It's Hard to Raise Interest Rates When the Economy Is Weak

June 15, 2016

15 Junio 2016

There have been several pieces in the media complaining that the Fed is having a hard time raising interest rates from their current unusually low level. This is true, but the basic story here is quite simple: the economy remains very weak.

The growth rate has averaged just 2.0 percent for the last five years and may well fall below that pace in 2016. That is not an environment in which it makes sense for the Fed to be raising interest rates.

The recent news reports make it sound like the problem is that the Fed can’t raise interest rates, as though this is a goal in itself. The real point is that we should want to see a strong economy in which it might be necessary for the Fed to raise interest rates to prevent overheating. The fact that the economy is not stronger means that people are unable to get jobs, or full-time jobs, or jobs that fully utlilize their skills.

It also means that we are foregoing an enormous amount of potential output. We could be devoting resources to the spread of clean energy, educating our kids, or providing better health care. But because there is not enough demand in the economy, resources just sit idle.

This is a real and huge problem. The fact that the Fed can’t raise interest rates? Sorry, not in the same ballpark.

There have been several pieces in the media complaining that the Fed is having a hard time raising interest rates from their current unusually low level. This is true, but the basic story here is quite simple: the economy remains very weak.

The growth rate has averaged just 2.0 percent for the last five years and may well fall below that pace in 2016. That is not an environment in which it makes sense for the Fed to be raising interest rates.

The recent news reports make it sound like the problem is that the Fed can’t raise interest rates, as though this is a goal in itself. The real point is that we should want to see a strong economy in which it might be necessary for the Fed to raise interest rates to prevent overheating. The fact that the economy is not stronger means that people are unable to get jobs, or full-time jobs, or jobs that fully utlilize their skills.

It also means that we are foregoing an enormous amount of potential output. We could be devoting resources to the spread of clean energy, educating our kids, or providing better health care. But because there is not enough demand in the economy, resources just sit idle.

This is a real and huge problem. The fact that the Fed can’t raise interest rates? Sorry, not in the same ballpark.

Robert Samuelson Resumes the Attack on Social Security

By CEPRCEPR

June 14, 2016

14 Junio 2016

It undoubtedly was very disappointing for Robert Samuelson, the Washington Post, and the rest of the Very Serious People (VSP) to see President Obama's call for increasing Social Security. For the time being, their plans to attack Social Security and Medicare seem completely dead in the water. After all, President Obama had earlier been a grand bargainer, willing to put both Social Security and Medicare on the table, now he actually wants to increase benefits. And even Donald Trump, the presumptive Republican presidential nominee, says he is opposed to cuts, at least for the moment. But it is important to remember that in our nation’s capital, no bad idea stays dead for long. For that reason, no one should view Robert Samuelson’s latest column as an admission of defeat. It is a call for resurrection. So let’s get out that stake and see if we can nail this vampire once and for all. The basic theme is the standard one: it is an effort to divert class warfare into generational warfare. Over the last four decades we have seen the greatest upward redistribution of income in the history of the world. Rather than have the losers blame the gainers, Robert Samuelson wants them to be angry at their parents. Samuelson’s basic story is that the elderly are actually doing quite well; therefore, we should be looking to take money away from them rather than give them more. His main piece of evidence is a subjective question on well-being which shows the over age 65 age group consistently answers that they are most satisfied with their financial situation. There are many points that can be made about this sort of subjective assessment. The most obvious is that the sense of satisfaction depends on expectations. People who are in retirement or the last years of their working career have little hope of substantial improvements in their living standard, so it may not be surprising that most would answer they are satisfied with what they have. Younger people can of course hope for, and in fact expect, better times ahead as they advance in their career. In fact, there is useful information in this survey and it goes in the opposite direction of Samuelson’s complaints. If we look at recent and near retirees, the group between the ages of 50 to 64, we see a sharp decline in their sense of satisfaction over the period since the survey began in 1972. In 2014, the most recent year in the survey, just 25.2 percent of those in this age group expressed satisfaction with their financial situation. This is down from 38.4 percent in 1972 and a peak of 41.4 percent in 1978.

10 Years on the Beat

By CEPRCEPR

June 06, 2016

06 Junio 2016

That’s right, CEPR Co-Director Dean Baker has been Beating the Press for 10 years now (and that doesn’t include the commentary on economic reporting he did for 10 years before that).

This means 10 years of waking up every morning — even on weekends! — at 4:30AM, combing through The New York Times, The Wall Street Journal, The Washington Post (or as he has been known to say, Fox on 15th street) and other major new outlets. 10 years of dismantling bogus economic theory. 10 years of uncovering the ideological bias behind misrepresentation of data and revealing the spin that promotes narrow interests.

Beat The Press has called out deficit hawks, Social Security slashers, and bubble deniers. Every day for the past 10 years (or close to it anyway) Dean has candidly explained what policies mean for real people.

All of this wouldn’t be possible without your support.

CEPR receives no dedicated funding for our blogs — all funding must come from general support, which is getting harder and harder to come by. With a 24-hour-news cycle and moneyed interests dominating the political world, it is as important as ever that people are informed about the matters that impact them the most.

Won’t you show BTP some 10th Anniversary love by clicking here and donating today? Robert Samuelson will thank you! Well…maybe not, but all of us at CEPR will.

Thanks for your support,

Dean and your friends at CEPR

That’s right, CEPR Co-Director Dean Baker has been Beating the Press for 10 years now (and that doesn’t include the commentary on economic reporting he did for 10 years before that).

This means 10 years of waking up every morning — even on weekends! — at 4:30AM, combing through The New York Times, The Wall Street Journal, The Washington Post (or as he has been known to say, Fox on 15th street) and other major new outlets. 10 years of dismantling bogus economic theory. 10 years of uncovering the ideological bias behind misrepresentation of data and revealing the spin that promotes narrow interests.

Beat The Press has called out deficit hawks, Social Security slashers, and bubble deniers. Every day for the past 10 years (or close to it anyway) Dean has candidly explained what policies mean for real people.

All of this wouldn’t be possible without your support.

CEPR receives no dedicated funding for our blogs — all funding must come from general support, which is getting harder and harder to come by. With a 24-hour-news cycle and moneyed interests dominating the political world, it is as important as ever that people are informed about the matters that impact them the most.

Won’t you show BTP some 10th Anniversary love by clicking here and donating today? Robert Samuelson will thank you! Well…maybe not, but all of us at CEPR will.

Thanks for your support,

Dean and your friends at CEPR

What Does China's Demographic "Problem" Mean?

By CEPRCEPR

June 05, 2016

05 Junio 2016

The NYT has another piece that talks about China’s demographic problem due to an aging population. (In fairness, this is really a sidebar, the piece is mostly arguing that China has failed to get itself on a sustainable growth path.) I went through the arithmetic on this last week.

The basic point is simple: China has had extraordinarily rapid productivity growth over the last three and a half decades. The impact of this growth on raising wages and living standards swamps any conceivable negative effect from a declining ratio of workers to retirees. The math is about as simple as it gets, but I’m still curious how the bad story is supposed to manifest itself.

Keep in mind, the story is supposed to be a labor shortage. What does that mean?

That’s a serious question, how does an economy know it’s having a labor shortage? Presumably it means that the lowest paying jobs end up going unfilled because people have better options. So what? Many retail stores will go out of business, so will some restaurants, and other low wage employers. Why would we care? Remember, no one is going unemployed. These businesses are going under because they can’t find workers willing to work at the wage they are offering. Instead, workers are going to better paying, higher productivity jobs. That’s unfortunate for these businesses, but hey, that’s capitalism.

There is an issue that much of the support for retirees may go through the government, which means that China would have to increase taxes. There may be a Chinese Grover Norquist who will make any tax increases very difficult politically, but that is a political issue, not an economic one. Workers who have seen their real wages double or triple in the last couple of decades can certainly afford to pay somewhat higher taxes to support their retired parents.

So again, what exactly is the problem?

The NYT has another piece that talks about China’s demographic problem due to an aging population. (In fairness, this is really a sidebar, the piece is mostly arguing that China has failed to get itself on a sustainable growth path.) I went through the arithmetic on this last week.

The basic point is simple: China has had extraordinarily rapid productivity growth over the last three and a half decades. The impact of this growth on raising wages and living standards swamps any conceivable negative effect from a declining ratio of workers to retirees. The math is about as simple as it gets, but I’m still curious how the bad story is supposed to manifest itself.

Keep in mind, the story is supposed to be a labor shortage. What does that mean?

That’s a serious question, how does an economy know it’s having a labor shortage? Presumably it means that the lowest paying jobs end up going unfilled because people have better options. So what? Many retail stores will go out of business, so will some restaurants, and other low wage employers. Why would we care? Remember, no one is going unemployed. These businesses are going under because they can’t find workers willing to work at the wage they are offering. Instead, workers are going to better paying, higher productivity jobs. That’s unfortunate for these businesses, but hey, that’s capitalism.

There is an issue that much of the support for retirees may go through the government, which means that China would have to increase taxes. There may be a Chinese Grover Norquist who will make any tax increases very difficult politically, but that is a political issue, not an economic one. Workers who have seen their real wages double or triple in the last couple of decades can certainly afford to pay somewhat higher taxes to support their retired parents.

So again, what exactly is the problem?

I Am Out of Here: Vacation 2016

By CEPRCEPR

June 05, 2016

05 Junio 2016

I’ll be back on Tuesday, June 14th. Remember, until then don’t believe anything you read in the newspaper.

How Bad Was the May Jobs Report?

By CEPRCEPR

June 04, 2016

04 Junio 2016

The May jobs report was worse than most analysts (including me) had expected. We are now seeing a lot of columns asking how bad was it? My answer is pretty bad. First, to get an obvious source of overstated weakness out of the way, we lost 35,000 jobs in the communications sector due to the Verizon strike. Those jobs will come back in the June report. If we add that number in we get 73,000. That’s better, but hardly a great report. Furthermore, this bad report wasn’t hugely out of the line with the reports from the prior two months, both of which were revised down with the May release. The average for these two months was 154,500. Taken together, the three reports provide solid evidence that the rate of job growth has slowed sharply from the 200,000 plus rate of the prior two years. We get a similar story if we look at total hours. Since December, the index of average weekly hours has risen at less than a 0.7 percent annual rate. This compares to a 2.0 percent rate over the prior year. (The index has actually been slightly negative if we use January, 2016 as the start point.) We can also look to other items in the report that are to some extent independent of the establishment jobs numbers. For example, we can look to the employment diffusion indexes, which show the percentage of industries in which employers expect to add workers over a given period. All of these have fallen sharply in recent months.

The Mortgage Interest Tax Deduction

By CEPRCEPR

June 03, 2016

03 Junio 2016

Neil Irwin has an interesting piece in the Upshot section of the NYT noting factors that people may not consider in deciding between renting and buying their home. One item I would add to the list is the tendency to overstate the value of the mortgage interest tax deduction.

It is common for realtors to push houses on prospective buyers by telling them that their mortgage interest is tax deductible. This is true, but the value of the deduction is only equal to the difference between the household’s deductions including mortgage interest and the standard deduction.

Most people will have few deductions other than their mortgage interest deduction. Typically, they may have state income taxes, and that will be pretty much it.

Suppose these taxes come to $5k a year for a couple and their mortgage interest is $10,000 a year. If they are in the 25 percent bracket, they might be inclined to think that they are saving $2,500 a year from their taxes due to the mortgage interest deduction. In fact, since the standard deduction for this couple is $12,600, they are only benefiting to the extent that the mortgage interest deduction puts them above this number. In this case their combined deductions are now $15,000, which is $2,400 above the standard deduction. That will save them $600 a year on their taxes, not $2,500.

Furthermore, as time goes on, interest will be a smaller share of this couple’s mortgage payment as the mortgage is gradually paid off. This will reduce the amount that can be deducted against their taxes. This means that the mortgage interest deduction will be of less use to this couple over time.

Many homebuyers are unaware of these facts, these realtors can be misleading. They are worth keeping in mind by potential homebuyers.

Neil Irwin has an interesting piece in the Upshot section of the NYT noting factors that people may not consider in deciding between renting and buying their home. One item I would add to the list is the tendency to overstate the value of the mortgage interest tax deduction.

It is common for realtors to push houses on prospective buyers by telling them that their mortgage interest is tax deductible. This is true, but the value of the deduction is only equal to the difference between the household’s deductions including mortgage interest and the standard deduction.

Most people will have few deductions other than their mortgage interest deduction. Typically, they may have state income taxes, and that will be pretty much it.

Suppose these taxes come to $5k a year for a couple and their mortgage interest is $10,000 a year. If they are in the 25 percent bracket, they might be inclined to think that they are saving $2,500 a year from their taxes due to the mortgage interest deduction. In fact, since the standard deduction for this couple is $12,600, they are only benefiting to the extent that the mortgage interest deduction puts them above this number. In this case their combined deductions are now $15,000, which is $2,400 above the standard deduction. That will save them $600 a year on their taxes, not $2,500.

Furthermore, as time goes on, interest will be a smaller share of this couple’s mortgage payment as the mortgage is gradually paid off. This will reduce the amount that can be deducted against their taxes. This means that the mortgage interest deduction will be of less use to this couple over time.

Many homebuyers are unaware of these facts, these realtors can be misleading. They are worth keeping in mind by potential homebuyers.

• EuropeEuropaGreeceGreciaWorldEl Mundo

Differences Between Greece and Japan: Japan Borrows in a Currency It Prints

By CEPRCEPR

June 02, 2016

02 Junio 2016

In an article on the decision by Japan’s Prime Minister, Shinzo Abe, to delay a long scheduled increase in its sales tax, the NYT told readers:

“Its [Japan’s] debt may be large, but it is almost entirely funded by domestic savers, making a crisis like the one in Greece much less likely.”

While it is true that most Japanese debt is held domestically, an even more important difference is that Japan’s debt is almost entirely in yen. This means that Japan can never be in the situation Greece faced where it was unable to meet payments on its debt. Japan could always print the money to pay the bonds. Greece could not, since it is not allowed to print euros.

There is a risk that printing large amounts of yen would lead to inflation, but that is a very difference situation that the one Greece faces. Also, the idea that Japan will face a risk of excessive inflation at any point in the near future does not seem very plausible.

In an article on the decision by Japan’s Prime Minister, Shinzo Abe, to delay a long scheduled increase in its sales tax, the NYT told readers:

“Its [Japan’s] debt may be large, but it is almost entirely funded by domestic savers, making a crisis like the one in Greece much less likely.”

While it is true that most Japanese debt is held domestically, an even more important difference is that Japan’s debt is almost entirely in yen. This means that Japan can never be in the situation Greece faced where it was unable to meet payments on its debt. Japan could always print the money to pay the bonds. Greece could not, since it is not allowed to print euros.

There is a risk that printing large amounts of yen would lead to inflation, but that is a very difference situation that the one Greece faces. Also, the idea that Japan will face a risk of excessive inflation at any point in the near future does not seem very plausible.

Robert Samuelson Is Right Again: Robot Are Not Taking Our Jobs

By CEPRCEPR

June 02, 2016

02 Junio 2016

No, I'm not about to become a charter member of the Robert Samuelson fan club, but he does get the basic story right in his column this morning. The robots are not taking our jobs, or at least not at an especially rapid pace. As Samuelson correctly points out, robots are just a form of productivity growth and productivity growth has been very slow in recent years. This is 180 degrees at odds with the robots taking our jobs story. In fact, we should want more robots taking our jobs. That would allow more rapid wage growth and/or longer vacations and more leisure, assuming of course that the Federal Reserve Board did not deliberately slow the economy to create more unemployment. There are a couple of other points worth mentioning on this piece. Samuelson is dismissive of the potential impact of self-driving cars. He tells readers: "Consider. An opinion survey by Brandon Schoettle and Michael Sivak at the University of Michigan found that only 16 percent of respondents wanted self-driving vehicles; 39 percent preferred “partially self-driving” and 46 percent wanted no “self-driving” features. Safety is one anxiety. Cost may be another. Presumably, car prices would be higher, reflecting the costs of software, sensors and electronics. Will drivers pay the premium, especially when today’s cars last longer than ever? (The average age of today’s vehicles is 11 years, up from five years in 1969, reports the Transportation Department)." This one completely misses the potential of self-driving cars. If cars are remotely driven, there is no need to own your own car. You can summon a car to meet your specific needs at the time you need it. In other words, if it's just a short trip by yourself, you would presumably summon a small car that uses very little gas (or electricity). If you're going on a longer trip with friends or family, you would summon a bigger car that would allow everyone to be comfortable. Not owning a car could lead to enormous savings, in addition to not needing parking spaces or garage space to house your car. It's not surprising that people grabbed for a quick survey would not have a clear idea of the potential of this technology. It's unlikely any of us can fully grasp the potential of major innovations. I remember Paul Krugman dismissing the value of the iPad when it first came out. I say this not to trash Krugman, but to point out that even a very insightful economist, who had time to reflect on the topic, had no clue as to use of this new product. Anyhow, put me down as a big optimist on self-driving vehicles.