Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).
It is amazing how often we hear that China is experiencing some sort of crisis because of its aging population. This is supposed to lead to a situation in which it won't have enough workers to support an aging population.
If folks have been following events in China recently its big problem is too few jobs and unemployment. It has closed a number of coal mines in recent years, leading to the loss of tens or even hundreds of thousands of jobs in the coal mining industry. Currently it is hugely subsidizing its steel exports to keep its steel factories running. Without these subsidies, hundreds of thousands of workers could lose their jobs. There are comparable stories in many other industries.
So China's big problem for the foreseeable future is going to be too many workers, that is 180 degrees at odds with the too few workers story that the demographic crisis people keep pitching, as in this Reuters article that appeared in the NYT today. This piece includes the ominous warning:
"For the first time in decades China's working age population fell in 2012 and the world's most populous nation could be the first country in the world to get old before it gets rich."
Actually, China is pretty close to getting rich. If the I.M.F.'s projections prove correct, then it will be as wealthy as countries like Portugal and Greece by the end of the next decade. (This assumes that the per capita growth rate over the rest of the decade is the same as is projected from 2019-2021.) In an international context, that would count as "rich," and in any case many countries with lower per capita incomes already have high ratios of retirees to workers. Given its extraordinarily rapid growth over the last three and half decades China is far better positioned to care for its population of retirees than almost any other country in the developing world.Add a comment
The NYT had an interesting column on how we can reduce the length of the security lines at airports. (Start with your shoes.) However, the piece left out one obvious factor lengthening security lines: carry on baggage.
Security lines would move much quicker if more people checked their luggage rather than carry it on board. Of course, there is a good reason that people want to carry their bags on board, most airlines charge them $25 per checked bag. (Southwest is a notable exception, allowing two free checked bags per passenger.) So we have airlines carrying through a policy that is making everyone's life miserable to squeeze a few extra dollars out of their passengers.
We can counter the airlines bad behavior. Suppose that TSA charged a $10 fee for each bag that goes through security. That would give people more incentive to check their bags, thereby reducing the length of the security lines. If that is too radical, we can change an absurdity in current law under which airline tickets are subject to a 7.5 percent tax used to fund airport operations, but fees like those for checking bags are not. If there is a planet where this makes sense, I haven't seen it.
Anyhow, trying to get more people to check their bags is a really simple way to reduce the length of the security lines. Southwest is a highly profitable airline, maybe they could provide some management training to their competitors.
Irrelevant sidebar — here's the reference for my title.Add a comment
Yes, what else is new? The basic story is that Robert Samuelson has discovered a wage series that shows, "many workers are actually receiving modest increases." Samuelson tells readers:
"...the study [the one showing modest wage growth] exerts pressure on the Fed to raise interest rates."
The series that has Samuelson so excited is a wage series that tracks the same workers over time. It looks at full-time workers and compares their wages this year with their wages last year. It will exclude anyone who was not employed full-time in both periods and it also will miss anyone who moves, since it is a household survey.
My friend Jared Bernstein has already given a good argument as to why the Fed should not jump on this new series as an excuse to raise interest rates. Let me add three additional points.
First, the gap between this series and the other wage series can be explained by an increased premium for longer tenured workers. More than 4 million workers leave their jobs every month. This series is picking up only the people who stay in their full-time job or leave their job and find a new full-time job, but do not move. That exlcudes a very large segment of the labor force. Suppose this group is getting an increased wage premium. Why is this a rationale for the Fed to raise to interest rates? In this respect, it is worth noting that the wage gains shown by this measure are still almost a full percentage point below the pre-recession pace.Add a comment
That's the question millions are asking, or at least the one they should be asking. The OECD recently did an analysis of the economic consequences for the U.K. if it decides to leave the European Union. It concluded that it would cost the country 5.1 percent of GDP in its central estimate. Other analyses have arrived at similar estimates. Such estimates have been cited by right-thinking people everywhere as a powerful argument against the U.K. leaving the European Union. (It is.)
But Brexit is not the only policy that can cost the U.K. large amounts of output. Since the Cameron government came to power in 2010 it has placed a priority on reducing the budget deficit rather than restoring the economy to full employment. As a result, the U.K. economy is still well below its potential level of output. (The potential has undoubtedly fallen as a result due to weak public and private investment since the downturn and workers experiencing prolonged stretches of unemployment and thereby losing skills.)
To get a simple estimate of the output lost due to Cameron's austerity policies, we can compare the I.M.F.'s projected growth path for the U.K. from 2008, before the severity of the recession was recognized and its current level of output. In 2008, the I.M.F. projected that the U.K. economy would be 26.2 percent larger in 2016 than it was in 2007. (Since the projection only runs to 2013 I have assumed that the growth rate for 2012 to 2013 [2.7 percent] continues for the next three years.) The most recent projection shows that 2016 GDP will be just 9.4 percent higher than the 2007 level.
If we can credit the I.M.F. research staff for knowing what they were doing in their 2008 projections, then the U.K.'s austerity policies have cost it an amount of output equal to 16.8 percentage points of 2007 GDP or more than three times the estimated cost of Brexit. This means that if Brexit is an economic disaster then Cameron's austerity has been three times as costly as an economic disaster.
For the curious ones out there, the I.M.F's projections showed the U.S. economy being 26.4 percent larger in 2016 than in 2007. The most recent projection shows the economy being 12.6 larger. The implied loss of 13.8 percentage points of 2007 is a bit less than the three times Brexit measure.Add a comment
The Washington Post has an article telling readers that a former McDonald's CEO is warning that a $15 minimum wage will lead to widespread use of robots at fast food restaurants. The piece goes on to warn about the danger that robots pose to jobs more generally:
"Robotics and artificial intelligence are hot areas in the technology sector, and the World Economic Forum estimated earlier this year that their rise would cause a net loss of 5.1 million jobs over the next five years.
"Some experts are so concerned about looming unemployment that they are calling for a basic income, a regular stipend to be paid to citizens who are likely to lose their jobs and cannot be retrained."
When robots replace workers it is known as "productivity growth." Productivity growth has actually been incredibly slow in the last decade and has even been negative the last two years.
It is not clear who the "some experts" are (names please), but actual experts know that the economy's problem is too little productivity growth, not too much. Productivity growth allows for higher living standards. With more rapid productivity growth we can either have more goods or services or work fewer hours to have the same amount of goods and services.
Of course this depends on their being enough demand in the economy. Lack of demand can lead to unemployment. It is not hard to create demand. For example, we could have the government spend money. That is not hard in principle, but deficit cultists, like the Washington Post editorial board and much of the leadership in Congress (in both parties) start yelling and screaming about budget deficits.
We could try to get the trade deficit down, for example by lowering the value of the dollar against other currencies, which makes our goods and services more competitive. People in policy positions generally don't like to discuss this policy, which would hurt manufacturers like GE which have relocated much of their production overseas and major retailers like Walmart, which has profited by establishing low-cost supply chains.
We can also take steps to reduce average work time, for example by promoting work-sharing as an alternative to layoffs. We can also push for paid family leave, sick days, and vacations, like they have in other wealthy countries.
And, we could discourage the Fed from raising interest rates to choke off demand. Higher interest rates are a policy explicitly designed to keep people from getting jobs.
In short, there are many ways to ensure that the economy has enough demand to employ workers, but the Washington Post would rather yell about robots.Add a comment
In an article that reports on plans by a new coalition to challenge the financial industry, the Washington Post implied that the financial transaction tax (FTT) supported by the coalition would hurt ordinary investors. The piece told readers:
"The proposed so-called transaction tax has already raised concerns among some on Wall Street. Such a tax would also effect pension funds or other large investors who sometimes trade thousands of stocks a day, they say.
"'While some politicians claim this tax is directed at high frequency trading, the truth is that it would directly hit the pension funds of hard-working teachers, nurses and teamsters,' said Bill Harts, chief executive of Modern Markets Initiative, which represents high frequency trading firms.
"'We don’t understand why unions would support something that would so clearly hurt their membership’s pension funds.'"
It's interesting that the Washington Post chose to turn to a representative of the financial industry as its major source on this proposal. This would be comparable to relying on a spokesperson from the tobacco industry as the main source on tobacco taxes.
If the Post had turned to a more neutral source, like the Tax Policy Center of the Brookings Institution and the Urban Institute, it would have discovered that Mr. Harts is completely wrong. According to the Tax Policy Center's analysis of a FTT, the volume of trading would actually decline by a larger percentage than the increase in trading costs due to a FTT. (In other words, the demand for trading is elastic.)
This means that on average the pension funds of hard-working teachers, nurses, and teamsters would be paying less money on trading costs after the tax was put in place than they do now. The tax would be more than fully offset by lower trading fees paid to the people that Mr. Harts represents.Add a comment
The NYT apparently wants its readers to believe that the economic policies put in place by Shinzo Abe, Japan's prime minister, have been a failure. In an article on G-7 summit meeting it quoted Kenneth S. Courtis, chairman of Starfort Holdings and a former Asia vice chairman at Goldman Sachs Group Inc., as saying that Abe's policies are "viewed mainly as a 'marketing slogan.'" According to Courtis:
"Japan needs to 'take a blowtorch' to regulations and red tape that discourage competition."
It would have been useful to include some actual data in the piece instead of just presenting readers with disparaging comments from someone in the financial industry. According to the OECD, Japan's employment rate has increased by 3.2 percentage points since Abe took office in the fall of 2012. This would be equivalent to an increase in employment in the United States of more than 6.4 million workers.
By comparison, the employment rate in the United States has risen by just 1.9 percentage points over this same period. Articles in the New York Times and elsewhere have often praised the pace of job growth in the United States over this period.
While it is clear that Mr. Courtis is unhappy with the regulatory structure in Japan, the data seem to indicate less need for change than he implies in this article.Add a comment
Eduardo Porter used his NYT column this week to remind us that we have seen people like Donald Trump before and it didn't turn out well. Porter is of course right, but it is worth carrying the argument a bit further.
Hitler came to power following the devastating peace terms that the allies imposed on Germany following World War I. This lead to first the hyper-inflation that we will continue to hear about until the end of time, and then austerity and high unemployment that was the immediate economic environment in which Hitler came to power.
The point that we should all take away is that there was nothing natural about the desperate situation that many Germans found themselves in when they turned to Hitler for relief. Their desperation was the result of conscious economic decisions made by both the leaders of the victorious countries as well as the leaders of the Weimar Republic. (It is not as though the latter had any good choices.) Nothing can excuse support for a genocidal maniac, but we should be clear about what prompted the German people to turn in that direction.
When we look at the rise of Trump and other right-wing populists across Western Europe, we see people responding to similar decisions by their leaders. The European Commission has imposed austerity across the euro zone largely at the insistence of Germany. It is not clear what economic theory explains the infatuation with austerity, but nonetheless it is now the golden rule across Europe. The U.K. has gone in the same direction even though it is not bound by the euro rules. Even Denmark has been making cuts to its health care system and other aspects of its welfare state in spite of the fact that its debt to GDP ratio is less than 10.0 percent and it is running a massive trade surplus.Add a comment
It is a question that goes unasked in a NYT piece that touted the Trans-Pacific Partnership (TPP) as providing the glue for an alliance of the U.S. and East Asian countries against China. While the deal will increase trade between the member countries in some areas, a major thrust of the deal is to increase patent and copyright protections. These increased protections will raise prices in many areas, most importantly prescription drugs.
If the TPP results in some of the poorer countries in the pact paying much higher prices for their drugs (to U.S. drug companies), imposing a large burden on government health care programs or possibly making drugs unaffordable for many citizens, it is not clear that it will make the countries closer allies with the United States. The NYT article does not consider this possibility.Add a comment
Paul Krugman used his column this morning to point out how strong the economy was in the 1990s and how the low unemployment in the second half of the decade allowed for strong wage and income gains at the middle and bottom end of the income distribution. This is all very much on the mark. However, he also distinguished the impact of the stock bubble from the housing bubble by saying that the collapse of the latter had more serious consequences because of the growth of private debt.
There are a few points worth making on this assessment. First the collapse of the stock bubble did have very severe consequences for the labor market. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, this was the longest period without net job growth since the Great Depression. The weakness of the labor market was the reason the Fed kept the federal funds rate at 1.0 percent until the middle of 2004.
If Krugman is pointing to the financial crisis as fallout, then of course the issue of private debt is correct. There were a huge amount of mortgage loans and derivative instruments that could go bad with the collapse of house prices. This was not true in the case of stock prices. It's much more difficult to borrow against stocks than housing. (The evil regulators at work.)
However, when it comes to the real economy, as opposed to the fun of watching collapsing financial behemoths, we don't have any reason to look to debt. The investment boom sparked by the stock bubble was much smaller than the construction boom sparked by the housing bubble. The share of non-residential investment in GDP fell by 2.6 percentage points from its 2000 peak to its 2003 trough. Residential construction fell by 4.0 percentage points of GDP from 2005 to 2010.
In addition, the housing wealth effect on consumption is much larger than the stock wealth effect. This is due to the fact that it is much easier to borrow against wealth and also that housing wealth is much more evenly distributed. Bill Gates probably doesn't increase his consumption much when the value of his stock doubles. Middle income homeowners are likely to spend much more when the value of their house doubles.
In short, while it has become fashionable to cite the importance of debt in explaining the severity of the downturn following the collapse of the housing bubble, it really doesn't fit. The severity of the downturn can easily be explained by the loss of wealth and the end of the construction boom, debt is at most a secondary consideration.Add a comment
The Washington Post's lead editorial is a pitch to defend the "liberal international order." The piece notes the rise of right-wing populist movements in much of the world and includes a swipe at Bernie Sanders "false promise of trade protectionism." Incredibly the editorial goes on to give a pitch for the Trans-Pacific Partnership (TPP) which it describes as a "free-trade agreement."
Of course, the TPP is not a "free-trade" agreement. The reductions in trade barriers provided for in the pact are very limited since most of the barriers between the countries in the pact are already low. (The U.S. already has trade deals with six of the eleven other countries in the pact.) Last week the International Trade Commission projected that the trade liberalization provisions in the TPP will increase income by just 0.23 percent when its effects are fully realized in 2032.
The TPP actually increases protectionist barriers in a wide variety of areas, most importantly by requiring stronger and longer patent and copyright protection. These barriers are likely to have much more impact in slowing growth than the tariff reduction provisions of the TPP will have in increasing growth. In the case of prescription drugs alone the United States will spend close to $430 billion in 2016. It would likely spend roughly one-tenth this amount in the absence of patents and related protections. The difference of $380 billion is more than 2.0 percent of GDP.
The goal of the TPP is raise drug prices in the partner countries closer to U.S. levels and lock in place the high drug prices in the United States. The cost of higher protections in other areas may be comparable.
It is also worth noting that highly paid professionals in the United States, most importantly doctors, will continue to be protected even with the TPP in place. If our doctors' salaries were brought down to European levels it would save patients close to $100 billion a year in health care costs (0.6 percent of GDP). The Post is apparently fine with this sort of protectionism.
If the Post were serious about an agenda to counter right-wing populism it would be talking about economic policies that reversed the upward redistribution of income of the last four decades. This would mean changing trade policy and ending austerity. Instead the Post wants more upward redistribution and then will morally condemn the victims of its policies for not supporting the "liberal international order."Add a comment
The NYT had a piece assessing which of Donald Trump's promises he would be able to keep if he got in the White House. When discussing trade the piece implied that most workers would be hurt by his efforts to reduce the trade deficit since it would mean higher prices for a wide range of imports. This is faulty logic.
To see the point, suppose that our "free trade" deals had been focused on subjecting doctors, dentists, lawyers, and other highly paid professionals to international competition instead of manufacturing workers. (Yes, there are tens of millions of smart people in the developing world who would be happy to train to U.S. standards and work in the United States for half of the pay of U.S. professionals. We just don't allow this inflow of foreign professionals because our trade policy is designed by protectionists.) In this case, we would be paying much less for health care and other services provided by these professionals. (The savings from paying doctors European wages would be around $100 billion a year or around 0.6 percent of GDP.)
Suppose our trade deals had gone the route of free trade in professional services. Then Donald Trump promised to restrict the number of foreign doctors who could enter the country. The NYT would say that U.S. doctors would be hurt by this restriction since they would be paying more for health care.
Of course they would pay more for health care, just like everyone else. However their increase in pay would almost certainly dwarf the higher cost of health care.
The same would almost certainly be the case for manufacturing workers and likely a large segment of non-manufacturing workers whose wages have been depressed by competition by displaced manufacturing workers. The NYT is misrepresenting the story by implying that these workers would be losers in this scenario simply because they would have to pay more for imported goods.Add a comment
David Shribman wants to tell us how to "save Clintonism." In doing so he seriously misrepresents the issues at hand.
He tells readers:
"The 42nd president left the White House with high approval ratings after serving during years of economic growth. Many liberals felt bruised, even betrayed — there were some high-profile repudiations of the president, especially when he signed a welfare overhaul in 1996 that set time limits on benefits. But no one doubted that he had given new life to the party when he left office in 2001."
Of course, Clinton left the White House as the stock bubble that had fueled the prosperity of his second term was in the process of collapsing. It led to a recession that began less than two months after he left office. From the perspective of working people this was the worst recession of the post-World War II era until the Great Recession. The economy did not get back the jobs lost until January of 2005.
Shribman's treatment of this period would be comparable to a situation where George W. Bush left office at the end of 2007 and describing his departure as being a period of prosperity. Of course by the end of 2007, the seeds of the crash had already been planted just as was the case with the recession of 2001.
Clinton also left a large and rapidly rising trade deficit. The United States has only been able to fill the demand lost as a result of this trade deficit with asset bubbles: first the stock bubble in the 1990s and then the housing bubble in the last decade.Add a comment
Max Ehrenfreund had an interesting column reporting on research that showed the prices of goods purchased by higher income households fell more rapidly than the prices of goods purchased by lower income households. The basic argument is that new goods introduced into the market tend to be targeted towards higher end households. These new goods put downward pressure on the prices of the older goods with which they are competing. Since these are goods disproportionately purchased by higher end households (e.g. craft beers), it means the goods they consume rise less rapidly in price.
This story is actually not new. Two decades ago there was an effort to reduce Social Security by claiming that the consumer price index (CPI) overstates the true rate of inflation. (Social Security benefits are indexed to the CPI after workers retire.) One of the main arguments for an overstatement was that the new goods that were declining rapidly in price often did not enter the CPI basket until after their most rapid period of price decline. The poster child for this argument was the cell phone, which didn't get into the index due to a fluke until 1998, when almost half of all households owned a cell phone. (Due to changes in procedures, this sort of mistake is virtually impossible with the current methodology.)
However, with the cell phone and other new items, the first purchasers who would enjoy these large price declines would be overwhelmingly high end individuals. The new goods argument might be a compelling case that the CPI overstates the rate of inflation experienced by the wealthy, but the story is much less plausible for the less well off segment of the population. The failure to include the cell phone in the CPI did not lead to any overstatement whatsoever in the rate of inflation experienced by the half of the population that didn't own a cell phone, as some of us tried to point out at the time.
There are likely to be continuing battles over the rate of inflation experienced by different groups. There has been some research arguing that the poor actually see a lower rate of inflation than wealthy households. (See Shawn Fremstad's analysis here.) Many elite types, like the Washington Post editorial board, continue to argue that Social Security should be cut because the CPI overstates the true rate of inflation. Unfortunately, all of these people oppose constructing an elderly CPI that would determine the extent to which this claim is true. Anyhow, it is apparently much easier to cut benefits for people by changing the measurements than by actually voting directly for benefit cuts, so look for many more battles over the measurement of inflation in the years ahead.Add a comment
Arthur Brooks, the the president of the American Enterprise Institute, used his NYT column to complain that people in the United States were not moving enough. He argues that people were reluctant to move from depressed areas of the country to the growing areas which offer more opportunities. Ironically, his examples of prosperous areas and sectors were based on badly outdated information.
Brooks tells readers:
"We might expect movement from a high-unemployment state like Mississippi (unemployment rate: 6.3 percent) to low-unemployment states like New Hampshire (2.6 percent) or North Dakota (3.1 percent). Instead, Mississippians are even less likely to migrate out of the state today than they were before the Great Recession hit."
While New Hampshire's economy (with total employment of 660,000) still seems to be healthy, North Dakota has lost 3.8 percent of its jobs over the last year. While Brooks might expect people from Mississippi to move to leave their family and move to a frigid state whose economy is collapsing with the oil bust "we" probably don't.
Brooks continues in this vein:
"There has also been a decline in blue-collar skills, like welding on a pipeline, that often require moving. This has created a needs-skills mismatch, with companies desperate for skilled tradesmen sitting alongside idle workers."
The link is to an article from March of 2014 which discusses the surging demand for welders as a result of the oil boom. With the bust, employment in the mining sector has collapsed. According to the Bureau of Labor Statistics, employment in mining has fallen by 132,000 (15.7 percent) in the last year.
The more general point about a serious needs-skill mismatch was never supported by the data. The way we know there is a shortage of workers with a particular skill is that wages in that occupation rise rapidly, as employers attempt to get workers to fill vacancies. There were/are no major occupations seeing rapidly rising wages, which means that there are no major areas with shortages of workers.
The moral of this story is that the main problem with the labor market continues to be weak demand overall. This is remedied by either the government spending more money or reducing the trade deficit. If a strong economy lead to vibrant labor markets in certain regions, it is likely that people would move there. (Better government support for such moves would be beneficial.) However no one should be surprised that people are reluctant to move across the country in pursuit of phantom jobs.Add a comment
Economists have been largely puzzled by the sharp slowdown in productivity growth over the last decade. (Sorry, robot fans, they aren't taking jobs yet.) Anyhow, productivity growth has fallen from nearly 3.0 percent annually from 1995 to 2005, to less than 1.0 percent over the last decade. We've actually seen negative growth over the last two years.
Anyhow, there are no widely accepted explanations for this sharp falloff. (My story is that in a weak labor market with workers desperate to find jobs, many employers are hiring them at very low productivity jobs. Think of the midnight shift at a convenience store or the greeters are Walmart. In a stronger economy, these workers would move to higher paying jobs and these low productivity jobs would go unfilled.)
The NYT reports on a possible way of increasing productivity, shorten work hours. It reports on the situation in Gothenburg, Sweden, where the city put in place a 6-hour workday for public employees last year. According to the piece, the workers hugely value the shorter workday. They claim that it has improved the quality of their lives and also made them more productive workers.
While there is no hard data to support this contention, the one numerical example given seems to support the claim. The article reports on a hospital that had 89 workers before the experiment started, which hired an additional 15 workers to compensate for the shorter workdays. If all of the 89 workers had previously put in 8-hours days, and all 104 workers (counting the 15 new hires) now work 6-hour days, this would imply an 14.1 percent increase in productivity, assuming no change in output. This would be an enormous gain — more than the U.S. economy has gained over the last decade. In fact, the piece indicates there actually has been an increase in output, implying an even larger gain in productivity.
In general, it is not easy to find ways to increase productivity. The standard recipes involve investing in more capital and better education and training for the workforce. While both of these routes are good, they are expensive and the gains will typically take a long period of time to be realized. If shortening work hours actually does lead to gains in productivity, this would be a remarkably easy route to accomplish this goal. And, it would make workers' lives much better.Add a comment
The Washington Post, which has decided to abandon journalism for the cause of bashing Bernie Sanders, included this bizarre comment in a piece on the failure of the college headed by Jane Sanders, Senator Sanders' wife:
"...many observers wonder whether the septuagenarian socialist even fully understands how the economy works. His inability to explain how he’d break up the big banks during the disastrous sit-down with the New York Daily News editorial board last month remains a good data point in the case that he is in over his head on policy."
Actually, Senator Sanders (the septuagenarian above — ageism in the service of Sanders-bashing is cool at the Post), explained exactly how he would break up the big banks. He said that he would have the banks break themselves up. The logic is simple. The banks know the most efficient way to break themselves into smaller pieces and the incentive to do so is in order to preserve shareholder value. The government's role is to give them size target(s), timelines, and penalty schedules for failing to meet the targets.
It does seem like someone is over their head in this story and it's not the Senator from Vermont.Add a comment
The NYT is once again confused about the story of deflation, telling readers that it's bad news for Japan that the yen has recently risen in value since a higher yen reduces import prices, increasing the risk of deflation. While a higher valued yen is a problem because it makes Japan's goods and services less competitive internationally, and therefore worsens the trade deficit, its impact on the inflation rate is of little consequence for the economy.
The impact on the trade balance is straightforward and direct. The higher valued yen will make Japanese made goods and services more expensive to people in other countries, so they will buy less of them. On the other hand, imports will be cheaper for people living in Japan, so they will buy more imports. The net effect is to worsen the trade balance, decreasing demand in the economy.
However, the effect of lower import prices on the inflation rate is likely to have little effect on demand. While it is often claimed that deflation hurts demand because it leads consumers to delay purchases with the idea that the price will be lower due to waiting, as a practical matter, this makes almost no sense.
If the deflation rate is -1.0 percent (much larger than Japan has seen in recent years), it means that consumers can save themselves 1.0 percent of the price of a product by delaying a purchase for a year. On a $20,000 car, a consumer can save $200 if they wait a year. On a $500 television set, they will save $5.00 and on a $30 shirt, they will save 30 cents. If the deflation rate is half this much (-0.5 percent), the savings will be half of these sums. It is unlikely that many people will put off purchases for such savings.
The more likely impact will be on investment. The issue here is the real interest rate, the difference between the rate of interest firms must pay and the rate of increase in the price of the products they are selling.
Suppose that a company was selling a product for $1000 (or the yen equivalent price), with $100 of the cost of the production of this product due to imported items. Suppose that its costs of production were $800, leaving a profit of $200 on each item. Now imagine that a 10 percent rise in the yen leads the price of the imported inputs to fall to $90. If the drop in the price of imported inputs is fully passed on to consumers, then the price of the product falls to $990, leaving profit margins unchanged.
In this case, the company has the same incentive to invest after the rise in the value of the yen as it did before the rise in the value of the yen. The one-time drop in prices is not a problem. (If the drop in the price of imported inputs is not fully passed on, then the increased profit margin would increase the incentive to invest.) This would only be an issue if it was expected that the yen would keep rising leading to continuing falls in the price of the product. For this reason, a reduction in the inflation rate, or even deflation, that is the result of lower import prices should not be bad news for Japan's economy.
Just to remind folks, the problem of deflation is actually a problem of the inflation rate being too low. Since it is difficult to push nominal interest rates below zero, or at least much below zero, when inflation is low there are limits to how much the central bank can boost the economy with low real interest rates. When the inflation rate declines or turns negative due to a drop in oil prices or other imports, it does not affect the real interest rate as seen by firms. For this reason, the drop in import prices is not the problem implied by this article.Add a comment
The first paragraph in a Reuters article on the April consumer price index (CPI) told readers:
"U.S. consumer prices recorded their biggest increase in more than three years in April as gasoline and rents rose, pointing to a steady inflation build-up that could give the Federal Reserve ammunition to raise interest rates later this year."
Before the cheering for another Fed rate hike gets too loud it would be worth looking at the data more closely. The core CPI has risen modestly in recent months, however inflation is still below the Fed's 2.0 percent target using its chosen measure, the personal consumption expenditure deflator. And, since 2.0 percent is supposed to be an average, not a ceiling, we have a long way to go up before the Fed needs to move, assuming it takes its own target seriously.
But it's also worth noting that even the very modest evidence of acceleration in inflation may be largely illusory. The rise in the core CPI has been driven by rising housing costs. Here's the change in a measure of the core CPI that excludes shelter costs.
CPI without Food, Shelter, and Energy
Source: Bureau of Labor Statistics.
See the acceleration? This measure has been trailing off the last two months and in any case never got as high as it was in late 2011. It has remained under 2.0 percent since the middle of 2012.
The story with housing is that shortages of supply are pushing up prices. If this is bothering the Fed, it is not going to fix the problem by raising interest rates. (Higher rates mean less housing construction — check your intro textbook.) In short, contrary to what the folks at Reuters might tell you, there is not much of a case here for higher interest rates.Add a comment
That is the impression that readers may take away from an article discussing the potential for self-driving trucks. The article notes that 3 million people work as truckers and warns of the risk that these people face from displacement due to this technology.
In fact, technology has always displaced workers from jobs. This is the basis for higher wages, as the remaining workers got the benefit of productivity growth in the form of higher wages. Higher wages allowed them to buy more goods and services, thereby creating new jobs that could be filled by the displaced workers. Alternatively, if hours per worker are reduced, then the gains in productivity can result in the same number of people being employed, with workers enjoying the benefits of productivity growth in more leisure.
This will not happen if the government pursues policies that keep workers from sharing in the benefits of productivity growth, for example by raising interest rates to reduce employment or if it pursues anti-union policies to undermine workers bargaining power. However, in these cases the problem is the policies, not the technology.
At a time when productivity growth has fallen to almost zero, workers should welcome technology that has the promise of substantial gains in productivity. Of course, they should also demand policies that will allow them to share in the gains.Add a comment
Robert Samuelson used his column today to argue against included environmental, equity considerations, or other factors in the measure of the gross domestic product. He is completely right.
Over the decades there have been many efforts to change the measure of GDP to include other factors that we should value under the argument that the output of goods and services is not everything. Of course, the output of goods and services is not everything, but the problem is trying to use GDP as a comprehensive measure of well being. It isn't, and anyone who imagines it is a comprehensive measure of well-being is badly confused.
GDP is a measure of economic output, which is useful to know, but hardly sufficient to tell us whether a country and its people are doing well. A country can have rapid GDP growth, but if it all goes to the richest one percent, it would be hard to see that as a good story. Or if rapid GDP growth went along with extreme environmental degradation, it also would not mean the population was doing well.
The measure of GDP is useful in assessing the health of an economy and society in the same way that weight is a useful measure in assessing a person's health. If a person is five feet and ten inches and weighs 300 pounds, then it is likely they have a problem. On the other hand, they can weigh 160 pounds and still have an inoperable tumor. We would want to know the person's weight to assess their condition, but it will not tell us everything we need to know to evaluate their health.
In the same vein, we identify countries with high per capita GDP, but enormous inequality. It is hard to view these as success stories, since most of the population would not be benefiting from the strength of the economy. However, if a country has a very low per capita GDP or has seen little or no growth over the last two decades, it is unlikely that its population is doing very well. Some countries may consciously choose to have lower GDP for very good reasons. Workers in West Europe put in about 20 percent fewer hours on average than workers in the United States. This allows them to have paid sick days, paid family leave, and 4–6 weeks a year of vacation. Having more family time and leisure are good reasons for sacrificing some amount of output.
In short, GDP is a useful but limited measure. The problem is not with GDP, but with people who might see it as a comprehensive measure of well-being. It isn't.Add a comment