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).

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The NYT apparently thinks so, since it ran a front page piece on the difficulty of increasing birth rates in Europe, China, and elsewhere. Let's see, if we have a declining population that means fewer traffic jams, less crowded parks and beaches, and less pollution. Sounds like a crisis to me.

I know the "hard to get good help" crowd is worried about who is going to work as their servants, but for the foreseeable future it looks like we are facing a situation of inadequate demand in the economy (a.k.a. secular stagnation). This means that we do not have enough demand to fully employ the available workforce. If we don't have enough demand to employ the available workforce how is it a problem if the size of the available workforce shrinks?

People should feel confident enough in their economic situation and have sufficient social support in the form of affordable child care and paid leave from work that they can have children if they want. But if the population declines because people opt not to have children, it's difficult to see what the problem is.

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Tyler Cowen had a piece in the NYT arguing that the mandates in Obamacare may be painful for many moderate-income people who don't qualify for subsidies and don't value the insurance. This is true, but it is also true of almost any policy that would be designed to help low- and moderate-income people.

First, the basic point is that the mandate requires people to buy insurance who might not have otherwise if the law didn't require it. If we give these people credit for acting rationally, they would choose to pay necessary medical expenses out of pocket and to rely on emergency room care rather than pay for an insurance premium. In this case, the mandate is effectively a tax that can be a substantial burden on households who are over the cutoff for subsidies at 350 percent the poverty level. (That would be $41,200 for a single person, $71,300 for a family of three.)

This sort of argument would also apply to a program like Social Security. There are many people who can reasonably expect that they will not enjoy long retirements based on the age at which parents and other relatives have died. Social Security also provides survivors benefits for spouses and dependent children. In addition, it provides disability benefits. But if a person with a short life expectancy does not have children, or they have grown, and either does not have a spouse or the spouse would be entitled to comparable benefits based on their own work history, Social Security will not provide this person with a very good expected payback. We may or may not feel bad about requiring this person to contribute to Social Security, but it is essentially the same sort of dilemma that Cowen raises about Obamacare.

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In an editorial railing against the Republican Congress for reducing the Fed's reserve fund (which is needed in case they forget how to print money), the Washington Post told readers:

"Central bank independence and fiscal transparency are attributes of a healthy democracy and have been throughout history. Many a banana republic, by contrast, has come to grief using its central bank to facilitate government deficit spending. Post-World War I Germany had a similar problem, if memory serves."

Apparently memory isn't serving the Post's editorial writers very well. The Bank of England did not independently set its monetary policy until 1997. Nonetheless, it somehow it managed to avoid hyperinflation and most people probably would still describe the U.K. as a democracy. There are many other examples of central banks, including the Fed during World War II and for six years afterwards, which were not independent of the elected government. In almost none of these cases did countries suffer from hyperinflation.

On the other side, independent central banks in the United States and Europe somehow managed to overlook enormous housing bubbles, the collapse of which sank their economies. In Europe, the collapse has actually caused more economic damage than the Great Depression. Incredibly, none of the bank officials responsible lost their jobs for their extraordinary incompetence.

Unlike dishwashers, truck drivers, or school teachers, independent central bankers are not held responsible for the quality of their performance. In fact, virtually all of the bankers responsible for this disaster will retire with pensions that are an order of magnitude larger than the Social Security checks that so enrage the Post's editorial writers.

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As the debate over a Fed interest rate hike heats up, it is worth noting an important distinction between the types of issues being debated. On the one hand there is a debate over what is likely to happen in a scenario in which the Fed soon begins raising interest rates and one in which it does not. On the other hand there is debate over what we want to see happen.

The first question has to do with the likelihood that we will see more rapid wage growth and more rapid inflation if the Fed holds off compared to a scenario in which it starts raising rates. Looking to the 1990s, many of us see the possibility that wages could grow considerably more rapidly without any substantial uptick in inflation. (There was strong real wage growth in the last year due to a plunge in energy prices, but no one expects that to be repeated. Real wage growth in the year ahead will depend on stronger nominal wage growth.)

Since productivity growth has been incredibly weak in recent years, the possibility of stronger real wage growth will depend at least in part on a return of more normal productivity growth, at least in the range of 1.5–2.0 percent. (Where are the robots when we need them?) There is a story that productivity growth may be in part endogenous. This would mean that in a tighter labor market firms have more incentive to economize on labor. Also, in a tighter labor market workers move from low paying, low productivity jobs to higher paying, higher productivity jobs.

There are clear differences among economists in their views on the extent to which a tighter labor market will first translate into higher wage growth, and secondly how much this will translate into higher inflation. However, there is also a difference on what we might want to see. There was a massive shift from wages to profits at the start of the recession. The weakness of the labor market allowed employers to keep pretty much all of the gains in productivity in 2008–2011.

This is a sharp departure from the rise in inequality that we saw in the prior three decades. That was pretty much entirely a story of redistribution of labor income. Money went from assembly line workers and retail clerks to doctors and lawyers, Wall Street bankers, and CEOs.

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Most young people today are having tough times economically. As we know, the main reason for this fact is that so much income has been redistributed upward over the last thirty five years. (Also, we have a cult of deficit reduction in which our leaders in Washington insist on keeping deficits small even when this means slowing growth and keeping people out of work.) Their parents are not doing notably better, with most approaching retirement with little to support them other than their Social Security and Medicare. The wealth holdings of the middle quintile of households headed by someone between the ages 55–64 averaged $165,700 in 2013. Excluding home equity it was just $89,300. 

But Social Security and Medicare are still something. And the guiding philosophy of many in Washington is that a dollar that is in the pocket of a poor or middle-class person is a dollar that could be in the pocket of a rich person. Furthermore, if they can get the kiddies to complain about their parents' Social Security and Medicare they may not notice all the money that the Wall Street gang, the pharmaceutical companies, and the rest are pocketing at their expense.

Hence we get folks like private equity billionaire Peter Peterson devoting much of his fortune to perpetuate attacks on Social Security and Medicare. The Washington Post has also been a major actor in this effort using both its news and opinion pages to advance the cause. Unfortunately, they appear to have enlisted a relatively new economics reporter, Jim Tankersley, who should know better.

Tankersley used his column to complain that "baby boomers are what's wrong with the economy." He adds in the subhead, "they chewed up resources, they ran up the debt, and escaped responsibility."

He lays out the case in the third and fourth paragraph:

"Boomers soaked up a lot of economic opportunity without bothering to preserve much for the generations to come. They burned a lot of cheap fossil fuels, filled the atmosphere with heat-trapping gases, and will probably never pay the costs of averting catastrophic climate change or helping their grandchildren adapt to a warmer world. They took control of Washington at the turn of the millennium, and they used it to rack up a lot of federal debt, even before the Great Recession hit.

"If anyone deserves to pay more to shore up the federal safety net, either through higher taxes or lower benefits, it’s boomers — the generation that was born into some of the strongest job growth in the history of America, gobbled up the best parts, and left its children and grandchildren with some bones to pick through and a big bill to pay. Politicians shouldn’t be talking about holding that generation harmless. They should be asking how future workers can claw back some of the spoils that the “Me Generation” hoarded for itself."

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Insanely high drug prices have been in the news lately. We are regularly hearing about new miracle drugs like the Hepatitis C drug Sovaldi. Sovaldi comes with an $84,000 price tag for a 3-month course of treatment. Many of the new cancer drugs cost well over $100,000 for a year's dosage. And of course we had the case of Turing Pharmaceuticals, which raised the price of a Daraprim, an old but important anti-infection drug, by 5000 percent. 

These stories of extraordinarily high drug prices are especially painful because they are unnecessary. In almost all cases drugs are cheap to produce. The reason they are expensive is because the government grants them a patent monopoly. (In the case of Daraprim, at the moment Turing is the only licensed manufacturer, even though the drug is off-patent.) Generic Sovaldi is available for just $300 a treatment in Egypt, less than one percent of the U.S. price. Most of the cutting edge cancer drugs would also be available for less than one percent of the U.S. price if they could be sold as generics in a free market.

The rationale for patent monopolies is that the drug companies need high prices to recover their research costs. And, they claim they have very high research costs. According to Joe DiMasi, an economist with close ties to the industry, the research and development costs of the pharmaceutical industry averages almost $2.6 billion for each new drug they produce that is a new molecular entity. (New molecular entities account for only about 15 percent of the new drugs approved by the Food and Drug Administration.)

Patent monopolies are not the only way to support research. There are other mechanisms. For example, the U.S. government spends over $30 billion a year on biomedical research through the National Institutes of Health. There are also various private initiatives that support research.

One such initiative is the Drugs for Neglected Diseases Initiative (DNDI). This is a research network, led by Doctors Without Borders, that was established to develop treatments for diseases that primarily affect poor people in the developing world. It was created in 2002. On their tenth anniversary, DNDI produced a report describing some of their accomplishments. The figure below shows some of the highlights and their price tag and compares them to DiMasi's estimate of what it costs the big pharmaceutical companies to develop a single drug.

Book2 28641 image001

Source: DNDI and DiMasi, 2014.


As the figure shows, DNDI was able to develop ASAQ, a combination drug for treating Malaria, for $17 million. More than 250 million dosages have been distributed since 2007. It developed Fexinidazole, a new drug candidate and new chemical entity, intended to treat sleeping sickness, at a cost of $38 million. DNDI developed SSG&PM, a combination therapy for visceral leishmaniasis at a cost of $17 million. DNDI's entire budget for its first 10 years of existence was $242 million, less than one-tenth of what DiMasi estimates it costs the pharmaceutical industry to develop a single new drug.

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The Washington Post got recent history badly wrong in the third paragraph of its lead front page article when it told readers:

"Three years ago, GOP presidential nominee Mitt Romney and Ryan, his running mate, faced withering Democratic attacks after endorsing dramatic overhauls of Medicare and Social Security that proved unpopular."

Actually, Romney did not endorse an overhaul of Social Security in his 2012 campaign, although Ryan has long been on record as favoring privatization. Presumably, they chose not to raise the issue in the campaign since they knew it would be highly unpopular.

The piece also notes Governor Chris Christie's characterization of himself as a "truth-teller" on Social Security and then reports on his plan to save the system money by means-testing benefits starting at $80,000 and eliminating them entirely for people with incomes over $200,000. The truth is that this cut would only reduce spending by 1.0-1.5 percent. Furthermore, it would effectively increase the marginal tax rate for people in this $80,000-$200,000 range by more than 20 percentage points.

 

Correction:

While Romney did not call for privatizing Social Security, he did propose raising the normal retirement age by two years to 69. He also proposed reducing benefits for middle and upper income workers from their currently scheduled levels.

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That might have been a better headline for a NYT piece on the Trans-Pacific Partnership. As the piece points out, the provisions on labor rights in Vietnam and currency interventions by governments, which have been widely touted by the Obama administration, are not actually enforceable under the terms of the TPP. There are other much less well-defined mechanisms. On the other hand, if Pfizer wants to argue that Australia is not respecting its patent rights or George Lucas wants to complain that Malaysia is not honoring his copyrights on Star Wars, there is recourse through the Investor-State Dispute Settlement mechanism.

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The Washington Post decided to correct the positive image of Denmark that Senator Bernie Sanders and others have been giving it in recent months. It ran a piece telling readers:

"Why Denmark isn't the Utopian fantasy Bernie Sanders describes."

The piece is centered on an interview with Michael Booth, a food and travel writer who has spent a considerable period of time in the Scandinavian countries.

Much of the piece is focuses on the alleged economic problems of Denmark and the other Scandinavian countries. At one point the interviewer (Ana Swanson) asks:

"Danes are experiencing a rising debt level, and a lower proportion of people working. Are these worrying signs for its economy or the country's model?"

While Denmark's employment rate has been declining, it is still far higher than the employment rate in the United States. The employment rate for prime age workers (ages 25–54) is still more than 5 full percentage points higher than in the United States. If the rate of decline since the 2001 peak continues, it will fall below the current U.S. level in roughly 24 years. (The U.S. rate also fell over this period.) If we take the broader 16–64 age group then the gap falls slightly to 4.7 percentage points.

denmark U.S.fredgraph

As far as having an unsustainable debt level, Swanson seems somewhat confused. According to the I.M.F., Denmark's net debt as a percent of its GDP will be 6.3 percent at the end of this year. Sweden has a negative net debt, meaning the government owns more financial assets than the amount of debt it has outstanding. In Norway's case, because of its huge oil assets, the proceeds of which it has largely saved, the government wealth to GDP ratio is almost 270 percent. This would be equivalent to having a public investment fund of more than $40 trillion in the United States.

Some of the other assertions in the piece are either misleading or inaccurate. For example, Booth is quoted as saying:

"Meanwhile, though it is true that these are the most gender-equal societies in the world, they also record the highest rates of violence towards women — only part of which can be explained by high levels of reporting of crime."

Actually, Danish women are far less likely to be murdered by their husbands or boyfriends than women in the United States. Its murder rate is 1.1 per 100,000, compared to 5.5 per 100,000 in the United States.

Later Booth is quoted as saying:

"In Denmark, the quality of the free education and health care is substandard: They are way down on the PISA [Programme for International Student Assessment] educational rankings, have the lowest life expectancy in the region, and the highest rates of death from cancer. And there is broad consensus that the economic model of a public sector and welfare state on this scale is unsustainable."

While Denmark is not among the leaders on either PISA scores or life expectancy, on both measures it is well ahead of the United States. And the "broad consensus that the economic model...is unsustainable" exists only in Booth's head.

Booth is also apparently confused about tax rates around the world. He tells readers:

"Denmark has the highest direct and indirect taxes in the world, and you don’t need to be a high earner to make it into the top tax bracket of 56% (to which you must add 25% value-added tax, the highest energy taxes in the world, car import duty of 180%, and so on)."

Actually France has a top marginal tax rate of 75 percent. The U.S. rate was 90 percent during the Eisenhower administration.

Booth apparently is confused about Denmark's public spending. He tells readers:

"How the money is spent is kept deliberately opaque by the authorities."

Actually, it is not difficult to find a great deal of information about Denmark's money is spent. Much of it can be gotten from the OECD's website.

So we get that Mr. Booth doesn't like Denmark. He tells readers that the food and weather are awful. That may be true, but his analysis of other aspects of Danish society doesn't fit with the data.

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Hey, better late than never. It was good to see two columns reporting on new data indicating that the Current Population Survey (CPS), the main survey used to measure poverty rates, as well as employment and unemployment, seriously undercounts the number of poor people due to undercoverage in its sample. It's an important point and deserves attention.

We thought so too, which is why John Schmitt was writing about the issue almost a decade ago for CEPR. Schmitt noticed a large gap between employment rates as shown in the CPS and the 2000 Census long-form. The latter was lower with the largest gap for the groups with the lowest coverage rate in the CPS. (Coverage rates in the Census are close to 99 percent due to extensive outreach efforts.) In the case of young African American men the gap was close to 8.0 percentage points.

Anyhow, this is an important issue and it is good to see it get some attention. Of course it would have been better if it got some attention a decade ago.

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Austin Frakt had an interesting piece discussing people's abilities to select the lowest cost health care plan to meet their needs. He cites a number of studies that indicate people often make mistakes. For example, they frequently will pay way too much for plans with low deductibles and they fail to switch drug plans, even when they would have clear savings. (These behaviors are not necessarily irrational. If people know that a high deductible will discourage them from getting necessary care, they may opt for a plan that removes this obstacle. Also, filling out forms can be an ordeal for many people. If a person has familiarized themselves with one company's forms, they may not want to switch companies and have to deal with a new set of forms, even if it could save them money.)

Anyhow, there is an interesting implication of this discussion that is not explored in the piece. If we assume that insurers have some target profit rate, then they obtain this rate from the average profit they earn from their customers. If insurers can make a larger than average profit from people who make bad choices, for example by paying too much to reduce their deductible, then they can make a lower than average profit from people who can effectively navigate through the choices offered.

This means that presenting a range of choices is a good way to redistribute from the people who are not very good at analyzing choices to those who are. The latter group tends to do things like write about insurance systems and advise politicians on these issues. This could help explain the preference by our politicians for systems involving choice over more simple options, like universal Medicare.

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That is sort of what the Post reported. It told readers that:

"One of the largest federal programs that provides cash benefits to disabled workers overpaid $11 billion during the past nine years to people who returned to work and made too much money, a new study says."

The Post article never bothered to tell readers that the program paid out roughly $1.1 trillion in benefits over this period, making the overpayment equal to 1.0 percent of benefits. It also would have been worth noting that the study by the Government Accountability Office found that most of this money is repaid, so that the government ends up losing substantially less than 0.5 percent of its spending on the disability program due to overpayments.

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The Wall Street Journal had an article on slow pay growth in recent years that was headlined, "shift to benefits from pay helps explain sluggish wage growth." The article goes on to explain that one of the reasons that wages are not growing is that an increasing share of compensation is going to benefits like health insurance.

The problem with this explanation is that it is clearly not true. According to data from Bureau of Economic Analysis, wages accounted for 83.2 percent of labor compensation in the corporate sector in 2007 (Table 1.14, Line 5 divided by Line 4). In the most recent quarter they accounted for 83.8 percent of labor compensation. This means that the wage share of compensation has increased by 0.6 percentage points over the last eight years. That goes the wrong way for the WSJ's story.

 

Note: Typo and link corrected, thanks Robert Salzberg and ltr.

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The end of China's one child policy is producing an outpouring of nonsense about demographics. Nowhere is the confusion greater than in the opinion pages of the Washington Post, which gets the gold medal for confusion on this issue. In honor of this occasion, BTP will explain the issue in a way that even a Washington Post editorial page editor could understand.

The key point here is that the ability to support a given population of retirees depends not only the ratio of workers to retirees, but also the productivity of the workers. The Post again told readers today that China faces a terrible demographic problem because of its one-child policy.

"Even with its recent rapid economic growth, China is growing old before growing truly wealthy; its shrinking labor force will be hard-pressed to support the millions of dependent elderly."

To see why this is not true, we will take a very simple story where we contrast a country with moderate productivity growth and no demographic change with a country rapid productivity growth and a rapid aging of its population. The figure below shows the basic story.

Book3 9522 image001

Source: Author's calculations.

We assume that in 1985 there are five workers to every retiree in both the Washington Post and China story. If we set output per worker in 1985 equal to 100, then the amount of output per worker and retiree in 1985 is 83.3 (five sixths of the output per worker). We then allow for different rates of productivity growth and population growth over the next three decades.

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Neil Irwin, a writer for the NYT Upshot section, had an interesting debate with himself about the likely future course of the economy. He got the picture mostly right in my view, with a few important qualifications.

First, his negative scenario is another recession and possibly a financial crisis. I know a lot of folks are saying this stuff, but it's frankly a little silly. The basis of the last financial crisis was a massive amount of debt issued against a hugely over-valued asset (housing). A financial crisis that actually rocks the economy needs this sort of basis.

If a lot of people are speculating in the stock of Uber or other wonder companies, and reality wipes them out, this is just a story of some speculators being wiped out. It is not going to shake the economy as a whole. (San Francisco's economy could take a serious hit.)

Anyhow, financial crises don't just happen, there has to be a real basis for them. To me, the housing bubble was pretty obvious given the unprecedented and unexplained run-up in prices in the largest market in the world. Perhaps there is another bubble out there like this, but neither Irwin nor anyone else has even identified a serious candidate. Until someone can at least give us their candidate bubble, we need not take the financial crisis story seriously.

If we take this collapse story off the table, then we need to reframe the negative scenario. It is not a sudden plunge in output, but rather a period of slow growth and weak job creation. This seems like a much more plausible story.

As Irwin notes, the rising dollar and weak economies of U.S. trading partners are reducing net exports for the country. This is likely to be a drag on growth through the rest of this year and well into 2016. Non-residential investment growth has slowed to a crawl, and with a lot of vacant office space in many markets (look around downtown D.C.), it may slow further. In spite of all the whining about people being unwilling to spend, consumption is actually quite high relative to disposable income. 

This doesn't leave much to drive growth. We have been stuck at a weak pace of just over 2.0 percent for the last five years. This has been associated with decent job creation only because of the collapse of productivity growth over this period. It is reasonable to think that growth may slow further. If slower growth were coupled with even a modest uptick in productivity growth (e.g. to 1.5 percent), it could bring job growth to a halt.

This would leave us with an indefinite period of labor market weakness. The unemployment rate may not go up much, but we will make no headway towards bringing the employment to population ratio back to a more normal level. And most workers would continue to see their pay stagnate. 

We got a piece of evidence supporting this bad story yesterday when the Labor Department released the Employment Cost Index (ECI) for the third quarter. Instead of the prospect of rising wages, that has folks at the Fed worried, the ECI showed wage and compensation rates slowing from earlier in the year. Over the last year, total hourly compensation has risen 2.0 percent, with wages rising 2.1 percent. There is zero evidence here of any acceleration.

Anyhow, a story of slow job growth and ongoing wage stagnation would look like a pretty bad story to most of the country. It may not be as dramatic as a financial crisis that brings the world banking system to its knees, but it is far more likely and therefore something that we should be very worried about.

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We all know how hard it is for folks like David Brooks, living in remote corners of Washington, to find out about changes in public policy. Therefore, it wasn't surprising to see him praise Marco Rubio, Brooks' favored candidate for the Republican presidential nomination, for a welfare reform proposal that was put in place almost 20 years ago.

The context was the installation of Paul Ryan as speaker and Brooks' perception that Rubio has emerged as the likely Republican presidential nominee. Brooks see both as promising conservative leaders.

The 20-year-old proposal that Brooks sees as a new idea is the plan to:

"...convert most federal welfare spending into a 'flex fund' that would go straight to the states."

Brooks may be too young to remember, but this proposal was at the center of the 1996 welfare reform in which TANF, the main government welfare program, was transformed into a block grant. It turned out that block granting did not work very well. While some states did respond to the increased need for TANF in the last recession by increasing funding, many did not. This is the reason why programs are run by the federal government or with rules set by the federal government.

This is not the only item on which Brooks is apparently unfamiliar with the evidence. He also tells readers:

"As Oren Cass of the Manhattan Institute has pointed out, there are two million fewer Americans working today than before the recession and two million more receiving disabilities benefits."

Accordiing to the Bureau of Labor Statistics, we actually have 4 million more people working today than before the recession, but the 2 million increase in disability beneficiaries is approximately correct, although the implication that it is due to more people opting not to work is completely wrong. The vast majority of this increase was due to the aging of the baby boomers into the peak disability years and the increase in the normal retirement age to 66. (Disability beneficiaries stay on disability insurance until they reach the normal retirement age.)

Since these factors were known before the recession, the Social Security Trustees were able to predict in their 2007 report that the number of disability beneficiaries would be 1.8 million higher in 2015 than in 2006. One item that the Trustees may not have incorporated into their projections was the tightening of state worker compensation program eligibility requirements. As a result, many people who might have otherwise been getting worker compensation benefits are instead collecting disability benefits.

The characterization of Speaker Ryan as a forward looking moderate is also questionable. He has repeatedly advocated extreme positions that are far outside of the mainstream of both parties. He has called for privatizing Social Security and Medicare and shutting down the non-military portion of the government by the middle of the century.

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Economists constantly have difficulties figuring out what problem we are trying to solve. The NYT's discussion of the Chinese government's decision to switch to a policy that allows most families to have two children, instead of just one, provides an excellent illustration of this situation. At one point the piece explains the policy shift:

"Now the party leadership has acted more forcefully, apparently in the hope that a burst of children will replenish the nation’s work force and encourage more consumer spending."

The idea of having more children to increase the size of the labor force implies that the problem facing China is inadequate supply. (This is more than a bit peculiar given the enormous growth in productivity in the last three decades. Productivity growth, means more output per worker. It has the same impact on supply as having more workers.)

However, the concern about boosting spending, expressed repeatedly throughout the article, is a concern about lack of demand. At any point in time an economy can be suffering from either supply shortages stemming from a lack of workers or demand shortages because people don't spend enough to keep the labor force employed. It doesn't make sense for it to be suffering from both at the same time.

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A NYT article on the prospects of an interest rate hike by the Federal Reserve Board at its December meeting told readers:

"The case for raising rates hinges in part on the Fed’s forecast that the economy will continue to add jobs at a healthy pace and that inflation will begin to rise more quickly. Moreover, some analysts argue that maintaining near-zero interest rates is now doing more harm than good by encouraging businesses to invest in things like share buybacks to lift their stock price, rather than long-term investments in equipment and developing new products."

It's difficult to see how low interest rates would cause firms to prefer share buybacks to long-term investment. Low interest rates make the cost of borrowing lower. This could lead some firms to carry more debt and use cash for share buybacks or dividends. But low interest rates also make it easier to borrow for long-term investment. There is no obvious mechanism through which low interest rates would lead firms to divert money from investment to share buybacks.

If low interest rates eventually led to enough growth that it pushed up the rate of inflation, then they could provide a boost to investment at the expense of buybacks (higher inflation means that the output will sell for more, raising profits, other things equal). It is difficult to see how low interest rates could cause buybacks to increase at the expense of investment.

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In his recent book, former Fed chair Ben Bernanke claimed that the Fed did not choose to let Lehman fail, he said that it had no choice because it could not bail it out. The NYT is insisting that this account is true.

"During his remarks, Mr. Bernanke sought to dispel a perception that the Fed and other policy makers made a conscious decision to let Lehman Brothers fail. Even today, nearly a decade after the financial crisis, the view still persists among some.

"'The tools we had were inadequate' to save Lehman, Mr. Bernanke said. Early efforts to line up a buyer for Lehman – first Bank of America and then the British bank Barclays — failed. The only remaining option was for the Fed to lend Lehman money. But Mr. Bernanke said that Lehman was 'so deeply in the red' that the Fed did not have the financial muscle to bail it out."

The Fed absolutely did have the financial muscle to bail out Lehman. It could have lent the bank as much as it wanted. Legally, the Fed is not supposed to lend to an insolvent bank, but it almost certainly ignored this restriction in lending to Citigroup and Bank of America, as well as other banks, during the crisis.

Had the Fed opted to lend to Lehman, in spite of its being insolvent, it is difficult to imagine who would have stopped it. It is unlikely that the courts would grant legal standing to anyone trying to sue and even if they did, a suit would likely take years to resolve, at which point we would have been through the worst of the crisis.

The decision to let Lehman fail was a decision. It is unfortunate that the NYT is working to help Bernanke rewrite history on this issue.

 

Note: Typo corrected.

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I see that my co-author Jared Bernstein has been pondering this question. While this sort of thinking can get you thrown out of the church of mainstream economics, I think that he is very much on the mark. Let me throw out a few reasons.

First, there is an issue about the money available to firms to invest. While larger and more established firms likely to have little problem financing investment in the current low interest rate environment, smaller and newer firms may find it difficult to get access to capital. For them a rapidly growing economy can be strong sales growth and higher profits, both of which are strongly linked to investment. This is a finding from an old paper by my friend Steve Fazzari and Glenn Hubbard (yes, that Glenn Hubbard.)

A second reason why productivity can be tied to growth is that firms will have more incentive to adopt labor saving equipment in a context of a rapidly growing economy. When they see additional demand for their products, they have to find a way to meet it. Of course they can hire more workers or have the existing workforce put in more hours, but another option is to find a way to produce more with the same amount of labor. Of course profit maximizing firms should always be trying to produce more with the same amount of labor, but they may not follow the economics textbook. Meeting increased demand can give them more incentive to do so.

A third reason is changes in the mix of output. At any point in time we have many high paying high productivity jobs and many low paying low productivity jobs. When we have a strong labor market, people go from the low paying, low productivity jobs to the higher paying high productivity jobs. This means that many people now working at fast food restaurants, the midnight shift at a convenience store, or as greeters at Walmart will instead find better paying jobs in a strong labor market leaving these low-productivity jobs unfilled.

The rapid growth of jobs in low-paying sectors in this recovery has been widely noted. Rather than reflecting an intrinsic feature of the economy, this could be the result of the failure of demand to create enough growth in the high-paying sectors. This is again a story where the causation goes from growth and low unemployment to high productivity.

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Hey, who can blame them? It's an obscure government program with 60 million beneficiaries, with benefits that are so small that they don't matter to anyone who is anyone.

I'm actually not joking here. The WSJ ran an article telling readers that the average baby boomer between the ages of 55-64 faces a gap of $36,371 between the $45,000 a year they expect to need as income in retirement and the $9,129 they can expect to get based on the savings they have accumulated. The incredible part of the story is that the piece never once mentions Social Security, nor does the Blackrock study on which the article is based.

While Social Security benefits will not fill this gap, they will be by far the largest part of the retirement income of most middle income retirees. The average worker's retirement benefit is roughly $16,000 a year. If this is a couple, then the spouse can count a benefit of at least $8,000 unless his work history entitled him to a larger benefit. Together with the savings accumulations estimated by Blackrock, this is still likely to leave most middle income couples well below the $45,000 comfort level that the study found, but they are far closer than the discussion in the WSJ article implied.

 

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