Robert Samuelson tells us that the problem behind the Gulf oil spill and the housing bubble meltdown is not the corruption of industry and regulators, but rather complacency born of success. In the case of the oil industry, Samuelson noted that the industry has been drilling close to 1.6 million barrels a day, with only a few hundred barrels a year being spilled. He makes a similar argument about the financial sector, noting the sharp decline in daily stock market volatility.
It is worth noting that the sort of bad events that one expects in these sectors are almost by definition going to be very rare (we will not have huge spills or financial collapses on a weekly basis) and very costly. Any regulator must understand this fact and if they are competent would not allow their judgment to be affected by the absence of a bad event for a long period of time. The cost of the economic meltdown will be at least $5 trillion in lost output in the United States alone. By contrast, the benefits from reduced daily volatility are trivial. (How much do you care if you risk buying a stock at a price that is 0.2 percent too high, when you have an equal probability of getting it at a price that is 0.2 percent too low?)
So, if our regulators cannot understand the potential harm from extremely rare, but extremely costly, disasters, then the country has a very serious problem.
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NPR had a segment on Morning Edition which badly misled listeners about the potential economic impact of a temporary ban on deepwater drilling. The piece focused on the impact of oil on the economy of Louisiana and the Gulf region. In doing so, it highlighted the total impact of the oil industry, not the marginal impact of additional drilling.
For example, it told listeners that oil accounts for 16 percent of Louisiana's state GDP compared to 1 percent for fishing and 4 percent for tourism. This is an interesting set of numbers but it has nothing to do with the impact of a ban on new deepwater drilling. No one is proposing that existing wells be shut down. This means that the vast majority of this 16 percent of GDP will not be affected by the ban. (It is also worth noting that the vast majority of this 16 percent accrues to BP and quickly leaves the state.)
The piece does later give an estimate from the state's development department that the bad on drilling could lead to a loss of 20,000 jobs (this presumably includes indirect effects). By comparison, Louisiana has approximately 120,000 construction jobs. If we assume that each construction job indirectly generates 0.5 jobs elsewhere then the ban on drilling would have roughly the same impact as a ten percent decline in construction employment.Add a comment
There is no doubt that this is the steepest and longest downturn of the post-World War II period. However, the number of the long-term unemployed (more than 6 months) is not a good measure of its severity.
The reason is simple, benefits are available for a much longer period of time than has been the case in prior downturns. In some states benefits are available for as long as 99 weeks. This gives unemployed workers the opportunity to spend more time looking for work than would otherwise be the case. Therefore, they are less likely to take a job that means a large pay cut and/or does not fully utilize their skills. Also, some people who may otherwise drop out of the labor force continue to search for work (and get counted as unemployed) because looking for work is a condition for receiving benefits.
It is important to realize that this does not necessarily mean that extended benefits are raising the unemployment rate. If the long-term unemployed took low-paying jobs they would mostly be replacing other workers. However, the unusually long duration of benefits prevent a direct comparison of the number of long-term unemployed across recessions.
[Addendum: From some of the comments I realize that I may not have been very clear. I think that extended benefits are a good thing. We have a very severe problem of unemployment; the worst since the Great Depression. In this context, it makes sense to give unemployed workers more time to look for new jobs. That increases the probability of finding a job that fully utilizes their skills. (To take an extreme example, it would not only be bad for the worker, but a loss of skills for the economy if a brain surgeon was forced to take a job as a checkout clerk.)
However, if we extend the period of benefits to allow workers to take more time to find an appropriate job, then it should not be surprising that workers take more time to find an appropriate job. The duration of unemployment is no longer a consistent measure of the severity of the unemployment problem. This is just a measurement issue that reporters (and many economists) have been getting wrong.]Add a comment
Many economists had complained about rapid productivity growth as main factor in preventing the economy from generating more jobs. In this context, the downward revision of the first quarter number to 2.8 percent yesterday should have been good news. We know longer need to worry about rapid productivity preventing job growth. The 6.1 percent growth rate from the first quarter of 2009 to the first quarter of 2010 is only slightly faster than the 5.4 percent increase from the third quarter of 2002 to the third quarter of 2003 and the 5.3 percent growth from the first quarter of 1970 to the first quarter of 1971. It is the same as the rate from the first quarter of 2001 to the first quarter of 2002. In short, the rapid rate of productivity growth coming out of the recession should not have been a surprise.
It is also worth noting that better than expected productivity reflects directly on the intergenerational issues that the deficit hawks constantly rise. If productivity grows more rapidly than expected, then future generations will be wealthier on average than our projections show. This suggests that deficits are not having a negative impact on their well-being.Add a comment
Probably not the medical profession either. In discussing school reform today he applauded the fact that the Obama administration was making it easier to fire teachers, telling readers: "in every other job in this country, people are measured by whether they produce results." How many economists suffered any career consequences after failing to foresee the largest economic crisis in 70 years? You can't mess up more than Chairman Bernanke and company. Yet, they all still have high-paying jobs -- they probably didn't even miss a scheduled promotion.
The same obviously applies to many of those Wall Street high-rollers who would have sank their companies had it not been for the bailout from the nanny state. (I will refrain from commenting on reporters and columnists.) So, insofar as teachers are not evaluated based on their performance, they are clearly not alone.
It is also worth noting that it is not as easy to measure teacher quality as Brooks and many others seem to believe. Berkeley economist Jesse Rothstein found that "good" 5th grade teachers improved the scores of their students in 4th grade. The issue here is obviously one of selection. Parents who are very involved in their kids education make sure that their kids are taught by a teacher who is considered to be good. This means that part of the explanation for their better student test scores is that they are getting better students.
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USA Today told readers that, "small businesses usually help drive job creation during recoveries but credit clogs have hurt hiring," in the context of covering a speech by Federal Reserve Board Chair Ben Bernanke. Mr. Bernanke did not actually say that credit clogs are hurting small businesses in his speech, noting the possibility that banks have reduced lending because they see fewer good lending opportunities.
If it is the case that banks have reduced lending because of inadequate capital then we should be seeing two things:
1) Banks that do not have weak capital conditions should be lending aggressively, since there are many good loan opportunities that are not being met by their competitors; and
2) Larger firms, who can raise capital directly on capital markets (e.g. by issuing bonds or commercial paper) should be expanding rapidly to take advantage of opportunities that are closed to their capital constrained competitors.
There is no obvious evidence of either #1 or #2, suggesting that the issue is not a problem of capital constraints by weak banks, but rather a situation where firms weakened by the recession are less creditworthy than they were formerly.Add a comment
Morning Edition did a brief overview of the prospects for the financial reform bill as it heads to a conference committee. The piece concluded by citing Robert Litan, vice president for research and policy at the Ewing Marion Kauffman Foundation:
"He says that over the next two years, as regulators work out the details of the Volcker rule, the current anti-bank anger will probably subside. Litan says that will allow more rationality and less emotion to be applied to the issue."
The anger at the conduct of the bank has brought much more public involvement into an area that is normally the exclusive preserve of bank lobbyists. If the anger dies down, then the only people left in the room will be the bank lobbyists. This may not bring more rationality to the debate, but it will likely ensure that the final provisions more closely reflect the interest of the financial industry.Add a comment
David Leonhardt devoted his column day to consider the dilemma of the deficit hawks who are trying to decide whether to support the jobs bill. It outlines several of the main arguments as to why it would make sense to support additional jobs measures, while also noting (and exaggerating) the basis for concerns about the deficit.
However, the article neglected one important factor in the debate. We are in this situation because the deficit hawks, like Representative Jim Cooper who is featured in the piece, were unable to see the $8 trillion housing bubble that eventually sank the economy. In other words, we have 9.9 percent of the workforce unemployed, with almost as many either involuntarily working part-time or having left the workforce altogether, because people like Jim Cooper could not see the largest financial bubble in the history of the world.
Mr. Cooper enjoys a hefty six-figure salary and can look forward to a comfortable pension. This makes him far better off than the tens of millions of workers who are now suffering because of the incompetence of Mr. Cooper and his colleagues.
In any debate over jobs measures it is worth noting the irony that the people who are suffering at present are suffering due to the incompetence of people who are very comfortable, in spite of having failed disastrously at their jobs. And, the incompetents are now torn deciding the fate of those who are suffering as a result of their incompetence.Add a comment
David Leonhardt's magazine piece on mis-estimating risk gets the story of BP largely right. The top executives felt free to take big gambles with safety and the environment because it was entirely a one-sided bet for them. Large profits from increasing production could mean millions or even tens of millions of dollars in additional compensation each year. On the other hand, the downside from even the worst possible disaster carried little consequence for top executives (who will still be hugely rich) or even the company since Congress capped liability at $75 million.
However he gets the story of the housing bubble and the budget deficit almost completely wrong. He argues that Greenspan and Bernanke missed the fact that the economy faced a nationwide housing bubble because we had never seen one before. While that may be partially true, this comment also ignores the incentives facing the Fed chairs. Large financial companies like Goldman Sachs and Citigroup were making enormous profits from the financing that fueled the bubble. If Greenspan or Bernanke had tried to clamp down on the bubble they would have been confronted by the full force of this powerful industry. They may have found themselves ridiculed and pushed to the side as happened to Brooksley Born when she tried to regulate derivatives in 1998 as head of the Commodities and Futures Trading Commission.
In contrast, their decision not to clamp down on the bubble led to catastrophic results leading to the worst economic downturn in 70 years with tens of millions of people unemployed or underemployed. Yet, both Greenspan and Bernanke are still wealthy men and highly respected. In fact, Bernanke was reappointed to a second term as Fed chair in spite of his disastrous first term.
In short, the problem was not that they underestimated risk. The problem is that they face an entirely assymetric tradeoff structure. Clamping down on financial speculation was sure to have serious consequences for their careers, even if they were right. By contrast, failing to regulate properly did not seem to damage either man's wealth or stature in any major way even though it led to just about the most distrous possible outcome.
Leonhardt also gets the story of the risks from the budget deficit largely wrong. He writes:
"The big financial risk is no longer a housing bubble. Instead, it may be the huge deficits that the growth of Medicare, Medicaid and Social Security will cause in coming years — and the possibility that lenders will eventually become nervous about extending credit to Washington. True, some economists and policy makers insist the country should not get worked up about this possibility, because lenders have never soured on the United States government before and show no signs of doing so now. But isn’t that reminiscent of the old Bernanke-Greenspan tune about the housing market?"
First, it is pecular to include Social Security in this list. Social Security is growing at a relatively slow pace. It is projected to grow less rapidly than interest on the government debt. Like interest on the government debt, Social Security benefits have already been paid for in advance by their beneficiaries. Wall Street tycoons like Peter Peterson have been desperate to gut Social Security for decades and have invented numerous stories (e.g. that the Trust Fund does not exist) to advance their agenda. However a responsible newspaper should not be advancing this agenda under the guise of news reporting.
The projected growth of Medicare and Medicaid, driven by the explosive growth of health care costs in the private sector, will impose strains on the budget. However, if the growth in health care costs really follows the path assumed in budget projections it will provide a much greater burden on the private sector than the public sector. It is difficult to imagine that the public will itself to be priced out of the market for health care rather than taking simple and obvious steps that challenge the industry's power and ability to continually jack up prices. The point is that this is first and foremost a health care problem. It is only the Peterson Wall Street gang that insists on discussing the issue as a budget problem.
The second reason why the discussion of the budget is not entirely right is that we have been here before. The country has had ratios of debt to GDP in excess of 100 percent following World War II. In spite of this debt burden, interest rates remained low and the economy grew rapidly. Other countries, like the UK and more recently Japan and Italy have sustained much larger debt to GDP ratios without seeing any financial panics.
Finally, unlike Greece, which does not control its own currency, the debt of the United States is in dollars and the United States can always print more dollars. This means that the actual risk is not insolvency, but inflation, since the country would presumably print money rather than face bankruptcy. An honest discussion of the debt problem in the United States would discuss the risk from inflation. In the current environment, this is extremely low. In fact, according to a recent paper by Olivier Blanchard, the IMF's chief economist, the United States would actually benefit from a somewhat higher inflation rate (3-4 percent) since it would reduce debt burdens and lower the real interest rate.
So, the supposed threat from the deficits has been seriously misrepresented by the Wall Street deficit hawks. It is hardly irrational to disregard threats that are incoherent.
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The Washington Post reported that several state governments are now trying to remove a clause in the financial reform legislation that could limit the fees that credit card companies charge retailers. The article noted the states' claim that it cost them just 1.5 cents to load benefits like Food Stamp payments onto an electronic card while it can cost 60 cents to issue a check.
The article implies that states could be forced to go back to issuing checks for benefits if they were not able to take advantage of electronic cards that the credit companies now issue for free since they can get back their costs by charging retailers high fees. This is of course absurd. If the credit card fees are limited then states may have to pay a somewhat higher cost to the credit card companies so that they can recoup the cost of issuing the cards, however this would almost certainly be far below the cost of writing checks.
In effect, the credit card companies are using their market power to gouge retailers and sharing some of their gains with state governments to buy their support on this issue. The news article should have pointed this fact out to readers.Add a comment
The Washington Post notes the conventional wisdom of the Washington elite that there should be a run on U.S. bonds because of the size of the country's debt and deficits. It then points out that the markets seem to be contradicting the conventional wisdom. It is worth noting that nearly all of the purveyors of this conventional wisdom completely missed the $8 trillion housing bubble, the collapse of which wrecked the economy. Missing a bubble of this enormous size suggests that this convention wisdom is not grounded in a serious understanding of the economy. It would have been worth noting this point in discussing the conventional wisdom.
The article also asserts that: "the mix of spending cuts and tax increases that could close the gap [the budget deficit] are wildly unpopular." This is not true. During a period of extraordinarily high unemployment, like the present, there is no reason that the Fed could not simply buy and hold the debt being issued in order to prevent future interest burdens from increasing. To reduce future health care expenditures the government could publicly finance clinical trials for prescription drugs, thereby allowing all new drugs to be sold as generics for a few dollars per prescription. It could also allow Medicare beneficiaries to buy into the lower cost health systems in other countries, sharing the huge savings with the beneficiaries. The government could also roll back defense spending to the levels projected before the wars in Afghanistan and Iraq. And, to raise revenue the government could impose a financial speculation tax like the one that currently exists in the UK.
There is no evidence to suggest that any of these measures are wildly unpopular although powerful interest groups may object to them.Add a comment
I'm not sure of the point of David Brooks' column today other than to fill space and earn his paycheck, but one of the items on his list of complaints simply does not make any sense. He tells readers, presumably in reference to the stimulus, that "the money is spent."
It's not clear what Brooks thinks he means by this. Insofar as the country still suffers from high unemployment (Brooks tells us in the next paragraph, "unemployment will not be coming down soon") there is no lack of money for additional stimulus. The government can have the Fed hold the debt issued to finance the spending so as not to increase the interest burden on the Treasury in future years. (The Fed refunds its interest to the receipts.) So there is no plausible meaning to the idea that "the money is spent". This just seems to be a case of Brooks wanting to express his generic unhappiness with the current situation.Add a comment
Robert Samuelson invokes the cellphone standard of living in his column today which complains about the Obama administration's adoption of a new measure of poverty as an alternative to the official standard. The administration will use both.
Samuelson argues that we have failed to pick up all the gains for the poor over the last four decades noting, among other things, that 48 percent of poor households own cellphones. Needless to say, the reduction in price of many products in recent decades has made them accessible in ways that would not have been possible in the recent past, but it is not clear how much this tells us about living standards.
In China, there are more than 600 million cell phones in use. This means that roughly the same percentage of people in China have cell phones as do poor people in the United States. China's per capita income on a purchasing power parity basis is less than one-sixth as high as per capita income in the United States. By Samuelson's cell phone standard of living the average person in China has the same standard of living as do poor people in the United States.
There are a couple of other points worth noting about Samuleson's diatribe. The Obama administration did not just invent the measure that Samuelson denounces as a "propaganda device." This is a measure developed by the National Academies of Science based on research by many of the country's leading poverty experts. It is fine to criticize the measure, but Samuelson should have at least noted its origins.
Finally, Samuelson reports on research from the American Enterprise Institute (AEI) that shows that spending on the poor from all sources may be as much as double their reported income. It is worth noting that much of this spending involves Medicaid expenditures, many of which may provide little benefit to the patient. For example, if a lab bills (or overbills) Medicaid for an expensive test that was not really needed, this would count as spending on the poor. For this reason, the AEI measure may not provide much insight into their well-being.Add a comment
This could have reasonably been the headline of news articles on the decision of many moderate Democrats to demand a smaller package of unemployment benefits and assistance to state and local governments. Instead, neither article noted at all the negative impact that the cuts would be expected to have on growth. The NYT piece even invented an alternative history, telling readers that the current debt and deficit levels come from a "lavish spending spree engaged in by both parties over the past decade," as opposed to being the result of an economic collapse caused by the bursting of the housing bubble.
The plans by the deficit hawks seem likely to trim $30 billion in unemployment benefits and aid to the states from the bill. Using the methodology in the Romer-Bernstein paper put out by the Obama administration to promote its stimulus package, the cuts will reduce GDP by approximately $50 billion. This will correspond to a job loss of more than 300,000 people. It is irresponsible to report on plans to reduce deficits without noting their likely impact on the economy.
The Post piece included the comment that Congressional Democrats looking to cut benefits are "saying 99 weeks of unemployment benefits may no longer be justified after four consecutive months of job growth." It would have been worth reminding readers that the rate of job growth over the last four months has only slightly outpaced the growth of the labor force. Projections from both the Congressional Budget Officie and the White House show that it will be more than 5 years before the unemployment rate returns to a more normal level.Add a comment
Politicians sometimes don't say what they really believe. Therefore it is very impressive that the Washington Post is able to determine their true feelings about the world. An article about the failure of the Senate to approve an extension of unemployment benefits attributed the impasse to: " a growing concern among Democrats that government spending is out of control."
It's remarkable that the Post is able to determine the true concerns of politicians -- especially when it is easy to show that these concerns bear no relationship to the underlying reality. The main reason that the government deficit has expanded in the last three years has been due to the economic downturn. If the deficit were smaller right now, then more workers would be unemployed and more of our children would have unemployed parents.
If the Post is right in its assessment of Democrats' concerns then it owes its readers a good piece on how congressional Democrats became so far removed from reality and how this affects their views of other policies.Add a comment
Yes, I'm reusing blogpost titles, but that is only because the papers appear to be repeating their bad reporting. The Labor Department releaased its data on weekly unemployment claims on Thursday and it was moderately bad news. New claims were at 460,000 for the week, with claims for the prior week revised upward by 3,000 to 374,000. This put the 4-week moving average at 456,500.
Generally claims have to be below 400,000 a week before we see job growth. The current level is consistent with we would expect to see in a relatively mild recession. The 4-week average only reached this level in the 2001 recession in the immediate aftermath of the September 11th attack even though the economy continued to shed jobs for another two years.
Usually newspapers devote all or part of an article to reporting on weekly unemployment insurance claims. However, that was not the case this week.Add a comment