This is more of the “which way is up” problem in economics. Right now, we have lots of economists debating how best to reform the tax code. Most of them see increasing the incentive to save (which means not spending money) as an important goal.
Of course, more saving is not a good idea if we think the economy doesn’t have enough demand to fully employ the workforce. I put myself in the group of economists who hold this view, but we are the minority these days. Most economists think that the economy is pretty close to full employment. That is why the Fed is raising interest rates. Presumably, this is also why people are worried about budget deficits, at least insofar as their concern about budget deficits has any real world rationale.
Anyhow, in this context the NYT is completely off the mark when it tells readers:
“Homeowners are moving less, creating a drag on the economy, fewer commissions for real estate brokers and a brutally competitive market for first-time home shoppers who cannot find much for sale and are likely to be disappointed by real estate’s spring selling season.”
If people are spending less on real estate commissions and other costs associated with buying and selling homes, then they are saving more. Which, according to the economists trying to restructure the tax code, is a good thing. It will leave more resources for investment, leading to more rapid increases in productivity. (Again, I don’t buy this. I think investment is being held back by a lack of demand, but that’s just my fringe position.)
The rest of the claim also doesn’t make much sense. If more people sold their homes and then turned around and bought new homes, this would increase the number of homes for sale, but it would also increase the number of buyers on the market by roughly the same amount. There is only a net improvement for buyers if some of the sellers opt to rent, but the piece is not talking about people switching from owning to renting.
The data also don’t support the claim that people are moving less frequently, as can be seen in one of the charts included with the article. It shows that the most recent rate of sales of existing homes, at 5.7 million annually, is somewhat above the level at the start of the last decade. It is even further above the mid-1990s pre-housing bubble rate. In other words, the rate of sales of existing homes is pretty much back to, or possibly even above, the rate we saw in more normal times — even if it is below the frenzy levels of the bubble years.
This is more of the “which way is up” problem in economics. Right now, we have lots of economists debating how best to reform the tax code. Most of them see increasing the incentive to save (which means not spending money) as an important goal.
Of course, more saving is not a good idea if we think the economy doesn’t have enough demand to fully employ the workforce. I put myself in the group of economists who hold this view, but we are the minority these days. Most economists think that the economy is pretty close to full employment. That is why the Fed is raising interest rates. Presumably, this is also why people are worried about budget deficits, at least insofar as their concern about budget deficits has any real world rationale.
Anyhow, in this context the NYT is completely off the mark when it tells readers:
“Homeowners are moving less, creating a drag on the economy, fewer commissions for real estate brokers and a brutally competitive market for first-time home shoppers who cannot find much for sale and are likely to be disappointed by real estate’s spring selling season.”
If people are spending less on real estate commissions and other costs associated with buying and selling homes, then they are saving more. Which, according to the economists trying to restructure the tax code, is a good thing. It will leave more resources for investment, leading to more rapid increases in productivity. (Again, I don’t buy this. I think investment is being held back by a lack of demand, but that’s just my fringe position.)
The rest of the claim also doesn’t make much sense. If more people sold their homes and then turned around and bought new homes, this would increase the number of homes for sale, but it would also increase the number of buyers on the market by roughly the same amount. There is only a net improvement for buyers if some of the sellers opt to rent, but the piece is not talking about people switching from owning to renting.
The data also don’t support the claim that people are moving less frequently, as can be seen in one of the charts included with the article. It shows that the most recent rate of sales of existing homes, at 5.7 million annually, is somewhat above the level at the start of the last decade. It is even further above the mid-1990s pre-housing bubble rate. In other words, the rate of sales of existing homes is pretty much back to, or possibly even above, the rate we saw in more normal times — even if it is below the frenzy levels of the bubble years.
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The Washington Post had a very useful front page piece on the poor quality of dental care received by large segments of the population. It noted the high price of dental care, but never examines why it costs so much in the United States.
A big part of the story is that dentists earn on average $200,000 a year, roughly twice the average of their counterparts in Western Europe and Canada. This is in large part because our dentists benefit from protectionism. We prohibit qualified foreign dentists from practicing in the United States unless they graduate from a U.S. dental school (or in recent years, a Canadian school).
The price of dental equipment is also inflated due to the fact that it enjoys government-granted patent monopolies. In most cases, this equipment would be relatively cheap if it were sold in a free market. (Yes, we need to pay for the research that supports technological innovation, but there are alternative mechanisms. This issue and protection for dentists is discussed in Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer [it’s free].)
Anyhow, this is yet another example of how the religiously pro-free trade Washington Post happily turns a blind eye to protectionism when it is the wealthy who benefit.
The Washington Post had a very useful front page piece on the poor quality of dental care received by large segments of the population. It noted the high price of dental care, but never examines why it costs so much in the United States.
A big part of the story is that dentists earn on average $200,000 a year, roughly twice the average of their counterparts in Western Europe and Canada. This is in large part because our dentists benefit from protectionism. We prohibit qualified foreign dentists from practicing in the United States unless they graduate from a U.S. dental school (or in recent years, a Canadian school).
The price of dental equipment is also inflated due to the fact that it enjoys government-granted patent monopolies. In most cases, this equipment would be relatively cheap if it were sold in a free market. (Yes, we need to pay for the research that supports technological innovation, but there are alternative mechanisms. This issue and protection for dentists is discussed in Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer [it’s free].)
Anyhow, this is yet another example of how the religiously pro-free trade Washington Post happily turns a blind eye to protectionism when it is the wealthy who benefit.
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Binyamin Appelbaum had a good piece in the NYT presenting how mainstream economists assess the prospects for boosting growth with the sort of tax cuts proposed by the Trump administration. While the piece accurately conveys the range of views among the mainstream of the profession about the extent to which it is possible to boost GDP growth, it is worth noting that the mainstream of the profession has an absolutely horrible track record in this area.
The piece tells us that the Federal Reserve Board puts the economy’s potential growth rate at just 1.8 percent a year. It then presents views of several economists suggesting that a well-designed tax reform could raise this by 0.3 to 0.5 percentage points.
As recently as 2012, the Congressional Budget Office (CBO) projected that the economy could grow at a 2.5 percent annual rate for the period between 2018 and 2022 (see Summary Table 2). CBO’s projections are usually near the center of the economic mainstream, so in the not distant past, many economists believed that the economy could sustain a 2.5 percent annual rate of growth.
It is also worth noting that there is enormous uncertainty about how low the unemployment rate can go without sparking inflation. CBO put the non-accelerating inflation rate of unemployment (NAIRU) in the 5.2–5.4 percent range five years ago. In the most recent month, the unemployment rate was 4.4 percent. There is no evidence in the data of any acceleration in the rate of inflation.
This is important background. While it is probably true that the sort of tax reform proposed by Trump (i.e. giving rich people more money and creating more opportunities to game the tax code) will not provide much boost to growth, economists really don’t have much basis for confidence in their own projections of the economy’s potential. They have repeatedly been wrong by huge amounts in the past, so unless they suddenly learned a great deal of economics, we should view current projections with considerable skepticism.
Binyamin Appelbaum had a good piece in the NYT presenting how mainstream economists assess the prospects for boosting growth with the sort of tax cuts proposed by the Trump administration. While the piece accurately conveys the range of views among the mainstream of the profession about the extent to which it is possible to boost GDP growth, it is worth noting that the mainstream of the profession has an absolutely horrible track record in this area.
The piece tells us that the Federal Reserve Board puts the economy’s potential growth rate at just 1.8 percent a year. It then presents views of several economists suggesting that a well-designed tax reform could raise this by 0.3 to 0.5 percentage points.
As recently as 2012, the Congressional Budget Office (CBO) projected that the economy could grow at a 2.5 percent annual rate for the period between 2018 and 2022 (see Summary Table 2). CBO’s projections are usually near the center of the economic mainstream, so in the not distant past, many economists believed that the economy could sustain a 2.5 percent annual rate of growth.
It is also worth noting that there is enormous uncertainty about how low the unemployment rate can go without sparking inflation. CBO put the non-accelerating inflation rate of unemployment (NAIRU) in the 5.2–5.4 percent range five years ago. In the most recent month, the unemployment rate was 4.4 percent. There is no evidence in the data of any acceleration in the rate of inflation.
This is important background. While it is probably true that the sort of tax reform proposed by Trump (i.e. giving rich people more money and creating more opportunities to game the tax code) will not provide much boost to growth, economists really don’t have much basis for confidence in their own projections of the economy’s potential. They have repeatedly been wrong by huge amounts in the past, so unless they suddenly learned a great deal of economics, we should view current projections with considerable skepticism.
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As I like to point out, debates on economic policy suffer badly from the “which way is up problem.” At the same time we are constantly hearing concerns about aging baby boomers and large budget deficits (too little supply and too much demand) we also hear stories about robots displacing workers and creating mass unemployment (too much supply and too little demand).
Either of these stories could, in principle, be true, but they can’t possibly both be true at the same time. It speaks volumes for the confusion perpetuated in public debates that we do simultaneously hear both concerns raises. (I was once on a radio show where the other person was warning about robots taking all the jobs. He then said things will get even worse when the baby boomers retire and we have to pay for Social Security. Just think, we first have no jobs and then have no workers.)
Anyhow, the NYT had a story about a state-of-the-art auto factory in China which relies largely on robots to put together cars. This is interesting because there have been numerous stories about how China is going to meet some terrible fate as a result of its one child policy, which sharply curtailed population growth. Its labor force is projected to shrink over the next two decades.
In fact, there is basically zero reason for China to be worried about its shrinking labor force. China still has tens of millions of people employed in extremely low productivity agricultural work. It also has many older factories with outmoded technologies. These can be readily replaced with new factories, like the one highlighted here, which will have much higher productivity.
In short, there is pretty much nothing to the China labor shortage story. But on the plus side, many economists can be employed talking about it.
As I like to point out, debates on economic policy suffer badly from the “which way is up problem.” At the same time we are constantly hearing concerns about aging baby boomers and large budget deficits (too little supply and too much demand) we also hear stories about robots displacing workers and creating mass unemployment (too much supply and too little demand).
Either of these stories could, in principle, be true, but they can’t possibly both be true at the same time. It speaks volumes for the confusion perpetuated in public debates that we do simultaneously hear both concerns raises. (I was once on a radio show where the other person was warning about robots taking all the jobs. He then said things will get even worse when the baby boomers retire and we have to pay for Social Security. Just think, we first have no jobs and then have no workers.)
Anyhow, the NYT had a story about a state-of-the-art auto factory in China which relies largely on robots to put together cars. This is interesting because there have been numerous stories about how China is going to meet some terrible fate as a result of its one child policy, which sharply curtailed population growth. Its labor force is projected to shrink over the next two decades.
In fact, there is basically zero reason for China to be worried about its shrinking labor force. China still has tens of millions of people employed in extremely low productivity agricultural work. It also has many older factories with outmoded technologies. These can be readily replaced with new factories, like the one highlighted here, which will have much higher productivity.
In short, there is pretty much nothing to the China labor shortage story. But on the plus side, many economists can be employed talking about it.
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In his presidential campaign, Donald Trump made a big point of beating up on China for its “currency manipulation.” He said that China was ripping off the United States because of its large trade surplus with the U.S., which had cost us millions of manufacturing jobs.
Trump said the trade deficit was due to the fact that our “stupid” trade negotiators allowed China to get away with depressing the value of the yuan against the dollar. This makes Chinese goods relatively cheaper in world markets, giving them a competitive advantage. Trump promised to put an end to this currency manipulation.
Last month, Trump met with China’s President Xi Jinping. According to his own account, the topic of currency values did not come up. Trump said that he got along very well with President Xi and looked forward to his assistance in dealing with North Korea. He didn’t want to spoil the relationship by bringing up currency.
The Washington Post today reported on a trade deal the Trump administration worked out with China. The piece says that the deal will open the door for beef exports to China. It also will remove obstacles that prevented U.S. financial services companies (e.g. Goldman Sachs) from operating in China. This agreement is undoubtedly good news for beef exporters, even if the impact is exaggerated (it might trivially raise the price of U.S. beef) and it surely is good news for the financial industry, but it doesn’t do anything for the manufacturing workers who lost their jobs in places like Ohio and Pennsylvania.
In his presidential campaign, Donald Trump made a big point of beating up on China for its “currency manipulation.” He said that China was ripping off the United States because of its large trade surplus with the U.S., which had cost us millions of manufacturing jobs.
Trump said the trade deficit was due to the fact that our “stupid” trade negotiators allowed China to get away with depressing the value of the yuan against the dollar. This makes Chinese goods relatively cheaper in world markets, giving them a competitive advantage. Trump promised to put an end to this currency manipulation.
Last month, Trump met with China’s President Xi Jinping. According to his own account, the topic of currency values did not come up. Trump said that he got along very well with President Xi and looked forward to his assistance in dealing with North Korea. He didn’t want to spoil the relationship by bringing up currency.
The Washington Post today reported on a trade deal the Trump administration worked out with China. The piece says that the deal will open the door for beef exports to China. It also will remove obstacles that prevented U.S. financial services companies (e.g. Goldman Sachs) from operating in China. This agreement is undoubtedly good news for beef exporters, even if the impact is exaggerated (it might trivially raise the price of U.S. beef) and it surely is good news for the financial industry, but it doesn’t do anything for the manufacturing workers who lost their jobs in places like Ohio and Pennsylvania.
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The betting still seems to be that the Fed will raise rates in June, but it doesn’t seem like the inflation data could be the reason. The numbers were again quite tame in April, with the overall CPI increasing by 0.2 percent in the month and the core by 0.1 percent. The year over year increase in the overall CPI is 2.2 percent, and 1.9 percent in the core. This puts inflation well below the 2.0 percent average rate (for the PCE deflator) being targeted by the Fed.
However, the weakness of inflation is even more striking if we look at a core CPI that excludes shelter. There is a logic to this, since shelter does not follow the same dynamic as other components in the CPI. Furthermore, the Fed is not going to reduce shelter costs by raising interest rates. In fact, by slowing construction and thereby reducing supply, it could well be raising shelter costs.
Here’s the picture.
The rate of inflation in this non-shelter core is 0.8 percent over the last year. Perhaps even more importantly, it is falling, not rising. This means that the extremely weak evidence of any acceleration in core inflation was completely due to rising rents. If we pull out housing, the rate of inflation in everything else is declining.
So why does the Fed feel it has to raise rates?
The betting still seems to be that the Fed will raise rates in June, but it doesn’t seem like the inflation data could be the reason. The numbers were again quite tame in April, with the overall CPI increasing by 0.2 percent in the month and the core by 0.1 percent. The year over year increase in the overall CPI is 2.2 percent, and 1.9 percent in the core. This puts inflation well below the 2.0 percent average rate (for the PCE deflator) being targeted by the Fed.
However, the weakness of inflation is even more striking if we look at a core CPI that excludes shelter. There is a logic to this, since shelter does not follow the same dynamic as other components in the CPI. Furthermore, the Fed is not going to reduce shelter costs by raising interest rates. In fact, by slowing construction and thereby reducing supply, it could well be raising shelter costs.
Here’s the picture.
The rate of inflation in this non-shelter core is 0.8 percent over the last year. Perhaps even more importantly, it is falling, not rising. This means that the extremely weak evidence of any acceleration in core inflation was completely due to rising rents. If we pull out housing, the rate of inflation in everything else is declining.
So why does the Fed feel it has to raise rates?
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I’ve had people ask me, so I went back to refresh my memory. Yes, it was very bad news as the Watergate scandal unfolded and Nixon was eventually forced to resign. The economy slipped into a recession beginning in November of 1973, with the unemployment rate rising from a low of 4.6 percent in October of 1973 to an eventual peak of 9.0 percent in May of 1975.
Source: Bureau of Labor Statistics.
Having put these numbers on the table, I’m not sure how much of this can be attributed to Watergate and the crisis of the Nixon presidency. The proximate cause was the Arab oil embargo which quadrupled the price of oil at a time when the U.S. was far more dependent on oil than is currently the case. Nixon also removed the wage and controls which were intended to keep inflation under control through the 1972 election. Throw in a wheat deal with the Soviet Union that sent wheat prices soaring and you have a serious inflation problem.
The Fed responded by slamming on the brakes which gave us at the time what was considered to be a pretty awful recession. Would Nixon have done anything to save the economy if he wasn’t struggling to save his presidency? It’s hard to say to say what he could or would have done, but the story as it played out was not pretty.
I’ve had people ask me, so I went back to refresh my memory. Yes, it was very bad news as the Watergate scandal unfolded and Nixon was eventually forced to resign. The economy slipped into a recession beginning in November of 1973, with the unemployment rate rising from a low of 4.6 percent in October of 1973 to an eventual peak of 9.0 percent in May of 1975.
Source: Bureau of Labor Statistics.
Having put these numbers on the table, I’m not sure how much of this can be attributed to Watergate and the crisis of the Nixon presidency. The proximate cause was the Arab oil embargo which quadrupled the price of oil at a time when the U.S. was far more dependent on oil than is currently the case. Nixon also removed the wage and controls which were intended to keep inflation under control through the 1972 election. Throw in a wheat deal with the Soviet Union that sent wheat prices soaring and you have a serious inflation problem.
The Fed responded by slamming on the brakes which gave us at the time what was considered to be a pretty awful recession. Would Nixon have done anything to save the economy if he wasn’t struggling to save his presidency? It’s hard to say to say what he could or would have done, but the story as it played out was not pretty.
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We hear endless stories in the media about how the robots are taking all the jobs. There was a new rush of such stories after the release of a study by Daron Acemoglu and Pascual Restrepo, which found that robots were responsible for a substantial share of the job loss in manufacturing in the last decade. (For example, this Bloomberg piece by Mira Rojanasakul and Peter Coy.)
However, there remains a very basic problem in the robot story, it is not showing up in the productivity data. To step back a minute, robots are supposed to replace human labor. This means that for the same number of hours of human work, we should see much higher output of goods and services, since the robots are now adding to total output. This is what productivity growth means.
So if robots are having a large impact on jobs, then we should see productivity growth going through the roof. Instead, it is falling through the floor. It has averaged less than 1.0 percent annually in the last decade. This compares to an average growth rate of 3.0 percent in the decade from 1995 to 2005 and also in the long Golden Age from 1947 to 1973.
Strikingly, productivity growth has been especially bad in manufacturing, the place where we see the greatest use of robots. Here’s the picture since 1988, the period for which the Bureau of Labor Statistics (BLS) has a consistent series.
Source: Bureau of Labor Statistics.
Over the last four years productivity growth in manufacturing averaged less than 0.2 percent annually. This compares to rates that often exceeded 4.0 percent in prior decades. This slowdown is especially striking since the rate of installation has increased sharply in recent years. According to data cited in the Bloomberg piece, we’ve added an average of 22,000 robots a year in the last three years. This compares to a peak of around 16,000 in the years before the Great Recession.
If robots are leading to massive job loss, then we should be seeing some serious gains in productivity. Instead the opposite has occurred. It’s awful to let a good story be ruined by evidence, but it just doesn’t seem that the use of robots will go far towards explaining the weakness of wage and job growth in the recovery.
We hear endless stories in the media about how the robots are taking all the jobs. There was a new rush of such stories after the release of a study by Daron Acemoglu and Pascual Restrepo, which found that robots were responsible for a substantial share of the job loss in manufacturing in the last decade. (For example, this Bloomberg piece by Mira Rojanasakul and Peter Coy.)
However, there remains a very basic problem in the robot story, it is not showing up in the productivity data. To step back a minute, robots are supposed to replace human labor. This means that for the same number of hours of human work, we should see much higher output of goods and services, since the robots are now adding to total output. This is what productivity growth means.
So if robots are having a large impact on jobs, then we should see productivity growth going through the roof. Instead, it is falling through the floor. It has averaged less than 1.0 percent annually in the last decade. This compares to an average growth rate of 3.0 percent in the decade from 1995 to 2005 and also in the long Golden Age from 1947 to 1973.
Strikingly, productivity growth has been especially bad in manufacturing, the place where we see the greatest use of robots. Here’s the picture since 1988, the period for which the Bureau of Labor Statistics (BLS) has a consistent series.
Source: Bureau of Labor Statistics.
Over the last four years productivity growth in manufacturing averaged less than 0.2 percent annually. This compares to rates that often exceeded 4.0 percent in prior decades. This slowdown is especially striking since the rate of installation has increased sharply in recent years. According to data cited in the Bloomberg piece, we’ve added an average of 22,000 robots a year in the last three years. This compares to a peak of around 16,000 in the years before the Great Recession.
If robots are leading to massive job loss, then we should be seeing some serious gains in productivity. Instead the opposite has occurred. It’s awful to let a good story be ruined by evidence, but it just doesn’t seem that the use of robots will go far towards explaining the weakness of wage and job growth in the recovery.
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