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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Perhaps it has something to do with the ten-year anniversary of the Lehman crash, but we seem to be seeing more financial crisis stories in the media lately. Today's version comes to us from The New York Times in a column by Bethany McLean, headlined "the next financial crisis lurks underground." The subhead tells us the basic story:

"Fueled by debt and years of easy credit, America’s energy boom is on shaky footing."

The piece looks to be a very reasonable discussion of the fracking boom and points out that most fracking operations are not profitable. It describes fracking as essentially a Ponzi scheme, where fracking companies are able to survive by finding suckers to buy their stock. Most frackers don't actually make enough money to repay their debts and generate a profit.

All of this sounds very plausible, although a jump back to 2014 type oil prices ($100 a barrel or higher) would presumably change this picture. (That's not a prediction, just noting the arithmetic.) But the problem is that if the Ponzi game ends, where is the financial crisis? We are told:

"Amir Azar, a fellow at the Columbia University Center on Global Energy Policy, calculated that the industry’s net debt in 2015 was $200 billion, a 300 percent increase from 2005."

Okay, so suppose two-thirds this debt goes bad and investors get back fifty cents on the dollar, both pretty extreme assumptions. That comes to $67 billion in losses on $134 billion in debt, an amount equal to 0.34 percent of GDP. Perhaps there is a world where this gives us a financial crisis, but not this one.

Just to be clear, The New York Times picks the headline, not the author of the column. The column is a perfectly reasonable piece on fracking, the headline is not.

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Donald Trump is very confused about trade and it seems the confusion has spread to the NYT. Its article on the trade negotiations between the United States and Canada told readers that Trump is threatening with tariffs on the cars it exports to the United States.

Canada doesn't pay tariffs on cars exported to the United States. The companies that import the cars to the United States would be the ones that pay the tariffs. This would primarily be Ford and General Motors, although there may also be some foreign auto companies that bring cars in from Canada.

In Trump World, it seems that trade is a battle between countries, with the ones that have the largest trade surplus being the winners. In reality, many US corporations have benefited hugely from the imports that have been associated with the U.S. trade deficit. They have taken advantage of lower cost labor (not really true in Canada) in other countries to reduce costs.

The basic story is that trade is about class, not country. Our patterns of trade were put in place to redistribute income upward.

When Trump threatens to disrupt the patterns of trade established over the last quarter century he is most immediately threatening US corporations. While there may also be some negative effects for workers in other countries, the direct targets are US corporations. Trump may not understand this fact, but the NYT should.

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That could be one conclusion from the Commerce Department's release of consumption data for July. According to the release, spending on prescription drugs accounted for 24.7 percent of the growth in real consumption spending for the month. Before people get too nervous about the worsening of the opioid epidemic, it is worth noting that real spending on drugs actually declined in the prior two months. July's figure was just 3.0 percent above the year-ago level.

It is worth noting that inflation in drug prices has been quite restrained over this period. The Commerce Department's measure, which is somewhat different than the measure in the Consumer Price Index, shows drug prices rising by just 0.9 percent over the last year. The main reason that the cost of drugs has risen in the last four decades is that new drugs are put on the market at very expensive prices, not sharp price increases in existing drugs.

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It really is hard to follow economic policy debate these days. After all, we have robots taking all the jobs so no one will have any work, but then we keep getting reminded that the baby boomers are retiring, so we won't have any workers.

We got a dosage of the latter concern in the middle of a very interesting Thomas Edsall piece that everyone should read, on the question of whites becoming a minority. The piece quotes Thomas Frey, a demographer, at Brookings:

"Given the slow and in fact, last year, negative growth of the white population along with its rapid aging — it is important for older whites to understand that the only way we will have a growing labor force will be to embrace the younger racial minority populations."

The point about needing immigrants who are not generally viewed as white in order to have a growing labor force is true, but why exactly do we need a growing labor force? Japan and Germany both have shrinking labor forces and their populations are not suffering in any obvious way as a result. To be clear, I am not arguing that we should keep out immigrants, but if the argument rests on the assumption that we need a growing labor force, then we have a problem.

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The World Bank’s annual World Development Report (WDR) is viewed as the Bank’s official statement on best practices in development policy. It is important both because it often serves as a basis for project loans and IMF programs, and also because it is viewed as an authoritative document by many people in policy positions throughout the world.

For this reason, it is disconcerting that the draft report gets some very big things wrong. First and foremost, the overview dismisses concerns over growing inequality by noting that the Gini coefficient in 37 of 41 developing countries stayed the same or fell over the years from 2007 to 2015 (page 7). This is a bizarre conclusion because this is the period of the worldwide financial crisis. Inequality, even in the United States, was little changed over this period, even though there has been a massive increase in inequality over the longer period dating back to the late 1970s. While the experience of the developing countries may differ in this respect from the experience of the United States and other wealthy countries, it is strange that the Bank would use this clearly atypical period as the basis for dismissing concerns about growing inequality.

The other major concern, which is perhaps more important since it provides the basis for many of the specific recommendations, is a misunderstanding of the nature of the labor market. The draft largely accepts the idea that traditional employer–employee relationships are becoming obsolete and effectively urges developing countries to accommodate their policy to this reality. That means weakening or eliminating a wide variety of labor market regulations, such as minimum wages and employment protection rules.

While there has been a large amount of hype in the media about the gig economy, with the idea that workers are increasingly just taking temporary work through web-based apps rather than traditional employment, the data do not support this assessment. This is seen most clearly in the United States where the Bureau of Labor Statistics recently released its Contingent Work Survey (CWS), the first one conducted since 2005.

The CWS showed that there had actually been a slight decrease in contingent employment as share of total employment between 2005 and 2017. Pure gig jobs, like driving an Uber, accounted for less than 1.0 percent of total employment.

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We wouldn't have known this without the a Washington Post article headlined "...on NAFTA, Canadians worry they have been outmaneuvered by Trump." While that is the theme of the piece, the only person quoted or cited in the piece who says anything like this is a member of the opposition Conservative party.

The piece also bizarrely concludes that the US has much more leverage with Canada than the other way around:

"But the latest turn in the talks makes the 'no deal' option particularly dangerous for Canada if Trump goes ahead with his threat to impose tariffs on Canada’s substantial exports of cars and automotive components to the United States."

The companies that export cars from Canada to the United States have names like "Ford" and "General Motors." These companies will not be happy if Donald Trump uses his leverage to punish them. It is also not clear that the net effect in this story would a substantial increase in manufacturing employment in the United States, since some of the cars produced in Canada will be replaced by cars produced in other countries.

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I've had a number of people ask me my opinion of the Trump administration's proposal to change Securities and Exchange Commission (SEC) reporting requirements so that companies only have to make reports semi-annually rather than quarterly. While I would say the switch would be good in principle, I would say it is not good now.

The basic argument is straightforward: companies that obsess on quarterly reports may neglect long-term planning for short-term profit targets. It is not clear to me that making reports semi-annual rather than quarterly will hugely change this story, but this is probably a step in the right direction. Also, since quarterly reports are often manipulated to hit profit targets (several studies have found implausible smoothness in earnings patterns), it is not clear they provide much real information in any case. So, it seems in the interest of conserving resources and paper, switching to semi-annual reports is a good idea.

My not-now qualification stems from the character of the Trump administration. Trump has made it abundantly clear that he views conflicts of interest and fraud as all part of the game. He has shown unprecedented contempt for the disclosure requirements that administrations of both parties have followed for decades. He has appointed numerous individuals with serious conflicts to top-level positions.

In this context, we cannot count on the SEC and other regulatory agencies to do their jobs. Investors will have to do their own policing of company books. Given this reality, more information is better than less information. The switch to semi-annual reporting should occur under the next administration, assuming it takes the rule of law seriously.

 

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Margot Sanger-Katz had an interesting NYT Upshot piece on various proposals that are designed to have modest savings in health care that collectively could add up to large savings. The headline suggests that the target for these proposals is knocking one percent off of national health care spending.

It gives as an example using nursing facilities rather than hospitals for elderly patients in need of long-term treatments. The article cites evidence which indicates this could save the country $5 billion a year in health care costs. It then says, "If they’re right, the savings would probably be in the 1 percent range."

While $5 billion a year is not altogether chump change (there are often big fights in Washington over less money) it is not close to 1 percent of national health care spending. The country spends over $3.3 trillion a year on health care, which means that 1 percent would be $33 billion a year.

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Robert Samuelson takes on the collapse of Lehman a decade ago and assesses the argument of Larry Ball that the Fed could have bailed out Lehman. He ends up siding with Bernanke–Paulson and says the Fed would have taken big losses if it bailed out Lehman. He also says we would have seen the financial crisis anyhow.

There are three points worth making here. First, the claim that the Fed lacked the legal authority to bail out Lehman is absurd on its face. The Fed was doing lots of things at that point on questionable legal authority. It was operating in uncharted grounds.

But, whether or not a bailout out of Lehman would have been fully lawful, the more practical question is: Who would have stopped them? Who would have filed a suit to prevent the Fed from bailing out Lehman? Is it plausible that a court would grant standing and then tell the Fed that it had to let Lehman go bankrupt? That one is absurd on its face. Letting Lehman go bankrupt was a choice.

The second point is that the Fed need not have taken losses on a bailout. Regardless of the value of Lehman's assets at the time, there is a simple logic that the bailouts should have taught everyone. If you make massive loans to banks at below-market rates for a long enough period of time, and also give them a Timothy Geithner "no more Lehmans" guarantee, so that others will also make loans, any bank will eventually return to solvency.

This was the story of Citigroup, AIG, and Bank of America, all of whom were effectively bankrupt in the fall of 2008. In each case, the Fed set up special lending facilities to bring them back to life. Do the arithmetic. If banks get $500 billion in loans at 4–5 percentage points below the market rate (that's being generous, since the market rate for an effectively bankrupt bank in the middle of a financial crisis is going to be very high), then they can make $20 to $25 billion a year in profit lending at the market rate. Given two or three years, you can patch up a pretty big hole.

Certainly, the Fed could have done this with Lehman, say a Maiden Lane 4. Then Lehman would repay the loan, including the below market rate interest, and Timothy Geithner would have another success story where he could boast about how we actually made money on the bailout. And, the vast majority of the media would agree with him.

The third point is that we would have had the economic crisis anyhow, even if Lehman had been bailed out. Nationwide house prices were falling at a rate of close to 2.0 percent a month, even before Lehman. The bubble was deflating and there was nothing to stop it. This meant that the bubble-driven construction boom was going to end, costing more than 2.0 percentage points ($400 billion a year in today's economy) in lost demand.

We also were losing the consumption boom driven by the housing wealth effect. This would cost us another 2 percentage points of GDP or so in lost demand. A loss of 4 percentage points of GDP in annual demand ($800 billion) is going to lead to a bad recession even if the financial system is operating perfectly.

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The headline of an NYT article on the Trump administration's plan to overhaul the Jobs Corps program told readers that the program cost $1.7 billion. Since almost none of the NYT's readers has any idea of the size of the federal budget, this headline was really providing no information whatsoever.

In fact, since $1.7 billion is a very large amount of money to people who are not Bill Gates or Jeff Bezos, it likely misled many readers into believing that this program is a major expenditure for the federal government. In fact, the program comes to roughly 0.04 percent of total federal spending. The fact that it is not a large share of the budget is not a reason to support a program that is wasteful or to not try to have it run better, but it is wrong to think that the federal government has a major commitment to job training or that such spending is a big part of people's tax bills.

Addendum:

As was pointed out to me, this piece also includes some serious mind reading. We are told, "Progressives see it as an enduring commitment to the poor rooted in a golden age of liberalism. Conservative lawmakers support Job Corps because it encourages low-income young people to work hard." It would be simple enough to say that the program enjoys support across the political spectrum, noting that progressives "say" they value the commitment to the poor, while conservatives "say" they like the fact that it encourages hard work.

As the piece points out, the actual payments are made to contractors, many of whom are politically connected. This is a plausible alternative explanation for support.

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