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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- Written by Dean Baker
In its coverage of Fed Chair Janet Yellen's testimony before the Joint Economic Committee, the NYT told readers:
"Ms. Yellen, in a similar exchange with Representative Richard Hanna, a New York Republican, strongly defended the Fed’s commitment to control inflation. She said the high inflation of the 1970s had been a formative experience for the entirety of the Fed’s leadership, and they were determined to keep inflation below the 2 percent annual pace the Fed has described as its target."
This statement implies that the Yellen is treating 2.0 inflation as a ceiling rather than an average. If so, this would be a marked departure from past statements of Fed policy and imply a considerably more hawkish stance of the Fed toward inflation. With inflation running below 2.0 percent for the last five years the Fed could allow the inflation rate to rise above 2.0 percent for a period of time and still maintain a 2.0 percent average.
If the Fed now views 2.0 percent inflation as a ceiling, it means that it would have to act earlier and more strongly to slow economic growth and prevent the unemployment rate from falling. The implication would be that many more workers would remain unemployed or underemployed and that tens of millions would have less bargaining power to boost their wages. This Fed policy would be helping to foster the upward redistribution of income we have been seeing over the last three decades.Add a comment
- Written by Dean Baker
Thomas Friedman wants to "go big, get crazy" when it comes to energy policy in order to both deal with Vladimir Putin and global warming. The idea is that if the United States can drastically reduce its demand for foreign oil it would put downward pressure on world prices and thereby hurt Russia's economy. His way of reducing demand for foreign oil is a combination of promoting clean energy and allowing increased oil drilling and fracking, "but only at the highest environmental standards." He also would allow the XL pipeline, but a quid pro quo would be a revenue neutral carbon tax.
There are a few problems in Friedman's story. First, it's hard to see why the frackers would take it. The main limit on fracking at the moment is not regulation but low gas prices. In real terms, natural gas prices are less than half of their pre-recession levels and less than a third of their 2008 peaks. In states like Pennsylvania, where they have a drill everywhere policy, production is dropping because new sites are not profitable.
If we put new regulations on fracking, for example making the industry subject to the Safe Drinking Water Act and thereby forcing it to disclose the chemicals it uses, that would likely mean less fracking rather than more. That means both that the industry is not likely to buy it and that his policy would go the wrong way in terms of increasing U.S. production.
The same applies to his proposal for a carbon tax coupled with approving the XL pipeline. The tar sands oil that would go through the pipeline would be especially hard hit by a carbon tax. That would likely make it unprofitable, a point that Friedman himself notes. For this reason the industry is unlikely to see the XL pipeline as much of quid pro quo for a carbon tax. In short, it doesn't seem like he has much of the basis for a deal here.
His description of the Europeans, and in particular the Germans, is also inconsistent with his description of his "big" and "crazy" plan. Friedman tells readers:
"Europe’s response has been more hand-wringing about Putin than neck-wringing of Putin. They talk softly and carry a big baguette."
Actually Europe and in particular Germany have done a great deal to reduce their use of fossil fuels over the last two decades. Germany's energy intensity of production (energy use per dollar of GDP) has fallen by 30 percent over the last two decades to a level about half of the U.S. level. Almost a quarter of its energy comes from clean sources and this share is increasing by 2 percentage points a year.
In short, Europe has been doing a great deal to reduce its demand for fossil fuels. It certainly could do more, but if the United States had been following the European path over the last two decades, the price of fossil fuels would certainly be much lower than it is today. Of course, a big part of the story is that Europeans are more likely to carry a big baguette than to drive a big SUV.
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- Written by Dean Baker
Paul Krugman outlines his story of secular stagnation in a blog post this morning. The odd part of the story is that the trade deficit is nowhere in sight. The punchline is that a slower rate of labor force growth should lead to a reduction in demand. The simple arithmetic is that if the rate of labor force growth slows by 1.0 percentage point, then this would be expected to reduce investment by 3.0 percentage points of GDP.
This is a story of a demand gap that could be hard to fill, but how does that compare to a trade deficit that peaked at just shy of 6.0 percent of GDP in 2005 and is still close to 3.0 percent of GDP today? Why are we not supposed to be worried about this cause of a shortfall in demand?
Back in the days before the United States began running persistent trade deficits, the standard theory held that rich countries like the United States should be running trade surpluses. The argument was that capital was plentiful in rich countries, therefore they should be exporting it to poor countries where capital is scarce. This would lead to both a better return on capital and also allow developing countries to grow more rapidly.
We have seen the opposite story in the United States, especially after the run-up in the dollar following the East Asian financial crisis. This has contributed in a big way to the "secular stagnation" problem, but for some reason there continues to be a reluctance to talk about it. (No, being the reserve currency does not mean we have to run a trade deficit.)Add a comment
- Written by Dean Baker
In an article on the release of a report that documents the impact to date of climate change on the United States, the NYT told readers:
"Other Republicans concede that climate change caused by human activity is real, but nonetheless fear — as do some Democrats — that the president’s policies will destroy jobs for miners and hurt the broader economy."
While politicians obviously say they are concerned about job loss for miners and damage to the economy, does the NYT know that they really "fear" this prospect? Few Republicans or Democrats expressed concern about surface top mining that both causes damage to the environment and displaced tens of thousands of underground miners. If they feared the destruction of jobs for miners it would have been reasonable to insist that environmental restrictions be tightly enforced in order to limit this practice. The fact that they didn't suggests that concern about jobs for miners is not a high priority for these Republicans.
Similarly, global warming is causing large amounts of economic damage as illustrated in this report. Weather events that are at least partially attributable to global warming have already caused tens of billions of dollars of damage to homes and businesses. Anyone who was concerned about the damage to the economy caused by efforts to slow global warming would presumably also be concerned about the damage to the economy from global warming.
It seems unlikely that the politicians the NYT claims are fearful about the economy have carefully weighed the two effects. It is worth noting that in the context of an economy that is operating well below its full employment level of output, as is the case for the United States economy, spending money to reduce greenhouse gas emissions would be almost costless. We would be putting people to work who would not otherwise be employed.
The reality is the NYT has no clue as to whether the politicians to whom it refers are actually concerned about coal miners' jobs and the economy. They only that they say they are concerned. If they wanted to stop measures that would reduce the profits of the oil and gas industries, it is likely that they would express concerns over jobs and the economy whether or not they had them. It sounds much better for a politician to say that he is concerned about a coal miner's job than Exxon-Mobil's profit.
Rather than telling readers what politicians' actually think, the NYT should focus on telling readers what they do and what they say.Add a comment
- Written by Dean Baker
David Leonhardt presents a somewhat confused warning about stock valuations in his Upshot piece today. Looking at the recent run-up in stock prices the piece tells readers that it's "time to worry about stock bubbles." Actually, it's not. The stock market is high relative to its long-term trend, but there is little basis for fearing a plunge in prices as the piece suggests.
Leonhardt's basic story is that price to earnings ratios are substantially above their long-term average. He uses Robert Shiller's measure the ratio of stock prices to earnings (PE) lagged ten years. He notes that this ratio now stands at 25, which is well above its long term average. Leonhardt then tells readers:
"The average inflation-adjusted return since 1871 (the first year for which Mr. Shiller has data) in the five years after the ratio equals 25 or higher is negative 12 percent."
Leonhardt then warns against any assumptions that things might have changed and that this time is different. In other words, folks should expect some serious negative returns in the years ahead.
Of course folks who look at the data, including Shillers' data (available here), would know better. In the last two decades the stock market has twice hit the 25 PE ratio according to Shiller. The first time was in 1997, when Shiller puts the year-end ratio at 27.5. The average real return over the subsequent five years was -0.7 percent. That's not great, but not exactly a disaster either. Furthermore, the story would look considerably different if we started from the point where the ratio just crossed 25. Shiller puts the 10-year PE at 24.3 at the end of 1996. The average real rate of return for the subsequent five years from that point forward were 8.9 percent. Not much grounds for shedding tears.
The next time the PE crossed the 25 threshold was in 2004 when it hit 27.0. Shiller's data show the real rate of return in the subsequent five years was 1.1 percent. That's not fantastic, but it's probably better than you would have gotten in a money market fund and certainly a hell of a lot better than the negative 12 percent of which Leonhardt warns.
In other words, the last two times the market has crossed this magic 25 PE, investors would have been wrong if they expected a prolonged period of negative real returns. And, since these are the only two times it has crossed this threshold in the last 80 years, we might feel some comfort in using this experience as a basis for expectations of the future.
In fact, projecting stock returns really should not be a great mystery. If we assume that stock prices will on average grow at the same rate as the economy (i.e. we don't see permanently rising or falling PEs or profit shares), then the rate of return will be the rate of growth of the economy plus the portion of profit paid out to shareholders either as dividends or share buybacks. The latter has been in the range of 60- 70 percent in recent decades.
This means that if the ratio of stock prices to current year's earning is around 20 and the rate of growth is between 2.0-2.5 then we should expect real returns averaging between 5-6 percent going forward. (At the low end, we get payouts of 3.0 percent and 2.0 percent real growth. At the high end we get payouts of 3.5 percent and 2.5 percent real growth.) Note, this is a long-term average, not a prediction for next year.
This may take some of the mysticism out of stock returns, but hey, that is the way it is. Unfortunately this is far too simple for economists to understand. You can see a more elegant version of this here.Add a comment
- Written by Dean Baker
Larry Summers had a good piece in the Post pointing out that the recent growth in the United Kingdom should not really be cause for celebration. He notes that the U.K.'s economy is growing in part because it has moderated its austerity and also in part because it appears to be carrying through policies that are deliberately designed to re-inflate its housing bubble. The latter policies are likely to have disastrous consequences in the near future, but may help the government win the election next year.Add a comment
- Written by Dean Baker
The Post had a major front page article reporting that President Obama plans to focus on global warming in the remaining years of his presidency. At one point it tells readers;
"during his first term the president’s top aides were sharply divided on how aggressively to push climate policy at a time when Americans were anxious about the economy."
This is a striking statement since the main problem facing the economy, insufficient demand, could have been effectively addressed by measures to slow global warming. Insofar as the government spent money on clean energy and/or conservation it would create more demand in the economy and lead to more jobs. In this sense, environmental measures are virtually costless in a period of inadequate demand and high unemployment. It is striking that there is so little recognition of this fact.Add a comment
- Written by Dean Baker
The NYT had an interesting piece presenting the argument that the Federal Reserve Board should focus on wage inflation rather unemployment, not beginning to tighten up until wage inflation started to get above 3.0-4.0 percent, a rate consistent with its 2.0 percent inflation target. The piece included a counterargument from Torsten Slok, chief international economist at Deutsche Bank Securities, that if the Fed waited until it saw rising wage growth it would be too late. Inflation would then already be too high and getting out of control.
It is worth noting that there is no data to support Slok's view of inflation. Standard analyses show that the rate of inflation increases very slowly even in an economy where unemployment is below the level consistent with a stable inflation rate (i.e. the non-accelerating inflation rate of unemployment or NAIRU). According to the Congressional Budget Office, even if the unemployment rate is a full percentage point below the NAIRU for a full year the rate of inflation would only rise by 0.3 percentage points. This suggests that there would be very little risk in terms of higher inflation from delaying Fed tightening.Add a comment
- Written by Dean Baker
Robert Samuelson actually has a lot of sensible things to say about bubbles in his column today, until we get near the end:
"it was not simply the bursting of the housing bubble that created the Great Recession. Consider the contrast between the 1990s’ tech-stock bubble and the housing bubble. Both inflicted multitrillion-dollar losses. Yet the first caused only a mild recession while the second plunged the economy into a deep and stubborn slump. Why?
"The difference is this: The housing bubble spawned a broader financial panic; the tech bubble didn’t. No one knew which banks held “toxic” mortgage securities and which didn’t. Large deposits fled banks, which in turn reduced lending (banks’ loans fell nearly $600 billion in 2009). Borrowers cut their expenses. Firms laid off workers; consumers curbed spending. It was the panic that did the most damage."
No, it actually was the collapse of the housing bubble that caused the Great Recession. First Samuelson is badly mistaken about the "mild" recession that followed the collapse of the stock bubble. While the official recession was short and mild, the economy did not begin to create jobs again until the fall of 2003 almost two years after the end of the recession. And, it didn't get back the jobs lost in the downturn until January of 2005, at the time the longest period without job growth since the Great Depression. And even then the growth was only coming on the back of the housing bubble.
But, contrary to Samuelson, the real difference between the two bubbles was simply that the housing bubble was more important in driving the economy than the stock bubble. It led housing to rise to 6.5 percentage points of GDP, more than two percentage points above its long-term average. When the bubble burst, the overbuilding caused housing construction to collapse to 2.0 percent of GDP, creating a gap in demand of 4.5 percentage points (@ $770 billion a year in today's economy).
On top of that, the housing wealth effect is stronger than the stock wealth effect since housing wealth is more evenly distributed. As a result, there was an even bigger consumption boom in 2004-2007 than in 1999-2000. At the peak of the stock bubble the savings rate fell to just over 4.0 percent of disposable income. It fell to less than 3.0 percent of disposable income at the peak of the housing bubble. (The decline in the savings rate was in fact likely even larger than the official data indicate because of a measurement problem. Measured disposable income rose sharply relative to GDP in these bubbles, possibly because capital gain income was wrongly being recorded as normal income.)
The loss of this bubble driven consumption also created a gap in demand. Throw in the loss of demand from the collapse of a bubble in non-residential real estate and we are looking at a shortfall in demand of more than 8 percent of GDP (@ $1.4 trillion in annual demand in today's economy). The financial stuff was a lot of fun, but really beside the point. What did Samuelson think would replace this lost demand, Jeff Bezos newspaper purchases?
There was no mechanism in the economy that would allow it to replace this demand. The collapse of the housing bubble pretty much guaranteed a prolonged and severe downturn barring a vigorous policy response.
Note: Typos corrected.Add a comment
- Written by Dean Baker
No one expects to get serious insights on the economy from reading Thomas Friedman, but he really went off the deep end in today's column. The piece is a diatribe about how our economic weakness is preventing the United States from acting like a real superpower.
At one point Friedman tells readers:
"We need to counterbalance China in the Asia-Pacific region, but that is not easy when we owe Beijing nearly $1.3 trillion, because of our credit-fueled profligacy."
Presumably Friedman is referring to the amount of government debt that China owns, but it is hard to tell since the statement makes no sense at almost any level.
Let's assume that Friedman is referring to government debt. And this poses a threat to the U.S. exactly how? Yes, China could dump the debt. If they tried to sell it all Monday morning, it would probably drive down the price a little bit and raise interest rates some, but there is not exactly a shortage of people willing to buy U.S. debt right now.
Friedman may not have access to the business section of his paper, but the current interest rate on 10-year Treasury bonds is under 2.6 percent. If China dumps its bonds then maybe it would rise to 2.7 percent, 2.8 percent? Maybe it will go back to the 3.0 percent level we saw in December. A lower interest rate is better than a higher interest rate right now, but I don't recall anyone saying that high interest rates were suffocating the economy five months ago. (in more normal times, 10-year Treasury bonds carry a yield of 5-6 percent.)
Of course the story doesn't end with interest rates. The Obama administration has been publicly committed to a policy of forcing China to raise the value of its currency against the dollar. Many accuse China of "manipulating" the value of its currency, deliberately keeping it low against the dollar to make its products cheaper in U.S. markets.
The way China keeps the value of its currency down is through purchasing hundreds of billions of dollars of assets in the United States, primarily government bonds. If China were to dump its bonds, then it would send down the value of the dollar against the Chinese yuan. This is ostensibly exactly what the Obama administration has been asking China to do.
The result is that we will be able to export more goods and services to China and other countries and domestically produced items will replace imports. This will lower our trade deficit and potentially create millions of new jobs, many of which will be relatively high-paying jobs in manufacturing. Are you scared yet?
But wait, there's more. Friedman is badly confused about the relationship of "our credit-fueled profligacy" and the debt to China. Suppose that we had been running balanced budgets for the last decade, but China had the same policy of trying to prop up the dollar to boost its exports. It could have bought the exact same amount of government debt that was already outstanding. Alternatively, it could have bought up debt of private corporations or bought equity in them. In these cases, the United States would be just as much indebted to China as it is today, even though the government will not have been profligate by Friedman's standard.
In other words, our indebtedness to China is due to the conscious decision of the Chinese government to lend money to the United States, not any need by the U.S. government to borrow. It is probably also worth mentioning that the government has not been in any way particularly profligate in any normal meaning of the word. The deficits were just over 1.0 percent of GDP and the debt-to-GDP ratio was falling before the collapse of the housing bubble threw the economy into a recession.
If we had run smaller deficits over the last six years the main effect would have been to raise the unemployment rate. Friedman may be willing to throw millions of people out of work and weaken the bargaining power of tens of millions of others in the interest of his confused great power ambitions for the United States, but much of the public likely does not share his priorities.
Note: Corrections made.
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