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).
Since several people in comments and e-mails raised questions on my earlier post on capital-biased technological change I will try to clarify my point. The original impetus was a Paul Krugman post in which he raised the possibility that changes in technology were causing a redistribution from labor to capital. (He has since written further on the topic.)
My point was to note that this sort of redistribution cannot just be a matter of technology, it also involves a very big role for the laws and norms that make such a redistribution possible. I referred in the earlier post to the Cambridge controversies in the theory of capital. Unfortunately, these debates were sidetracked into a narrow and largely irrelevant discussion of the possibility and likelihood of "re-switching," a story where a production technique flips from being less capital intensive to more capital intensive as the interest rate rises or falls.
From my perspective the main takeaway from this debate is that there is no measure of capital that is independent of its price. How do we compare a steel mill, the latest supercomputer from IBM, the software produced by Google and the method for producing a lifesaving cancer drug whose patent is owned by Pfizer? Are we going to weigh each one, takes its volume? There is no measure of capital apart from its price.
This is in contrast to labor, the other part of the technology story. I would not want to minimize the problems of aggregating labor either (is an hour of a brain surgeon's time the same thing as an hour of dishwasher's time?), but at least there is something physically present that we can identify. What is the physical presence of a software or pharmaceutical patent? Yet, these items are hugely important in the modern return to capital story since a very large chunk of profits is earned by software companies, drug companies or other corporations that profit primarily based on their ownership of intellectual property.
Intellectual property serves a social purpose. It is a way to provide an incentive for innovation and creative work. However it is certainly not the only way. An enormous amount of research is funded publicly, as with the NIH, and also through universities and non-profits, and from private companies not seeking to profit from patent or copyright protection. It is far from clear that patents and copyrights are the most efficient mechanisms for supporting innovation and creative work. If our current intellectual property regime also has distributional consequences that we consider bad, then that would be a serious strike against it.
But the basic point is that if we are concerned that the economy is leading to a situation where an ever large share of the gains from growth are going to capital, we should not imagine that this is just the result of technological change. It was the result of conscious policy choices. As we say here at CEPR, money does not fall up.
Add a comment
That seems to be the view of the NYT editorial board which concluded a piece on the fiscal standoff by saying:
"But if Congress cannot approve a deal by New Year’s Day, the anticipated sell-off on Wall Street in early January would, one hopes, force House Republicans to budge."
This view, if correct, is truly scary. First, the real impact of failing to come to a deal is the higher taxes and reduced spending which will soon slow growth and raise unemployment if Congress waits too long into 2013 to take action. One might hope that this would be of sufficient concern to get the Republicans in Congress to move.
As far as a sell-off on Wall Street, first it may not come and second, who gives a damn? The stock market has presumably priced in the risk of not seeing a deal by the end of the year. While prices will likely fall further if that risk is realized, those anticipating some sort of double-digit drop are likely to be disappointed.
On the flip side, it would be really scary if folks in Washington are making policy based on the ups and downs of the stock market. The stock market moves in erratic fashion in response to real news and to nothing. What were the events in the world that provided the basis for the 25 percent drop in prices in October of 1987? Was the economy headed for disaster?
Furthermore, even large fluctuations in the market have only a limited impact on the economy. If the market rises (or falls) by 10 percent there will be a very limited impact on investment, as the small portion of firms that rely stock issuance for financing investment will find it easier (or harder) to do so, as well as a modest impact on consumption due to the wealth effect. But even a 10 percent movement hardly implies a boom or recession. If we see the market fall by 3 percent as a result of missing the deadline, which may subsequently reversed, the impact on the economy will be hard to detect.
It would be incredibly irresponsibly to make policy based on stock market fluctuations. If some members of Congress actually base their votes on stock market fluctuations then this would be a great news story. Voters should have this information so that they can replace the current members with more competent policymakers.
Thanks to Robert Salzberg for calling this to my attention.Add a comment
Let's see, if Congress does nothing then the budget deficit will fall by around $600 billion to a bit more than 2 percent of GDP. How is this a "fiscal crisis?" Of course it's not a fiscal crisis.
It is an austerity bomb. If the higher taxes and reduced pace of spending are left in place over the course of the year (not the first 2 weeks in January), then GDP growth will slow and the economy will likely fall back into recession.
Please explain why the NYT still doesn't have this straight after covering the issue endlessly for the last three months?Add a comment
The Serious People who are hyping the importance of a deal on the budget standoff before January 1 have various scare stories that are supposed to make us believe that missing the deadline will lead to an economic catastrophe. Part of the story is that consumers will freak out and stop buying things.
This part does not appear to be supported by the data, as the Conference Board Index of consumer confidence showed a sharp increase in December. Actually, that's not entirely right. The index fell sharply in December, from 71.5 in November to 65. However, this drop was entirely due to a drop in the future expectations index. This index has almost no relationship to current consumption.
On the other hand, the current conditions index, which tracks consumption reasonably well, rose to 62.8 in December from 57.4 in November. This is the index that tells us what people are actually doing.
The future expectations index reflects the nonsense reported in the media, which these days means lots of end of the world prophecies over missing the December 31st deadline.
Addendum: The NYT committed the same sin.Add a comment
Yes, the Washington Post is getting very worried that it will have egg all over its face if January 1 comes with no budget deal and we don't get its promised recession. The paper pushed this line yet again, telling readers:
"Unless the House and the Senate can agree on a way to avoid the “fiscal cliff,” more than $500 billion in tax increases and spending cuts will take effect next year, potentially sparking a new recession."
Of course the potential for a new recession does not refer to missing the January 1 deadline. It is the risk the country faces if we continue well into 2013 paying higher tax rates and with large cuts in spending. This is an enormously important distinction.
This is not the only important distinction missed in this piece. It told readers that President Obama and Speaker Boehner were very close to a deal:
"Boehner offered to raise $1 trillion in fresh revenue, and he wanted spending cuts of equal size. By that measure, Obama’s tax offer was $300 billion too high and his cuts $150 billion too low, for a net difference between the two men of about $450 billion — less than 1 percent of projected federal spending over the next decade.
In the end, however, the gap proved to be much wider politically than it was numerically."
Actually, Boehner never specified the tax increases that raised $1 trillion in fresh revenue. ( If he did, the Post did not bother to report them.) So it is not clear how far apart they were. It is also likely that one of Boehner's big revenue raisers would have been a cap on deductions, including the deduction for state and local taxes. This would make it far more difficult for states like New York and California to maintain their current level of taxation. President Obama would find considerable resistance among Democrats to this sort of deal.
The piece also refered to Senator Lindsey Graham's warnings that the country could end up like Greece. It should have pointed out that Graham is either ignorant of economics or was trying to needlessly scare his audience since there is no way the United States can end up like Greece.
The United States borrows in its own currency, which means that it will always be able to pay its debt. Its worst risk would be inflation, which is a very remote risk at the moment. Greece, on the other hand is like Ohio. It cannot borrow in its own currency. The Post should have pointed out this distinction to its readers since some might have taken Lindsey's scare story seriously.
The piece also tells readers that Starbucks decision to make employees write "come together" on cups is a "'sign of mounting anxiety over Washington gridlock." While anxiety may explain the motivation of Starbucks CEO Howard Schultz, he may also just want to curry favor of the powerful executives in the Campaign to Fix the Debt and win praise from their allies in elite media outlets like the Washington Post. Since Schultz's motives are not known, a serious newspaper would just report his actions without implying that it knew his motives.
Add a comment
Perhaps we should be glad that the NYT gives their regular editors vacations over the holidays, but there still should have been someone to stop or qualify these lines:
"For months, President Obama, members of Congress of both parties and top economists have warned that the nation’s fragile economy could be swept back into recession if the two parties did not come to a post-election compromise on January’s combination of tax increases and across-the-board spending cuts.
"Yet with days left before the fiscal punch lands, both sides are exhibiting little sense of urgency, and new public statements Wednesday appeared to be designed more to ensure the other side is blamed rather than to foster progress toward a deal."
Nope, there are no economists who have warned that we have a serious risk of recession if there is no deal by January 1, 2013. The risk of recession comes if we go several months into 2013 without a deal. Those are very different scenarios, someone at the NYT must be able to understand this fact.Add a comment
Paul Krugman has been rightly troubled by the continuing shift of income shares from labor to capital. However the explanation he considers in the form of capital-biased technological progress requires a little more careful examination.
Krugman discusses the case where there is an exogenous change in the nature of technology that makes capital relatively more productive than labor. This leads to more capital being used, driving up its price, and less labor being used, driving down its price (i.e. wages).
This is a relatively straightforward story, but there is a serious problem. Capital is not a well-defined item. Back in the good old days we could have one good models where capital was corn that we had chosen to use as seed rather than eat. However, once we move into the real world, we have to recognize that what counts as a "capital" is a diverse array of items that includes not only physical goods, but also things likes patents.
There is a long literature on the problem of measuring capital. (The Cambridge capital controversy gives some of the flavor.) But, just to make a simple point, we might end up with considerably less "capital" if we shortened, weakened, or eliminated patent protection, especially in areas where it arguably is impeding technological progress (e.g. software and prescription drugs).
For this reason, the fact that we may appear to be seeing capital-biased technological progress should not be viewed as just some unfortunate event in the world that we have to learn to cope with. If we are in fact seeing capital-biased technological progress it is almost certainly the case that it is at least in part the result of policy decisions that could be handled differently.Add a comment
A Washington Post article on how most Democrats have come to support the Bush tax cuts for the bottom 98 percent of the population, after originally opposing them, told readers:
"The Democrats were also correct in warning about the effect on the government’s debt. The tax cuts did more to fuel ballooning federal deficits over the past decade than any other Bush administration action — including the wars in Afghanistan and Iraq and the creation of a prescription drug benefit for seniors, according to the Pew Fiscal Analysis Initiative. And in coming years, the Bush-era tax cuts are projected to expand the deficit by trillions more."
Actually the deficits were not ballooning until the collapse of the housing bubble crashed the economy in 2008. The budget deficit in 2007 was 1.2 percent of GDP and the debt to GDP ratio was falling. The Congressional Budget Office projected that it would stay in this neighborhood for another decade or so even if the Bush tax cuts did not expire. The reason that the deficit became large and the debt to GDP ratio started to rise was that the collapse of the economy cost the government hundreds of billions in tax revenue annually and led to hundreds of billions of additional expenditures for unemployment benefits and other programs to counteract the impact of the downturn.
While the Bush tax cuts may have been bad policy, in fact they were affordable in the context of an economy that was near full employment. If the collapse of the housing bubble had not sank the economy, there would be little issue about the sustainability of the debt.Add a comment
Well, who can blame her? After all, we have tens of millions of seniors living high on Social Security checks averaging a bit over $1,200 a month at a time when folks like the CEOs in the Campaign to Fix the Debt are supposed to subsist on paychecks that typically come to $10 million to $20 million a year.
Anyhow, her main trick for cutting benefits is to adopt the chained consumer price index as the basis for the annual cost of living adjustment. This would have the effect of reducing benefits by 0.3 percentage points for each year of retirement. This means a beneficiary would see a 3 percent cut in benefits after 10 years, a 6 percent cut after 20 years and a 9 percent cut after 30 years. This is real money. Since Social Security is more than half the income for almost 70 percent of retirees and more than 90 percent of the income for 40 percent of retirees, the hit to the affected population would be considerably larger than the hit to the top 2 percent from ending the Bush era tax cuts.
But Marcus insists this cut must be done first and foremost in the name of accuracy, since the chained CPI is supposed to provide a better measure of the cost of living. She notes but quickly dismisses the evidence from the Bureau of Labor Statistics (BLS) consumer price index for the elderly (CPI-E), which shows that the rate of inflation seen by the elderly is somewhat higher than the overall rate of inflation.
"The problem with that is twofold. That measure is imperfect — the “E” stands for experimental. And, as the liberal Center on Budget and Policy Priorities notes, the burden of higher health costs falls unevenly among the elderly. Average costs are skewed upward by a minority who face very high out-of-pocket expenses, a problem better addressed by fixing Medicare to deal with catastrophic costs."
Actually, the "E" stands for elderly, but let's get to the substance. First, if we are interested in accuracy then the answer would seem to be to have the BLS construct a full elderly index that tracked the actual consumption patterns of the elderly. This would cost some additional money, but we will be indexing $10 trillion in Social Security benefits over the next decade so if we want to ensure accuracy, it would seem reasonable to spend $70-$80 million to put together a full elderly index that actually tracked the consumption patterns of the elderly, looking at the specific outlets where they shopped and the items that they purchased.
It is difficult to know exactly what this would show, but it is possible that even apart from the issue of health care it would show that the elderly experience a higher rate of inflation than the population as a whole. The current index already assumes substantial amounts of substitution in response to price changes at lower levels of aggregation (e.g. different types of cell phones). If the elderly are less flexible in their shopping patterns and a less mobile population then this substitution may have the effect of understating the increase in their cost of living.Add a comment
Alan Greenspan will go down in history as the person who has done more damage to the U.S. economy and society that anyone who was not a foreign enemy. In fact the destruction he wreaked through his incompetence would also exceed the damage caused by almost all would-be enemies as well.
Greenspan accomplished the remarkable feat as Fed chair of ignoring the growth of the $8 trillion housing bubble. This bubble could not have been easier to see if it had been 500 feet high and lit up with huge neon signs saying "Huge Housing Bubble." But Greenspan insisted the bubble was not there.
And Greenspan somehow didn't recognize that the collapse of this massive bubble would devastate the economy. The bubble was generating over $1 trillion in annual demand through its direct impact on housing construction and its indirect impact on consumption through the housing wealth effect. This demand would inevitably disappear when the bubble burst, leaving a huge hole in demand.
Did Greenspan think that the private sector had some magic formula to replace this demand? What could he have been thinking or smoking?
If we had a political debate that was driven by evidence, where the accuracy of one's past judgements played any role in the credibility granted their current opinion, then Greenspan would be relegated to the role of ranting fool. His opinions on the economy would be given slightly less credibility than the mumblings of a street drunk.
This is why it would have been worth highlighting the news contained in a NYT article on the origins of the "Campaign to Fix the Debt," the corporate financed effort to reduce the deficit. The article tells readers in passing:
"The Campaign to Fix the Debt started to come together at a salon dinner held in the backyard of Senator Mark Warner, Democrat of Virginia, in the fall of 2011. An influential group of economic, political and business leaders — including the former Federal Reserve chairman Alan Greenspan and Mark Bertolini, the chief executive of the Aetna insurance company — huddled in a too-small tent in the pouring rain."
This is such an amazing tidbit that it really should have been the lead of the article. The person most responsible for wrecking the economy -- and incidentially adding trillions of dollars to the debt -- was there at the founding of the Campaign to Fix the Debt.
Wow, what did Santa get you for Christmas?
Add a comment
The Washington Post continued its practice of ignoring journalistic standards in trying to push its line on the necessity of a budget deal. An article referred to the end of the year deadline before higher tax rates and spending cuts kick in, then told readers:
"That deadline, now called the fiscal cliff, is widely believed capable of causing another recession."
It's actually not clear that any economists think that missing the deadline will cause the economy to fall into a recession. The Congressional Budget Office and others have projected that if higher tax rates and the legislated spending cuts stay in effect all year that the economy might fall into another recession. However, they did not project that a recession would result if we went a week or two into 2013 without a deal, especially if any tax cuts put in place were made retroactive, which would almost certainly be the case.Add a comment
Fareed Zakaria is very unhappy that "The American Left," by whom he means the vast majority of people across the political spectrum who oppose cuts to Social Security and Medicare, insist on taking arithmetic seriously. They are refusing to join Peter Peterson and his wealthy friends in the Campaign to Fix the Debt in their crusade to cut these key social insurance programs.
Zakaria tells readers:
"The American left has trained its sights on a new enemy: Pete Peterson. The banker and private-equity billionaire is, at first glance, an obvious target—rich and Republican. He stands accused of being the evil genius behind all the forces urging Washington to do something about the national debt. ...
Many news outlets, most notably the Washington Post, have been busy creating disaster stories associated with the failure to reach an agreement on the budget by January 1, 2013. Ryan Grim at the Huffington Post approached the issue as a news reporter would, by asking what is likely to happen if there is no deal by that date.
The answer is essentially nothing. No one disputes that if we drag on several months into 2013 without a deal that higher taxes and lower government spending will be a serious hit to the economy. But the consequences to the economy of not reaching a deal by New Year's itself is pretty much zero. (It will mean unnecessary stress for people facing the cutoff of unemployment insurance and other benefits, but the impact of this on the economy will be pretty much undetectable.)
Anyhow while most of the media have horribly failed the country in their reporting on this issue, Ryan Grim and the Huffington Post came through.Add a comment
One should always take second hand accounts from secret meetings with more than a grain of salt, but the Wall Street Journal's account of President Obama's position in his negotiations with Speaker Boehner should raise some concern. The WSJ told readers:
"The president told him [Boehner] he could choose one of two doors. The first represented a big deal. If Mr. Boehner chose it, the president said, the country and financial markets would cheer. Door No. 2 represented a spike in interest rates and a global recession."
Huh, a spike in interest rates and a global recession? What exactly could President Obama mean if he really said this? If there is no deal over the course of 2013 [not by January 1, that is a fairy tale told for children and Washington pundits] then it is likely that we will see a recession, as the Congressional Budget Office and others have projected. But a recession is associated with lower interest rates, not higher interest rates.
If President Obama really thinks interest rates will spike because of a big tax increase coupled with the cuts in the sequester then he badly needs some new economic advisers. I'm always open to new economic theories, but it's hard to see how you can get from standard economics to this sort of story.
If the WSJ is confident in the reliability of its sources it should be running a news piece on President Obama's loony economics.Add a comment
A Washington Post article on a report by the IMF's Independent Evaluation Office criticizing political influence by the United States on the Fund's policy may have misled readers on how countries accumulate foreign exchange reserves. The article told readers:
"A steady rise in foreign reserves — a country’s holdings of dollars, yen or other major world currencies — can be the result of large trade surpluses. But it can also stem from an undervalued exchange rate, something that the United States has long accused China of maintaining to give its products a more attractive price on world markets."
A rise in foreign exchange reserves can only result from a decision by a central bank to buy reserves. Its access to reserves is affected by the country's trade balance, but a central bank only ends up with reserves because it has decided to buy them. If the central bank of a country with large trade surpluses decided not to buy reserves, then its currency would rise in international markets as holders of foreign exchange (mostly dollars) dumped them on international markets to obtain more of their own country's currency.
This would cause the price of their own country's currency to rise and the foreign country's currency to fall. There is no real dispute that central bank intervention keeps the dollar high against the yuan and other currencies. The only questions can be the motivation and the implications of this intervention.Add a comment
Towards the end of an article that discussed efforts by Japan's government to boost the demand for workers by generating inflation the NYT told readers:
"The country has an aging, shrinking population. It needs more workers."
Umm, no. It does not make sense to say that Japan is suffering from inadequate demand, which means that it has more supply of workers than demand for workers, and then to say it needs more workers. Up is not down.
There is a well-funded effort in the United States to try to place demographics at the center of economic policy debates. Countries are growing older. This is not new, they have been growing older for many decades. Fans of arithmetic know that the increase in living standards that result from even modest growth in productivity swamps the impact of demographics in lowering living standards. Here's the story for the United States over the next 23 years -- the peak pressure associated with the retirement of the baby boomers.
Source: Author's calculations.
And remember after 2035, the demographnics change little for the rest of the century, but productivity keeps growing. In short, the aging story is a joke.Add a comment
For those of you BTP readers playing a drinking game out there in blogland, take another swig, the Washington Post used the phrase "tame the debt" in yet another budget article. Here it is:
"If there was going to be a deal to tame the nation’s debt, it had to happen now."
Not much to add here. I just will note for those tiring of my deficit projection chart showing the silliness of this out of control debt story, there is also the addition approach that Paul Krugman used in his Monday column. But as the deficit hawks say, "don't bother me with your stinkin numbers!"Add a comment
Ever since the election the Wall Street gang has been trying to build up scare stories around the budget standoff between the President and the Republican House. The term "fiscal cliff" is a central part of this campaign since it implies that something ominous happens if there is no deal by the end of the year.
As every economist and budget analyst knows, it makes virtually no difference whatsoever if there is a deal 10 days before the end of the year or 10 days after. However if the Wall Street gang can build up enough fear then it will lead to more pressure to get a deal before the end of the year. Since President Obama will be on much better negotiating turf after the end of the year and the tax cuts have already expired, a deal struck this year will likely be more favorable to the Republicans.
The NYT seems to have joined in this effort, telling readers that we may "careen off the so-called fiscal cliff" if there is no deal. This sort of silly and inaccurate metaphor is best left for fiction. It has no place in a serious newspaper.Add a comment
That's undoubtedly what readers are asking after seeing this strange and inaccurate phrase appear yet again in an article about the latest tax plan Speaker Boehner put forward. Of course it is inaccurate since it implies that debt and deficits have been out of control.
As every budget analyst knows, deficits were actually quite modest until the economy plummeted in 2008 following the collapse of the housing bubble. The deficit in 2007 was just 1.2 percent of GDP. The economy can run deficits of this size forever, since the debt to GDP ratio was actually falling. The deficit was projected to remain low for the next several years until the projected expiration of the Bush tax cuts pushed the budget into surplus in 2012.
Source: Congressional Budget Office.
There have been no large unfunded increases in spending nor permanent tax cuts since these projections were made. The sole reason that the deficits came in much higher than projected was the impact of the recession on tax and spending and the stimulus measures taken to counter the downturn.
The Post has consistently misrepresented the nature of current deficits. This helps to promote its agenda of cutting Social Security and Medicare.
The Post also misrepresented the risks of missing the December 31 deadline of reaching a budget deal. It told readers:
"If no action is taken before the end of the year, taxes will rise for nearly 90 percent of taxpayers in January, potentially sparking a new recession, according to many economists."
In fact it is not clear that any economists say that missing the deadline will cause a recession. The Congressional Budget Office and others have projected that if the higher tax rates and spending cuts remain in place all year that the economy will likely fall into a recession. They did not say that this would be the result of waiting one or two weeks into January to work out a deal.
Most analysts think that President Obama's negotiating position will improve after the tax cuts expire. If this is the case then trying to maintain pressure on President Obama to reach a deal before the end of the year would also advance the Post's agenda for cutting Social Security and Medicare.Add a comment
The Washington Post is having trouble with numbers again. It told readers that the bill passed by the Senate in the summer would restore the Clinton era tax rates on households with incomes over $1 million. Actually the bill would restore Clinton era tax rates on households with incomes over $250,000.
Thanks to Robert Salzberg for calling this to my attention.Add a comment
The top of the hour news segment on Morning Edition told listeners that forecasters have predicted that failing to meet the December 31st cutoff on budget negotiations would throw the economy back into recession (sorry, no link). This is not true. The projections for a recession assume that there is no deal on taxes and spending throughout 2013. They did not predict what would happen if it takes a few days or weeks in 2013 to come to an agreement that reversed most of the tax increases and spending cuts that go into effect at the end of the year.
This is a simple and important distinction. It is incredible that NPR could not find news writers who could get it right.Add a comment