sector in 2007 as the result of banks giving huge amounts of (sub-prime) loans or mortgages to individuals and families who could not afford them. Contagion spread across the Atlantic because many European banks committed even greater excesses than U.S. banks, and some European nations faced an even greater housing bubble than the United States.

India’s many trading partners and scant ownership of U.S. debt may soften any impact of the S&P’s decision.

For India, the major concern about the downgrade of United States debt is the long-term effect it may have on the Indian labor market through its impact on trade.

The downgrade has shaken the global market’s confidence in the U.S. dollar as a stable currency of international transactions. This lack of confidence will likely manifest as a shift in the dollar-rupee exchange rate, affecting trade flows.

The crisis in the E.U. has mitigated some consequences of the change in America’s credit rating.

There are at least three channels through which Standard and Poor’s downgrade of United States debt may, or may not, affect links between the American and European economies.

The first of these is the role of the dollar versus the euro as an international reserve currency. The S&P downgrade raised concerns that investors in other countries might reduce holdings of U.S.-issued assets. The Euro could have been a promising alternative. It is the second-most dominant international reserve currency. Of the world’s total allocated foreign reserves of $5.3 trillion, $3.2 trillion are held in U.S. dollars and the equivalent of $1.4 trillion are held in euros.

Theories abound about why the Eurozone’s currency is flawed. But most diagnoses ignore the simple source of the euro’s problems: It’s fiat money.

by Lawrence White, PhD, Visiting Research Fellow

Nearly all commentators, apart from officials of the European Central Bank, agree that the euro is flawed in some way. There is much less agreement about how the euro is flawed and what a more ideal currency system would look like.

When the currency speculator George Soros says that “the euro is a flawed construct,” as he did in a widely reported speech in Berlin last year, he means that the euro needs a stronger political union behind it. In his view, a...