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).
That's a cheap shot derived from the information that the NYT gave us at the end of Thomas Friedman's column: "Maureen Dowd is off today." Nonetheless it seems an appropriate response to a piece that tells real wages for most workers are stagnating because:
"In 2004, I wrote a book, called 'The World Is Flat,' about how the world was getting digitally connected so more people could compete, connect and collaborate from anywhere. When I wrote that book, Facebook, Twitter, cloud computing, LinkedIn, 4G wireless, ultra-high-speed bandwidth, big data, Skype, system-on-a-chip (SOC) circuits, iPhones, iPods, iPads and cellphone apps didn’t exist, or were in their infancy.
Today, not only do all these things exist, but, in combination, they’ve taken us from connected to hyperconnected."
So Facebook and Twitter are the cause of wage inequality? I knew there was some reason Mark Zuckerberg rubbed me the wrong way.
Friedman also tells us:
"we have record productivity, wealth and innovation, yet median incomes are falling, inequality is rising and high unemployment remains persistent."
Well the first part of this statement is almost always true. Except for short periods at the start of recessions, productivity always rises, implying greater wealth and presumably record innovation (not sure how that is measured).
Anyhow, it is not clear why Friedman finds anything surprising about this coinciding with high unemployment. Those of us who follow the economy would point to the fact that nothing has replaced the $1.2 trillion in annual construction and consumption demand that we lost when the housing bubble collapsed. And when we get more demand employment would grow, labor markets would tighten and we would see most workers in a position to get higher wages. There is no mystery here to folks who know basic economics and a bit of arithmetic.
Friedman wants people to have:
"more P.Q. (passion quotient) and C.Q. (curiosity quotient) to leverage all the new digital tools to not just find a job, but to invent one or reinvent one, and to not just learn but to relearn for a lifetime."
Yeah, it would be great if people had more passion, curiousity and learned more, but it's not clear that this would affect wages much for the 14.9 million people working in retail, the 10 million people employed in restauarants and the 1.8 million employed in hotels. In other words, even in Friedman's hyperconnected world, a very high percentage of jobs still do not offer many opportunities for passion, curiousity, and learning.
The reason that these people are not sharing in the benefits of productivity growth, as they did in the period from 1945 to 1973 is that the folks controlling economic policy lack passion, curiousity and an interest in learning. They think it's just fine that we waste $1 trillion a year due to an economy that is below full employment and that 15 million people are unemployed and underemployed.
Anyhow, maybe we can get the NYT to fix that line about Maureen Dowd.
Add a comment
The NYT tells us that biotech firms want the government to prohibit pharmacists from giving patients generic substitutes for biological drugs. This is a great story for a couple of reasons.
First it is a great example of the sort of abuses that economic theory predicts would result from having the government grant patent monopolies. When companies call sell drugs for prices that are a hundred or even a thousand times their cost of production, we should expect that they will lie, cheat, and steal to expand their market. And the drug companies largely act exactly as economic theory, if not economists, predicts.
The other reason this is a great story is that it shows the complete indifference to free market principles held by big business. Are the folks who want to arrest pharmacists for substituting generics "market fundamentalists?"
Note that the sums of money involved in the industry swamp the chump change that many liberals fight over. The article cites data showing drug industry sales at $320 billion a year. They would be around one-tenth this amount without patent and other protections provided by the government, a difference of $290 billion. By comparison, the entire food stamp program cost $87 billion in 2012, less than one-third this amount. Federal spending on TANF is around $17 billion, less than one-tenth of this amount.
This is a great example of how the rich rig rules to get all the money. Then they let the loser liberals run around saying that we need the government to help the poor.
Addendum: Zev Arnold pointed out in his comment that I orginally had the number of beneficiaries (47 million) rather than the amount of spending for Food Stamps.Add a comment
Can we get a heaping helping of ridicule for all the reporters and their favorite economic experts who told us that uncertainty over the fiscal cliff was a drag on the economy in the second half of 2012? The data just refuse to comply with this assessment.
Yesterday the Commerce Department reported a big jump in durable goods orders for the month of December. This was right when we stood at the precipice waiting to see if we would slide over the cliff. Orders jumped 4.6 percent for the month. Non-defense capital good orders (excluding aircraft) were up also, although by just 0.2 percent. However, this followed a 3.0 percent rise in November. If uncertainty was supposed to be discouraging investment, the folks making the orders apparently didn't get the memo.
This also seems to have been the case with employers, since employment increased by 155,000 in December, the same as its average over the last year. Retail sales also rose by a strong 0.5 percent, indicating that consumers were also too dumb to recognize the uncertainty caused by the fiscal cliff.
In short, it seems that the folks who make the relevant economic decisions did not agree with the economic experts. They ignored the uncertainty surrounding the fiscal cliff and just acted as though the boys and girls in Washington would get things worked out without seriously disrupting the economy. And they were right.
Big congrats to Neil Irwin at the Post for nailing this one exactly right today and fessing up to his past mistakes in covering the cliff.
Add a comment
It probably would have been useful to remind readers that Representative Paul Ryan's claim that country is facing a fiscal crisis is sharply at odds with the views of market participants in a NYT article reporting on his latest interview. The article quotes Ryan:
"I don’t think that the president thinks that we actually have a fiscal crisis, ... He’s been reportedly saying to our leaders that we don’t have a spending problem, we have a health care problem. That just leads me to conclude that he actually thinks we just need more government-run health care.”
Of course the fact that investors are willing to lend the U.S. government trillions of dollars for long periods of time for interest rates of less than 2.0 percent indicates that the markets do not believe the United States has a fiscal crisis. Also, it is a fact that if the United States had per person health care costs that were at all comparable to those in other wealthy countries that it would be looking at long-term budget surpluses, not deficits.
It would have been worth reminding readers that Mr. Ryan has no evidence to support his assertions that the United States somehow has a fiscal crisis or that fixing our health care system would not address its projected long-term deficit problem. Readers might be mistakenly led to believe that Ryan's position has a basis in reality.Add a comment
It's always entertaining to read Robert Samuelson's columns on Monday mornings. They are so deliciously orthogonal to reality. Today's column, asking whether America is in decline, is another gem.
He starts with a set of "good news" items from a paper issued by Goldman Sachs:
"For starters, the U.S. economy is still the world’s largest by a long shot. Gross domestic product (GDP) is almost $16 trillion, “nearly double the second largest (China), 2.5 times the third largest (Japan).” Per capita GDP is about $50,000; although 10 other countries have higher figures, most of the countries are small — say, Luxembourg."
That sounds good, except that having double the GDP of China depends on looking at exchange rate measures of GDP. This figure is inflated by the over-valued dollar and under-valued yuan. Using the purchasing power parity measure of GDP, the gap is much smaller, with the IMF projecting it will go the other way by 2017. According to some estimates China's GDP is already larger than ours, so it's probably best to keep this celebration short.
It is true that the U.S. has a higher per capita income than Germany, France, and most other wealthy countries. But by far the main reason for this gap is that we work about 25 percent more on average than workers in Western Europe who all get 4-6 weeks a year vacation, paid parental leave, and paid sick days. This is far more an issue of a different trade-off between work and leisure than a question of people in the United States being richer.
Next we get the good news about our massive energy resources:
"In turn, the oil and gas boom bolsters employment. A study by IHS , a consulting firm, estimates that it has already created 1.7 million direct and indirect jobs. By 2020, there should be 1.3 million more, reckons IHS."Add a comment
Okay, that is not exactly what he said, but if Chrystia Freeland's account of Summers' comments at Davos is to be believed Summers is badly misinformed about the state of the U.S. economy in 1993, when he was one of the top advisers in the Clinton administration. According to Freeland Summers said:
"In 1993, here’s what the situation was: Capital costs were really high, the trade deficit was really big, and if you looked at a graph of average wages and the productivity of American workers, those two graphs lay on top of each other. So, bringing down the deficit, reducing capital costs, raising investment, spurring productivity growth, was the right and natural central strategy for spurring growth. That was what Bob Rubin advised Bill Clinton, that was the advice Bill Clinton followed, and they were right."
This is not what the data say. Here's the story on real wages and productivity.
Source: Bureau of Labor Statistics.
There are some measurement issues that would reduce the gap somewhat, but anyone who could see these two as laying "on top of each other" needs some new glasses. The sharp divergence between productivity and wages began in the 1980s. It would be really scary if Larry Summers, Robert Rubin and the rest did not know this in 1993.
The other parts of Summers' story are also wrong. The trade deficit was less than 1.0 percent of GDP in 1993. By comparison it was almost 4.0 percent of GDP when Clinton left office in 2000. The interest rate on ten-year Treasury bonds was 6.6 percent in January of 1993. Coupled with an inflation rate of around 3.0-3.5 percent, this gave a real interest rate in the neighborhood of 3.1-3.6 percent. This is perhaps a bit higher than desirable, but actually not much different than what we saw through most of the Clinton years.
In short, Summers is describing a history that does not exist. He either has a very poor memory or is just making things up.Add a comment
Knowledge of arithmetic is a skill in short supply for people involved in economic policy debates. This is especially the case for the Washington Post (Wonkblog excepted).
Neil Irwin gives us an example of the problem when he expresses the hope that increasing house prices will provide a large boost to consumption and thereby spur growth. Irwin cites a recent academic paper on the size of the housing wealth effect:
"In a paper last year, Charles Calomiris, Stanley Longhofer, and William Miles found that the wealth effects from housing vary significantly depending on whether the homeowner is old or young, poor or rich—but their overall estimate is that a dollar of extra housing wealth triggers five to eight cents in additional spending."
He then notes that with house prices rising by roughly $1 trillion this year, this would imply an increase in consumption of between $50 and $80 billion (0.3 to 0.5 percent of GDP).
So far, so good. The Calomiris, Longhofer, and Miles estimate of the wealth effect is certainly within the range of other estimates, although it is worth noting that about 40 percent of the gain in house prices last year could be attributable to inflation. In other words, if house prices had not risen by at least 2.0 percent last year, the real wealth effect on consumption would be lower in 2013 than in 2012. The gains in terms of consumption have to be adjusted accordingly.
But the real problem is when Irwin tells us:
"In the Great Recession, spending fell by even more than could be attributed solely to the wealth effects caused by falling home prices. A vicious cycle set in through which falling home prices contributed to people being underwater on their mortgages, which had an outsized impact on their spending. Research by Atif Mian, Kamalesh Rao, and Amir Sufi last year found that in counties with high degrees of household debt and home price declines, retail sales fell much more than elsewhere."
Hmm, spending fell by even more than could be attributed to the wealth effect. Let's check that one.Add a comment
The NYT told us that Bank of America made $5.7 billion from "trading" last year. It then added:
"For the sake of clarity and consistency, it makes sense to relabel this type of revenue “market-making.” That’s because it mainly represents the gain Bank of America makes when it buys securities and sells them on to clients at a higher price."
Really? The NYT knows that it just turned out that the price of assets rose by $5.7 billion between the time when Bank of America acquired them and when they passed them on to their clients? That sounds like some pretty good luck for BoA. After all, we would expect that roughly half of the time when BoA buys an asset for a client and when it actually passes the asset on to the client the price would fall. If the net in this story came to a plus $5.7 billion that would seem like a remarkable streak of good luck for BoA.
Let's try an alternative hypothesis. Let's imagine that BoA was trading on its account, deliberately trying to find assets that would rise in price. If BoA has well-informed people doing its buying and selling, then it might not be too hard to believe that it could clear $5.7 billion on this sort of trading.
Of course trading on its own account would likely violate the law. This is exactly what the Volcker Rule intended to prevent. So it would be very helpful if people thought that BoA made this $5.7 billion from market-making.
In response to a question below, let me clarify the meaning of "trading on its own account." A market maker must be prepared to take positions on assets for at least short periods of time in order to service its clients. This means, for example, if a client wants to sell shares of stock or some other asset, then the market maker has to be prepared to buy and hold the asset until another buyer comes along. In principle, they will pay somewhat below the market price at the time to cover the risk that the price will fall before they can offload the stock and to cover the cost of their services.
By contrast, if a bank is trading on its account it is deliberately taking a directional bet on the asset. It is not always easy to distinguish between a trade where a bank is simply acting as a market maker and a trade where it is consciously making a bet that an asset will rise or fall in price. When the Volcker Rule is firmly in place the latter will not be legal for banks like Bank of America that have government guaranteed deposits.
It is entirely possible that BoA's $5.7 billion in trading profits were entirely due to market making activities, however that does seem unlikely since it is a substantial amount of profit on what would be a relatively small portion of the bank's revenue. In any case, rather than assuring readers that BoA is acting in a manner that would be in full compliance with the Volcker Rule, it would seem more appropriate to simply report its claims and let the readers make this assessment, unless the NYT has actually investigated the bank's trading practices and feels comfortable making this assurance to readers.Add a comment
Okay, I'm stealing from Paul Krugman today. Brooks' column today points out that modest redistributional measures implemented by Obama don't amount to a hill of beans next to the enormous upward redistribution going on in before-tax income. The restoration of Clinton era tax rates at best take away 2-3 years of growing inequality of before tax income.
Where Brooks is out to lunch is when he tells readers:
"On the one side, there is the meritocracy, which widens inequality."
That one is more than a few million miles far of the mark. When Erskine Bowles earned $340k as a director of Morgan Stanley as it was pursuing practices that would have landed it in bankruptcy had it not been saved by a government bailout, was that due to meritocracy? Did all the CEOs who got tens of millions of dollars in compensation as they tanked their companies get their pay due to meritocracy? Is the reason that our doctors get twice as much as doctors in Western Europe meritocracy?
The list here is very long, yes it's my book about Loser Liberalism, but you have to be pretty blind to realities in the United States today to think that the story of inequality is primarily about meritocracy -- although it might be useful for some people to think this.Add a comment
I didn't have a clue and I suspect that 99 percent of other NYT readers also didn't have a clue. This raises the question of why did the NYT use this number, referring to the size of the income tax cuts being proposed by Kansas Governor Sam Brownback, without any context?
Kansas 2013 budget was $13.4 billion, making the proposed tax cut equal to 6.3 percent of last year's budget. Most NYT readers would have a reasonably good sense of the meaning of 6.3 percent.Add a comment
A NYT article on the Republicans' latest plans in upcoming budget debates told readers:
"Republicans have made clear that they are willing to let the government shut down at that time to force deep spending cuts or changes to Medicare and Social Security that would bring down deficits in the long run."
The Republicans are interested in cutting these programs, that is how their plans would bring down deficits. While a "cut" can be termed a change, in the same way that a punch to a person's head can be described as a "change" in their circumstances, this is not the way such actions would typically be described.
It is understandable that the Republicans would prefer to use euphemisms to describe their plans for these very popular programs. However newspapers are supposed to try to convey information to readers. It is not their job to try to advance the agenda of a political party.
Add a comment
Deficits throughout the euro zone were relatively modest prior to the economic collapse in 2008 according to data from the IMF. In fact, some euro zone countries, like Spain and Ireland, were even running budget surpluses. This didn't stop Reuters from telling readers in the first line of an article picked up by the NYT:
"Public debt levels in the euro zone neared their projected peak last year after more than a decade of huge borrowing."
This is seriously misleading since it implies that large deficits were a longstanding problem as opposed to an outgrowth of the economic crisis.
Add a comment
David Brooks would benefit hugely from a remedial course in grade school arithmetic. It might keep him from saying silly things in his NYT columns like:
"We are now a mature nation with an aging population. Far from being underinstitutionalized, we are bogged down with a bloated political system, a tangled tax code, a byzantine legal code and a crushing debt."
If he were more acquainted with arithmetic he would be able to go to government publications and discover that far from being "crushing," the interest burden of our debt is near a post-war low. In fact, if we subtracted the $90 billion in interest that is refunded from the Fed to the Treasury the interest burden would be at a post war low.
Source: Congressional Budget Office.
Brooks' confusion then causes him to assert:
"Reinvigorating a mature nation means using government to give people the tools to compete, but then opening up a wide field so they do so raucously and creatively. It means spending more here but deregulating more there. It means facing the fact that we do have to choose between the current benefits to seniors and investments in our future, and that to pretend we don’t face that choice, as Obama did, is effectively to sacrifice the future to the past."
In fact there is no reason to make such a choice between meeting obligations to seniors and investing in the future. If we fixed our health care system so that our per person health care costs were in line with those in other wealthy countries we would be looking at long-term budget surpluses, not deficit.
Thanks to Robert Salzberg for calling this one to my attention.
Add a comment
It told readers:
"The country faces a fast-growing national debt as a result of waves of retiring workers who expect health care and pension benefits."
This is not true. The reason the debt has been rising rapidly in recent years is that the economy plunged due to the collapse of the housing bubble. In 2007, before the collapse, the deficit was just 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that the deficit would remain in this neighborhood well into the current decade, even if the Bush tax cuts were not allowed to expire.
Source: Congressional Budget Office.Add a comment
A Reuters article in the NYT told readers that:
"Japan's public debt burden is already the worst among major economies at more than twice the size of its $5 trillion economy."
While Japan does have the highest ratio of debt to GDP among wealthy countries, it also has one of the lowest ratios of interest to GDP. Its net interest payments are less than 1.0 percent of GDP. This number would be even lower if payments made to the central bank were subtracted out. (These are refunded to Japan's treasury.) By comparison, the interest burden in the United States is currently around 1.5 percent of GDP (approximately 1.0 percent after subtracting out money refunded by the Fed). It had been over 3.0 percent of GDP in the early 1990s.
The piece also warned that continued large deficits could raise interest rates and slow the economy. Actually this depends on what happens to the inflation rate. Japan has had near zero inflation or modest deflation for much of the last two decades. If interest rates rise, but the inflation rate rises by more, as is the explicit policy of the government, then real interest rates would decline. This would boost growth in Japan.Add a comment
Morning Edition's top of the hour news segment (sorry, no link) told listeners that the Nikkei dropped in response to the Bank of Japan's commitment to support stimulus. The Wall Street Journal said the opposite, pointing out that the bank's asset purchase plans were quite modest. According to the WSJ, the decline in Japan's stock market and rise in the yen was due to the concern that the bank was insufficiently committed to stimulus.Add a comment
There were numerous news stories and columns touting the liberal agenda that President Obama put forward in his second inaugural address yesterday (e.g. here and here). While the speech certainly hit on several issues that have historically been important to liberals, the failure to mention full employment was a major omission.
The fact that the economy is still more than 9 million jobs below its trend growth path implies enormous suffering. Not only are millions of people unnecessarily unemployed or underemployed, high levels of unemployment mean that most workers lack bargaining power. As a result they are unable to raise their wages and get their share of productivity growth. This means that income is likely to continue to be redistributed upward.
There are not easy political paths to full employment at this point. Government stimulus (i.e. larger deficits) is the most obvious path, but that seems out of the question in a context where deficit reduction is dominating the policy debate. If the dollar dropped, it would make U.S. goods more competitive, thereby increasing net exports, but Obama has made little commitment in this direction and the process would take time in any case.
The best prospect is probably increased use of worksharing. Germany has used worksharing to lower its unemployment rate by more than 2 percentage points below its pre-recession level, even though its growth has been no better than growth in the United States. Worksharing does enjoy bipartisan support in the United States and is an option in the unemployment insurance systems in 25 states, but the takeup rate has been extremely low. It's possible that a major presidential push could substantially increase the use of worksharing.
Anyhow, it is striking that a speech that touched on many liberal themes did not make a commitment to full employment. This should have been noted in the coverage.Add a comment
Adam Davidson has an interesting piece in the NYT Magazine on the debate over whether technology is responsible for the growth in inequality over the last three decades or whether the increase has been primarily the result of policies that have redistributed income upward. (As the author of The End of Loser Liberalism: Making Markets Progressive, I am firmly in the latter camp.) The immediate basis for the piece is a new paper by Larry Mishel, John Schmitt, and Heidi Shierholz that questions the widely accepted work of M.I.T. professor David Autor, which attributes rising inequality to the loss of jobs in middle class occupations. (The paper is not yet available, but several of the main points are presented in blog posts here, here, here, and here.)
Davidson does a good job laying out the central issues at one point turning to Frank Levy, another M.I.T. economist, to help define the terrain. Levy points out that while inequality has increased almost everywhere, there are huge differences in the extent of the increase. This suggests that there is a very big role for policy in the rise in inequality in the United States. (We're #1.)
However Davidson's conclusion may mislead readers.
"What do we value more: growth or fairness? That’s a value judgment. And for better or worse, it’s up to us."
The idea that there is tradeoff between growth and inequality does not follow from Levy's comments. It could be the case that policy decisions were aggravating trends in equality rather than alleviating them. For example, increasing the length and scope of patent and copyright protection is a policy that would have the effect of redistributing income upward as would protecting doctors and lawyers from international competition in a context where trade policy is designed to make most workers increasingly exposed to such competition. In these and other cases, it is possible to identify policies that would likely both increase growth and reduce inequality.Add a comment
Joe Stiglitz had an Opionator piece in the NYT arguing that inequality was bad for growth. Krugman responded by taking issue with a couple of the points raised by Stiglitz: that upward redistribution of income leads to fiscal problems and that upward redistribution of income leads to stagnation.
On the first point, Krugman correctly notes that the tax code is at least marginally progressive. This means that in general upward redistribution of income should increase revenues, the opposite of what Stiglitz claimed. It is possible that Stiglitz was considering the broader tax and transfer picture. This is certainly more ambiguous and could well go the other way.
Suppose we are redistributing 3 percentage points of income (roughly $400 billion a year) from the bottom 20 percent of the income distribution to the top 2 percent. While tax collections will almost certainly go up, we will likely be paying out more money in food stamps, TANF, Medicaid and other means-tested programs. My guess is the net in this story is negative, but I am sure it would depend on exactly who is being hit and who gets the money.
The more important point is whether we may suffer from a lack of consumption if we redistribute from low income people, who Stiglitz argues will spend most of their income, to rich people who he argues will spend a smaller share of their income. Krugman dismisses this assertion, noting the problem that consumption will depend on lifetime income, not temporary income. This would mean that people will always be spending a higher share of their income when their income is low than when it is high. He then turns to the macro picture to see if there is evidence of a rise in the savings rate as income shifted upwards in the last three decades.
The National Income data of course show a decline in savings, but there is a major complication in this story. The stock market began to rise above its historic average ratio to corporate profits in the 1980s and rose way above the historic ratio in the stock bubble in the 1990s. Also, in the 1990s house prices began to rise above their long-term trend level and in the last decade they rose way above their long-term trend.
We know that people spend based in part on their wealth. The increase in stock values relative to income in the 1980s meant that wealth was higher relative to income than would ordinarily be the case. We would expect this to lead to more consumption and a drop in savings. The same is true with the rise in house prices in the 1990s and 2000s. In other words, we did not have a problem of under-consumption because we had bubbles in the stock and housing markets that kept consumption at very high levels.
Does this prove Stiglitz's point? I wouldn't go quite that far, but it does suggest that Krugman's case is not as solid as it may first appear.
There are two other points worth mentioning on the general topic. The standard savings data would overstate private sector savings in the 70s relative to later decades because of the high inflation of that decade. This eroded the real value of government bonds held by the private sector. That meant that the deficits in that decade were smaller than they appeared, but it also meant that private sector savings was lower than the official data indicate.
The other item to keep in mind is that we are not supposed to be worried about insufficient demand in this story in part because the low interest rates that would result would cause the dollar to fall and net exports to rise. This happened a bit in the mid-90s in response to the deficit reduction of at the beginning of the Clinton administration. However things went the other way following Robert Rubin's high dollar policy and the East Asian financial crisis.
This is a longer story, but in the textbook story rich countries like the United States are supposed to be net exporters, sending capital to poor countries. The fact that we have seen the opposite in a big way for the last 15 years is not good.
Seth Ackerman reminds me that comparisons of saving rates only make sense when the economy is near full employment. Otherwise the saving rate will be inflated by virtual of the fact that income is depressed lowering the denominator. The full employment assumption is plausible for the late 80s, mid and late 90s, and near the peak of 00s cycle. It is less plausible for the early and mid 80s, early 90s, and early part of the last decade. Of course for comparison purposes, we would have the same issue with the 70s downturn.Add a comment
The NYT has an article on how Amgen managed to get a provision into the budget deal signed at the start of this year which could get it $500 million in additional revenue from Medicare over the course of the decade. The piece reports that this was a victory for Amgen's extensive lobbying network on Capitol Hill.
This sort of corruption is exactly what economic theory predicts when the government gives companies monopolies in certain markets, as it does with patent protected drugs. When a company can sell a drug at prices that are several thousand percent above the marginal cost of production it has enormous incentive to pressure politicians to allow it to sell the drug in contexts where it may not be the best treatment for a disease.Add a comment