Beat the Press is Dean Baker's commentary on economic reporting. He is a Senior Economist at the Center for Economic and Policy Research (CEPR). To never miss a post, subscribe to a weekly email highlighting the latest Beat the Press posts.

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The Washington Post went a bit overboard with its lead article reporting on the second quarter GDP data. The article begins:

"After suffering the sharpest contraction since the recession ended, the U.S. economy rebounded this spring, providing fresh evidence that the recovery is finally turning a corner.

"Government data released Wednesday shows the economy expanded at an annual rate of 4 percent during the second quarter. Consumers pulled out their wallets, businesses restocked their inventories and even the long-moribund housing market perked up.

"The strong report dovetails with recent improvements in the job market. The Labor Department is expected to announce Friday that more than 200,000 net new jobs were created in July, marking the sixth straight month it has hit that benchmark."

Actually the 4.0 growth figure reported for the second quarter implies the economy is on a very slow growth path when averaged in with the -2.1 growth in the first quarter. Taken together, the economy grew at less than a 1.0 percent annual rate in the first half of 2014. That is hardly cause for celebration. 

And it is important to understand that the strong growth in the second quarter was directly related to the weak growth in the first quarter. Inventory growth was very weak in the first quarter, subtracting 1.16 percentage points from the quarter's growth. This meant that the return to a more normal pace of inventory accumulation in the second quarter was a strong boost to growth, adding 1.66 percentage points. Final sales grew at just a 2.3 percent annual rate in the second quarter.

Even that rate was likely inflated to some extent by the weakness from the first quarter. In particular, a sharp jump in car sales added 0.42 percentage points to growth for the quarter. That will not be repeated in future quarters.

The report, taken together with the first quarter numbers, implies an underlying rate of growth close to 2.0 percent, the same as the rate for 2011-2013. This pace is at best keeping even with the economy's potential growth rate, meaning that it is making up none of the ground lost during the recession. According to the Congressional Budget Office's estimates, the economy is still operating at a level of output that is almost $800 billion (@4.5 percent) less than potential GDP. It will not close this gap unless it grows more rapidly than its potential.

The comment about job growth being in line with GDP growth seems misplaced given that the economy added 190,000 jobs a month in the first quarter when the data showed the economy shrinking by 2.1 percent. The pace of job growth has been quite extraordinary given the weakness of the economy.

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In his write-up of the new data on GDP, Wonkblog's Matt O'Brien noted that Gross Domestic Income grew considerably more rapidly (or more accurately, shrank less rapidly) than GDP in the first quarter. O'Brien sees this as evidence that the economy grew more rapidly than the GDP data indicate.

That is possible, but it is also possible that the GDI data are simply in error. In principle GDP and GDI should be the same. GDP measures everything that was produced based on the sales of goods and services. GDI measures all the incomes generated in the production process. As a practical matter, they never add to be exactly the same. The Bureau of Economic Analysis generally considers the GDP measures to be more accurate since its ability to measure the sales of goods and services is better than its ability to measure income.

However there are patterns to the divergences. When there are large run-ups in asset prices (i.e. stocks and housing), the GDI measure tends to show stronger growth than the GDP measure. There is a simple explanation as to why this would be the case. If a portion of the capital gain income from a run-up in asset prices ends up being recorded as ordinary income, then the larger the capital gains, the more income will be wrongly reported. (Capital gains or losses should not be counted in GDI.)

It is likely that this would be the case. While people pay lower taxes on long-term capital gains than ordinary income, they pay the same tax rate on short-term capital gains. This means that they have no reason to be careful to distinguish these capital gains from ordinary income on their tax returns. Since tax returns provide the ultimate basis for GDI data, insofar as income is misrepresented on these returns it will lead to a misreporting of GDI.

In fact, we find a consistent pattern where GDI grew more than GDP in both the stock and housing bubble and again in the last few years with the sharp run-up in stock prices. If the capital gains explanation is correct, it means that income in the national accounts is overstated. This means that the saving rates are substantially lower than the official data show. (Saving is defined as income minus consumption, if income is overstated by 2 percent, then the saving rate is overstated by 2 percentage points, which would be close to half in recent years.)

It  also means that we can take no special solace in GDI numbers that are stronger than GDP numbers. It's just a mistake.

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A NYT article on the possibility of a default by Argentina seriously misrepresented the issues involved and the origins of the term "vulture" in reference to the funds involved in a lawsuit against Argentina. The article implies that the funds had been bondholders at the time of Argentina's default in 2001 who refused to accept the terms that were offered to bondholders following the default:

"Through two restructurings, the government eventually struck a deal with a majority of its bond investors, who are now called exchange bondholders because they exchanged their bonds for ones that were worth as little as a fourth of the value of the original securities. The hedge funds, known as the holdouts, declined to participate in the restructurings. Instead, they are seeking $1.5 billion in repayment, including interest."

In fact, these funds bought up Argentine debt years after the default, paying a small fraction of its face value. Their intention was to use their political connections to get a favorable ruling from the courts, with the hope of being able to extract something close to the face value of the defaulted bonds from Argentina's government. This is exactly what "vulture funds" do. The term did not originate with Argentina, it dates back decades.

 

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The NYT had an article reporting on the possibility that China will use anti-monopoly laws and other regulations to limit Microsoft's operations in the country. This raises an interesting issue. Presumably the Obama administration will step in to try to protect Microsoft's interests. Since the United States cannot just dictate policy to China, if it wins concessions on the treatment of Microsoft then it presumably will make less progress in other areas like getting China to raise the value of its currency against the dollar.

If negotiating over Microsoft leads to the dollar having a higher value than would otherwise be the case, it would mean that we have a larger trade deficit. This raises the question of how many steel workers and auto workers will lose their jobs to protect Bill Gates' profits?

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It is great fun watching the establishment get so upset over the possibility that Boeings' the Export-Import Bank may not be reauthorized to issue more loans. Just to remind everyone, the Export-Import Bank issues the overwhelming majority of its loans and guarantees to benefit a small number of huge corporations. It is a straightforward subsidy to these companies, giving them loans at below market interest rates. (Yes, they are almost all paid back. This means that our financial wizards have discovered arbitrage -- the government borrows at a lower rate than anyone else so it can show a profit any time it lends to anyone else by splitting the difference in borrowing costs.)

Anyhow, today's fun is a column in the NYT (major media outlets have an open door policy to anyone who wants to argue to preserve the subsidies) by William Brock, a former senator and trade representative under President Reagan. Brock tackles head on the argument made by folks like me that only a small portion of our exports are subsidized by the bank:

"Opponents of the bank say that it supports just 2 percent of all exports. Still, 2 percent amounts to $37.4 billion of American products made by American workers in American plants. That translates into tens of thousands of jobs from every state in the country."

Wow, that's pretty compelling. But wait, suppose we ended the subsidies to Boeing. Would it never sell another plane abroad?

Fans of economics everywhere know that the end of the Ex-IM subsidies simply means that it would stand to make less money on each plane. For the most part this would be a story of lower profits, but there would be some reduction in exports, probably in the range of 10 to 30 percent of the amount being subsidized. That translates into $3.7 to $11.2 billion in exports that we would lose without the Ex-Im Bank.

Is that a big deal? We can compare this to another export number that has been in the news recently. A new study showed that because of the sanctions against Iran, the United States has lost $175.4 billion in exports since 1995, with the estimated losses coming to $15 billion in 2012, the latest year covered by the study. So the jobs at stake with the Ex-Im Bank are about 75 percent of the number that could be gained if we ended the sanctions against Iran. In other words, if we think the ending of loans from the EX-Im Bank would be a hit to the economy, then we must think the sanctions to Iran are an even bigger hit.

Of course as a practical matter, if we really wanted to boost exports we would go the free market route and push down the value of the dollar against other currencies. That is how economies with a trade deficit, like the United States, are supposed to adjust towards balanced trade in a system of floating exchange rates. However we don't see this adjustment because other governments buy up large amounts of dollars in order to prop up its value and preserve their export markets in the United States.

We could negotiate for a lower valued dollar, but that would hurt the profits of companies like Walmart that have arranged low cost supply chains in the developing world. It would also hurt major manufacturers like Boeing and GE who now do much of their manufacturing overseas.

So, we don't read much in the papers about reducing the value of the dollar. Instead we get an endless drumbeat of news stories and columns about the urgency of preserving the Ex-Im Bank. The public may lack the political power to stop the re-authorization, but we can at least enjoy the show.

 

Note: It is of course net exports that add jobs, not just exports. (We don't create jobs if we import a car from Mexico and export it to Canada.) In both the case of the Ex-Im Bank and the Iran sanctions there also is a question of imports, which is going unaddressed.

 

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It's hard to know what else it could possibly mean, but the Washington Post dutifully reported to readers:

"The aging population is shrinking here, with the 2011 census showing a loss of about 1.5 million people since the 1980s. As the decline accelerates, by 2030 the government predicts a hole as big as 2.3 million workers in the German labor force."

In a market economy, wages adjust to equilibrate supply and demand. If there are fewer workers in Germany it means that workers will leave less productive sectors, like retail trade, restaurants, and hotels, and instead move to sectors in which they can get a higher wage. Many of the firms in the less productive sectors will go out of business.

This sort of transition happens all the time. It is the reason that half of the U.S. population is not still working in agriculture. In the context of a market economy it is not clear what it can mean to have a hole in the labor force. This would just mean that low productivity jobs cease to exist. So what?

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The Washington Post told readers that New Jersey's public pension faces a shortfall of $40 billion. Just in case some readers aren't familiar with the size of New Jersey's economy over the next 30 years (the relevant period for pension planning), it will have a discounted state product of more than $12 trillion. This means that the shortfall is roughly equal to 0.3 percent of future GDP. This is considerably larger than the shortfall faced by most states.

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A NYT article reported on a study from Russell Sage reporting that median household wealth was 36 percent lower in 2013 than 2003. While this is disturbing, an even more striking finding from the study is that median wealth is down by around 20 percent from 1984.

This is noteworthy because this cannot be explained as largely the result of the collapse of house prices that triggered the Great Recession. This indicates that we have gone thirty years, during which time output per worker has more than doubled, but real wealth has actually fallen for the typical family. It is also important to realize that the drop in wealth reported in the study understates the true drop since a typical household in 1984 would have been able to count on a defined benefit pension. This is not true at present, so the effective drop in wealth is even larger than reported by the study. (Defined benefit pensions are not included in its measure of wealth.)

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Morning Edition had a piece on the possibility that Argentina will again default on its debt. The risk follows the decision by the Supreme Court to refuse to review a New York district court judge's ruling that Argentina had to pay a group of holdout bondholders 100 cents on the dollar and requiring U.S. banks to help enforce this ruling. As the piece explains, this is likely to lead to a second default since a provision in the agreement with the bondholders who had settled from the 2001 default required the government to treat all bondholders the same. This means that if the holdouts get 100 cents on the dollar then all bondholders would have to be paid 100 cents on the dollar.

There are a few points in this story that deserve clarification. The piece notes that Argentina refers to the holdout investors as "vultures." This is not a term the country invented. The term "vulture fund" goes back decades. It refers to a fund that buys assets at a seriously depressed price in the hope of being able to use the legal system to increase their value. The funds that have brought the legal case in U.S. courts are pretty much the textbook definition of vulture funds.

It is also would have been worth noting that Thomas P. Griesa, the judge whose ruling has created the current impasse, seems not to understand the implications of his actions. Given the large range of judges across the country, it is not surprising that complex cases will occasionally be assigned to a judge who does not fully appreciate the issues involved. However the appeals process usually allows for mistaken rulings to be corrected by higher courts. That did not happen in this case.

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That's because the data don't give any evidence of a great success. Nonetheless after noting the difficulties that France and Italy are facing in the implementation of labor market reforms, the NYT told readers:

"By contrast, the idea of making Luis De Guindos the new head of the Eurogroup, which brings together the zone’s finance ministers, is a good one. Spain’s finance minister is in a perfect position to explain to his colleagues the value of structural overhauls, because they have worked so well in his country."

The OECD's data on employment rates doesn't show much evidence of a structural overhaul working well in Spain. Its employment rate (EPOP) for workers between the ages 15 to 64 has risen by 0.5 percentage points over the last year to 55.3 percent. Over the same period, France's employment rate also rose by 0.5 percentage points to 64.4 percent. It's not obvious France has much to learn from Spain based on these numbers.

There's a little better story for Spain if we look at prime age workers between the ages of 25-54. The EPOP for this group rose by 0.7 percentage points over the last year to 66.5 percent. By comparison, in France the EPOP for prime age workers rose by just 0.3 percentage points to 80.8 percent. If these trends continue, Spain's EPOP for prime age workers will exceed France's by 2055. It will get back to its pre-recession level by 2043. 

Given the data, it would be understandable if other European leaders were hesitant about taking advice from the Spanish government.

 

Note: Age range corrected, thanks Urban Legend.

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