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 roundup of Beat the Press.

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We've been reading stories in the NYT and elsewhere about how Chicago has pension obligations to its workers that it can't possibly meet. Most of these accounts are exaggerated and seem intended to provoke excessive fears in order to facilitate default on the city's pension obligations. Nonetheless, there is no doubt that the city has seriously underfunded pensions.

This is why it is striking that when the NYT ran a piece on former Mayor Richard M. Daley going to the hospital, it failed to mention Daley's record on the city's pensions, telling readers:

"Mr. Daley, Chicago’s longest-serving mayor with 22 years in office, is credited with giving the city a face lift with new green spaces, a revived theater district and the transformation of Navy Pier into a colorful playground."

Daley is the person most responsible for the underfunding of Chicago's pensions, making him one of the most irresponsible elected leaders in recent history. It would be understandable that the NYT may not want to highlight negative aspects of Mr. Daley's tenure at a moment when he is apparently dealing with serious health issues, but there is no excuse for this sort of whitewashing of his record. Tens of thousands of people who worked for the city for decades may not see the pensions they earned as a result of Daley's recklessness.

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The NYT had an article discussing the extent to which political unrest in Thailand might have an impact on its economy. At one point it notes a flight of foreign capital from Thailand and other developing countries which it attributes to the Fed's taper and the "prospect of higher interest rates" in the United States.

The problem with this story is that long-term interest rates have actually been falling in the United States. If investors are fleeing Thailand and other countries because they expect long-term interest rates in the U.S. to rise, then these same investors should be dumping long-term bonds in advance of the interest rate hikes (which would lead to capital losses) thereby causing the rise in interest rates they expect. Instead interest rates on 10-year Treasury bonds have fallen from just over 3.0 percent in late December to under 2.7 percent as of Friday morning.

This suggests an alternative explanation for the flight from developing countries. Most likely it is a simple story of contagion, where investors feel the need to do whatever they see other investors doing. In prior years it was fashionable to unthinkingly put money into developing countries. Now that fashions have shifted the cool thing to do is to pull money out of developing countries. Since investors rarely get in trouble for making the same stupid mistake as everyone else, there is a big incentive to follow fashions in investing.

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There has been a bizarre cult of deflation phobia over the last decade in which we are supposed to be terrified that very low positive rates of inflation can decline further and turn into low rates of deflation, which then create really big problems. The NYT tells us this cult is still dominating economic thinking. In an article on the latest data on inflation and unemployment in the euro zone, it noted that European Central Bank President Mario Draghi unexpectedly lowered interest rates in November:

"amid concern that Europe might be headed toward a Japan-style deflationary quagmire."

In reality Europe is already in a Japan-style deflationary quagmire. It suffers from an inflation rate that is too low. A higher inflation rate would translate into lower real interest rates, giving firms more incentive to invest. It would also reduce debt burdens for homeowners as the real value of their mortgage debt fell. It would also allow the peripheral countries like Greece, Spain, and Italy to regain competitiveness, if they held wage and price increases below the rates in Germany and other core countries. 

For these reasons the near zero inflation rate is making Europe's problems more difficult, delaying the adjustment process that could allow it to return to a healthy growth path. If the inflation rate were to fall further, say from a positive 0.7 percent to a negative 0.3 percent, this would make matters worse, but only in the same way that a drop in the inflation rate from a positive 1.7 percent to 0.7 percent also makes the situation worse. The issue is a one percentage point decline in the inflation rate, there is no importance to crossing zero.

This should be obvious to people familiar with the construction of price indices. The indexes are based on the collection of millions of different price changes. When the index is near zero, many prices are already falling. Going from a low positive to a low negative rate means that the percentage of falling prices in the index has risen somewhat. How could this possibly have catastrophic consequences for the economy? (In this context it is worth noting that computers and cell phones have had rapidly falling prices for decades. Has everyone noticed the disasters befalling these industries?)

Also, the prices recorded for each item depend on quality adjustments imputed by the statistical agencies. Often the price of a product like a refrigerator or a car might show an increase, but due to imputed quality adjustments it will be recorded as a price decline. Is it plausible that the economy would face some horror story if the pace of quality improvement in these products increases slightly?

The notion that something bad happens if inflation crosses the zero line and becomes deflation is silly on its face. (There is a bad story where the rate of deflation continually accelerates, but even Japan never saw this.) It is often said that economists are not very good at economics. The concerns over a deflation horror story provides a good example of this proposition.

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Steve Rattner gives us a glowing appraisal of Ben Bernanke on his departure from the Fed. I have written on Bernanke elsewhere, but the basic story is that he bears a large amount of responsibility for the housing bubble and its subsequent bursting, since he was a Fed governor and chief economic advisorin the Bush administration as policymakers allowed it to grow to ever more dangerous levels. The result has been a loss of more than $7.6 trillion in output to date ($25,000 per person) and an economy that is still down more than 8 million jobs six years after the beginning of the downturn. There were few people better positioned than Bernanke to try to stem the growth of the bubble, but he consistently insisted that it did not pose any problem to the economy.

Bernanke also made the decision to leave the financial industry intact at a time when the market would have sent Goldman Sachs, Citigroup and most of the other Wall Street giants into bankruptcy. He misled Congress to rush it into passage of the TARP and he gave hundreds of billions of dollars worth of loan subsidies and guarantees to keep Wall Street alive. As a result, the financial industry is more concentrated than ever.

Bernanke does deserve credit for his aggressive monetary policy in the face of harsh opposition from Republicans and some Democrats. It has boosted the economy, although other banks, notably the Bank of Japan, have been more aggressive. Anyhow, his monetary policy over the last four years certainly is a plus, but it doesn't qualify Bernanke as a "godsend" by the usual meaning of the word.

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Firms added inventories at a record $127.2 billion (in 2009 dollars) annual rate in the fourth quarter of 2014. This increase did not draw much attention because it was only $11.5 billion above the third quarter pace, adding 0.44 percentage points to GDP growth in the quarter. The extraordinary pace of inventory growth in the last two quarters means it is likely that inventory growth will slow in future quarters, which will be somewhat of a drag on growth.

However, it is worth noting that we are likely looking at a slower rate of inventory growth in future quarters, not actually a decrease in inventories as has been suggested in several reports. If inventories were to actually decline (which they almost never do outside of recessions) then it would be a huge drag on growth almost certainly pushing GDP in negative territory. Just to take a simple case, if inventories stayed flat in the first quarter, then the rate of inventory accumulation would have fallen by $127.2 billion, in a single quarter. This would translate into roughly a $508.8 billion annual rate of change (the quarterly rate multiplied by four). With GDP at roughly $16 trillion (in 2009 dollars), this would knock roughly 3.2 percentage points off the rate of growth in the quarter.

Since the underlying rate of growth is almost certainly less than 3.0 percent at the moment, the flatlining of inventories would push growth into negative territory. Even a modest fall in inventories would virtually guarantee a substantial drop in GDP in the first quarter.

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Robert Samuelson is happy to tell us that contrary to what he hoped some of us believed, there was not much change in mobility for children entering the labor force between the first President Bush and second President Bush's administrations. Samuelson misrepresents the study to imply that it finds that there has been no change in mobility over the post-war period.

"By the conventional wisdom, American society is becoming more rigid. People’s place on the economic ladder (“relative mobility”) is increasingly fixed.

"Untrue, concludes the NBER study."

Samuelson then notes the study's finding that there has been little change in mobility for workers entering the labor market in 2007 compared to 1990. The study then refers to earlier work finding no change in mobility prior to 1990. This study did not itself examine the period prior to 1990.

This is important since that is the period in which we might have expected growing inequality to have a notable impact on mobility. There was some divergence between quintiles of income distribution in the 1980s. In the years since 1980, there has not been much divergence between the bottom half of the top quintile and the rest of the income distribution. Most of the inequality was associated with the pulling away of the one percent from everyone else. This study made no effort to examine mobility into the one percent.

As far as mobility in the years prior to the 1990, contrary to the claim of this study, the research is far from conclusive. For example, an assessment published by the Cleveland Fed concluded:

"After staying relatively stable for several decades, intergenerational mobility appears to have declined sharply at some point between 1980 and 1990, a period in which both income inequality and the economic returns to education rose sharply. This finding is also consistent with theoretical models of intergenerational mobility that emphasize the role of human capital formation. There is fairly consistent evidence that intergenerational mobility has stayed roughly constant since 1990 but remains below the rates of mobility experienced from 1950 to 1980."

While it would be wrong to take this statement as conclusive, it is also wrong to take the assessment of the study cited by Samuelson as conclusive and it is a gross misrepresentation to imply that this study examined patterns in mobility over the whole post-war period. It did not even try to examine changes in mobility over the 1980s, the period when patterns in inequality would have most likely led to a decline in mobility. 


Note: Link fixed, thanks Dennis.

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I see they are playing the really big number game in my home town. The Chicago Tribune headlined a news story: "Chicago pension tab: $18,596 for every man, woman, child." That's pretty scary. Fortunately my Chicago public school teachers taught me about fractions and denominators. That is what is missing here.

The key point is that Chicago does not have to pay this money tomorrow or even over the next year. This is a liability over the next 30 years. The relevant denominator then is Chicago's income over the next 30 years. I don't have the time to check the city's income data just now, but if we assume that disposable (after-tax) per capita income is the same as for the country as a whole ($40,000 a year), we get that the discounted value over the next 30 years will be roughly $1.1 million. (This assumes 2.4 percent average annual growth and a 3.0 percent real discount rate.)

I also don't have time to review the basis for the $18,596 pension tab, which puts the unfunded liability at around $50 billion, almost twice the official figure. But taking the number at face value, we get a liability that is equal to 1.7 percent of the city's projected income. That amount is hardly trivial, but also not obviously a path to poverty.

By comparison, the slowdown in health care cost growth over the last five years has probably saved Chicagoans at least this much money, with costs close to 10 percent less than what had been projected back in 2008. You didn't see the big news articles touting the big dividends from lower costs? Oh well.

Anyhow, the unfunded pension liabilities are a big issue with some big villains. At the top of the list is Mayor Richard M. Daley who thought it was cool not to meet the city's pension obligations for his last decade in office. Surprise, that leaves a shortfall. The bond rating agencies also should be strung up from the bridges over the Chicago river. They signed off on accounting back in the 1990s that assumed the stock bubble would continue growing ever larger. This meant that the city didn't have to contribute anything to the pensions.

When the city got in the habit of not contributing in the boom, it became much more difficult to suddenly find the money in the bust. Hence we get Mayor Daley's decision not to cough up the money the city owed. (Yes, this was predictable, as some of us said at the time.) These are the villains in this story, not the school teachers, the firefighters, and the garbage collectors who worked for these pensions in good faith. Not paying them the pensions they are owed is effectively theft and if Chicago is going to get into the game of stealing, it makes more sense to steal from the people who have the money than retired workers who will be living on a bit over $30,000 a year.

Full disclosure: My mother is a retired employee of the state of Illinois, so she may be among the pensioners who are on the chopping block in this story.

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Washington Post columnist Charles Lane took great leaps in philosophical thinking today, coming down firmly against freedom of contract when it comes to public sector unions. In the course of the discussion Lane develops several new principles for guiding public sector policy.

The starting point is whether public sector workers can sign contracts that require all the workers who are represented by a union to pay for that representation. The courts have long upheld that workers could negotiate such contracts. The remedy for workers who feel so strongly opposed to unions that they don't want anything to do with them is to work for a different employer.

It is difficult to see why other workers should be forced to pay for a worker's representation. Under the law, non-union workers not only get the same pay and benefits as everyone else covered by the union contract, they also are entitled to representation by the union in a grievance or disciplinary action. This is the rationale for requiring them to pay for representation even though they do not have to pay for union activities, such as supporting political candidates.

But Lane is going beyond just this issue that the Supreme Court is now considering. He apparently wants to outlaw public sector unions. He writes:

"Is public-sector collective bargaining in the public interest?

"The answer is no. All members of the public use schools, roads, parks and other government services — and pay taxes to support them. Their interest lies in receiving the highest-quality services at the lowest feasible cost. Period."

I kind of like this one. The public's interest is in the highest-quality services at the lowest feasible cost. Period."

Let's see, the government pays for lots of things like computers, paper, desks and chairs for school kids. Why should we pay for them? Why not just take them from the companies that produce them? After all, "the public's interest is in the highest-quality services at the lowest feasible cost. Period." 

Do you think that might be wrong, that it might be stealing? What part of Lane's declaration don't you understand?

Maybe we could get people to work for lower pay if we threatened them or their families. Remember "the public's interest is in the highest-quality services at the lowest feasible cost. Period."

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Budget reporters are apparently all in some secret fraternity in which they practice bizarre rituals like using numbers that will be meaningless to almost of their readers. Hence we get the Washington Post telling us:

"Negotiators agreed Monday evening on a new five-year Farm Bill that slashes about $23 billion in federal spending by ending direct payments to farmers, consolidating dozens of Agriculture Department programs and by cutting about $8 billion in food stamp assistance."

Okay, how big a deal is savings $8 billion on food stamps over the next five years or $23 billion on the whole bill? Sure, everyone knows the significance of these numbers because they've been reading through the Office of Management and Budget's projection for the next decade.

This is just asinine. The Post's reporters and editors know that almost none of their readers have any sense of what these numbers mean in terms of the total budget or their own pocket book. They are just really big numbers, as David Leonhardt the former Washington editor of the NYT said. Since almost no one reading these numbers can attach any meaning to them, the purpose of putting them in the paper cannot be to inform readers. Obviously the motive here is to comply with the bizarre fraternity ritual of budget reporters.

It is not hard to express these numbers in ways that would convey information to the vast majority of readers. A quick trip to CEPR's Responsible Budget Reporting Calculator would tell readers that the $23 billion cut amounts to 0.11 percent of projected federal spending while the $8 billion cut in food stamps would reduce federal spending by 0.04 percent. Now you know how much consequence these items have for the budget and your tax bill. Maybe one day we will have reporters and news outlets that put informing their audience above fraternity rituals, but not this day.

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The NYT had a peculiar account of the state of the economy in its lead up to the state of the union address. At one point it told readers that:

"several indicators show that the economy is in its best shape since he took office in 2009."

This is peculiar since it would have been true in 2010, 2011, 2012, and 2013 also. In effect, the recession could be seen as throwing the economy into a big hole. We have been climbing out of the hole ever since. It would take an extraordinary turn of events to throw us back down to the bottom of the hole so the real question is the rate at which we get out of the hole. Thus far the rate has been quite slow. Even if we sustain the somewhat faster growth rate projected for 2014 we would not be getting out of the hole (measured as returning to full employment) until the end of the decade. 

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