Too Many Pinocchios? The Washington Post Fact Checker, Public Citizen, and the Korea Free Trade Agreement

April 07, 2015

07 Abril 2015

Glenn Kessler has a difficult job. He is asked to assess claims that often arise in the middle of heated political debates. Inevitably his judgements will leave some unhappy. I sometimes fall into the unhappy camp, as is the case today with his assessment of Public Citizen's claims on the job impact of the Korea-U.S. Free Trade Agreement. He gave Public Citizen a whopping four pinocchios in saying that the deal led to the loss of 85,000 jobs. Before getting to the substance, let me say that I have known Kessler for years, and I'm sure he reached this assessment in good faith. I have discussed many issues with him over the years (including a related trade issue) and I have always felt that he was trying to determine the facts of the situation. In this case, I just think he got it wrong. He raises several objections to Public Citizen's number. Just briefly listing them, he is concerned about: 1) the relationship between the estimates of jobs per dollar of exports and jobs per dollar of imports; 2) the years chosen as endpoints for the Public Citizen analysis; 3) the nature of the counterfactual (i.e. what would have happened in the absence of the trade deal); and 4) Public Citizen's exclusion of re-exports from the calculation. There is some validity to all of these concerns, but none of these issues individually or collectively undermine the basic story in the Public Citizen report. Starting with the estimates of jobs per dollar, these are always very crude. Public Citizen took their estimate of jobs per dollar from a report from International Trade Commission which calculated how many jobs would be generated by a projected increase in exports associated with the U.S.-Korea Free Trade Agreement. Kessler points out that this estimate is from 2007 so it would be out of date by 2012, when the deal first took effect. Furthermore, it was an estimate of jobs per dollar of exports, not imports. Both of these points are true, but not likely of much consequence. The original estimate of jobs per dollar of exports is at best a crude approximation rather than a carefully constructed number. Certainly no one could rule out that the true number in 2007 may have been 10 percent higher or 10 percent lower. Ideally we would have separate estimate for the jobs lost in the industries competing with imports, but it is unlikely to be hugely different. (Most exports and imports are manufactured goods.) Furthermore, U.S. imports tend to be somewhat less capital intensive than U.S. exports, which means that there are likely to be more jobs lost per million dollars of imports than are gained per million dollars of exports. On the second point, Kessler takes issue with where Public Citizen decided the trade agreement's impact would first be felt. There will always be some ambiguity on this sort of question because businesses will start responding once they are sure the deal will go into effect, even before it actually is in place. Whatever date one picks, it is pretty hard not to see a clear pattern of rising deficits around the time of the deal. Here's the data from the Commerce Department going back to 2007. Source: U.S. Department of Commerce. The deal was ratified in late 2011 and went into effect in March of 2012. Whatever date we want to pick as the point at which the deal first started having an effect on trade, there seems no way of escaping the fact that there was a large increase in the deficit after that point.

Robert Samuelson Is Partly Right on High Employment Economy

By Dean BakerDean Baker

April 06, 2015

06 Abril 2015

Robert Samuelson comes down largely in the right place in arguing that the Fed should err on the side of raising employment in a context where we don’t know how far the unemployment rate can fall before triggering inflationary pressures. However, his warning that bad things happen if the Fed gets too carried away pushing high employment is misplaced.

First it is worth reminding everyone that the economics profession was far more confident (with far more evidence) back in the 1990s that the unemployment rate could not get much below 6.0 percent without leading to accelerating inflation. The profession was completely wrong in that belief as Alan Greenspan was able to prove by letting the unemployment rate fall to 4.0 percent as a year-round average for 2000 (without accelerating inflation).

The stories that the quest for full employment leads to bad things needs important qualifications. The main bad things in the 1970s were the OPEC price increases that quadrupled the price of oil in 1973-1974 and again in 1978-1980. These price increases would have led to enormous economic disruption even if the Fed had not been trying to sustain a high employment economy.

The other two bad stories, the stock bubble in the late 1990s and the housing bubble in the last decade both stemmed from an incredible failure of oversight by the Fed and other regulators. Both bubbles were easily seen by anyone with open eyes, and the recessions that would be caused by their collapse was 100 percent predictable.

The issue here is simply finding competent people to serve at the Fed and the relevant regulatory agencies. There has been much written about the skills shortage in the United States, but it should be possible to train enough people with the necessary skills to fill the small number of positions in question.

Robert Samuelson comes down largely in the right place in arguing that the Fed should err on the side of raising employment in a context where we don’t know how far the unemployment rate can fall before triggering inflationary pressures. However, his warning that bad things happen if the Fed gets too carried away pushing high employment is misplaced.

First it is worth reminding everyone that the economics profession was far more confident (with far more evidence) back in the 1990s that the unemployment rate could not get much below 6.0 percent without leading to accelerating inflation. The profession was completely wrong in that belief as Alan Greenspan was able to prove by letting the unemployment rate fall to 4.0 percent as a year-round average for 2000 (without accelerating inflation).

The stories that the quest for full employment leads to bad things needs important qualifications. The main bad things in the 1970s were the OPEC price increases that quadrupled the price of oil in 1973-1974 and again in 1978-1980. These price increases would have led to enormous economic disruption even if the Fed had not been trying to sustain a high employment economy.

The other two bad stories, the stock bubble in the late 1990s and the housing bubble in the last decade both stemmed from an incredible failure of oversight by the Fed and other regulators. Both bubbles were easily seen by anyone with open eyes, and the recessions that would be caused by their collapse was 100 percent predictable.

The issue here is simply finding competent people to serve at the Fed and the relevant regulatory agencies. There has been much written about the skills shortage in the United States, but it should be possible to train enough people with the necessary skills to fill the small number of positions in question.

Tyler Cowen's Three-Card Monte on Inequality

By Dean BakerDean Baker

April 05, 2015

05 Abril 2015

Tyler Cowen used his Upshot piece this week to tell us that the real issue is not inequality, but rather mobility. We want to make sure that our children have the opportunity to enjoy better lives than we do. And for this we should focus on productivity growth which is the main determinant of wealth in the long-run. This piece ranks high in terms of being misleading. First, even though productivity growth has been relatively slow since 1973, the key point is that most of the population has seen few of the gains of the productivity growth that we have seen over the last forty years. Had they shared equally in the productivity gains over this period, the median wage would be close to 50 percent higher than it is today. The minimum wage would be more than twice as high. If we have more rapid productivity growth over the next four decades, but we see the top 1.0 percent again getting the same share as it has since 1980, then most people will benefit little from this growth. The next point that comes directly from this first point is that it is far from clear that inequality does not itself impede productivity growth. While it can of course be coincidence, it is striking that the period of rapid productivity growth was a period of relative equality. At the very least it is hard to make the case that we have experienced some productivity dividend from the inequality of the post-1980 period. And many of the policies that would most obviously promote equality also promote growth. For example, a Fed policy committed to high employment, even at the risk of somewhat higher rates of inflation, would lead to stronger wage growth at the middle and bottom of the wage ladder, while also likely leading to more investment and growth.

What's This "We" Jazz, Matt O'Brien?

By Dean BakerDean Baker

April 04, 2015

04 Abril 2015

One of the few pleasures of the dismal science is getting to watch the surprised faces of economists and economic analysts when things don't turn out as they expect. NAFTA didn't lead to a boom in Mexico, who could have imagined? The 1990s stock bubble burst and took the economy and those big budget surpluses with it, how could that be? The housing bubble exploded, sending house prices plummeting and the financial system into the abyss, who could have imagined? We got a smaller item in this sequence in response to yesterday's weak job report. The 126,000 jobs reported for March was far below most analysts' expectations. This report, coupled with weak data in other areas, is now leading many to question the predictions of an economic boom. One especially visible questioner was Wonkblog's Matt O'Brien. He told readers: "the depressing message is that things weren't as good as we thought they were [emphasis added]." I am going to beat up on Matt for the use of the plural here. Some of us knew that things were not very good and we said that repeatedly. For example, here I am back in early February making fun of Matt for telling readers that the U.S. economy is booming. I don't mean to make this personal. Matt was pretty much in tune with most people writing about the economy at the time, he was just perhaps a bit more forthright in putting his assessment into print.

The True Myths on the Trans-Pacific Partnership

By Dean BakerDean Baker

April 04, 2015

04 Abril 2015

The proponents of the Trans-Pacific Partnership (TPP) are doing everything they can to try to push their case as they prepare for the fast-track vote before Congress this month. Today, Roger Altman, a Wall Street investment banker and former Clinton administration Treasury official weighed with a NYT column, co-authored by Richard Haass, the President of the Council on Foreign Relations. They begin by giving us three myths, all of which happen to be accurate depictions of reality. The first "myth" is that trade agreements have hurt U.S. manufacturing workers and thereby the labor market more generally. Altman and Haas cite work by M.I.T. economist David Autor showing that trade with China has reduced manufacturing employment by 21 percent, but then assert that the problem is trade not trade agreements. They tell us: "the United States does not have a bilateral trade deal with China." Of course if China became a party to the TPP the United States would still not have a bilateral trade agreement with China. (That's right, the TPP is a multilateral trade agreement, not a bilateral trade agreement.) This indicates the level of silliness to which TPP proponents must turn to push their case. As a practical matter, a trade agreement, the WTO, was enormously important in the increase in China's exports to the United States. China joined the WTO at the end of 2001, three years later the U.S. trade deficit with China had nearly doubled from $83 billion to $162 billion.

China Can Develop a Drug for Just 3 Percent the Cost in the United States

By Dean BakerDean Baker

April 03, 2015

03 Abril 2015

That would be an implication of research by Tufts University professor Joseph DiMasi. He found that it cost an average of $2.6 billion to develop a new drug in the United States. By contrast, the Wall Street Journal reported that a company in China developed a new cancer drug for just $70 million, less than 3 percent of DiMasi’s estimate.

Given the enormous difference in costs, the United States and the world economy would be much better served if we shifted drug development to efficient countries like China. The United States should instead focus on producing goods and services in which it has a comparative advantage. Unfortunately, our trade deals have been pushing in the opposite direction, trying quite explicitly to protect the U.S. drug industry by increasing the strength of patent and related protection. Of course the best outcome would be to move away from research financed by patent monopolies and moving toward more modern and efficient mechanisms.

(The $70 million estimate may not include any discounting for money spent in the past. The proper methodology would impute interest to money spent ten years ago as opposed to yesterday. It also is only the cost for a successful drug. It doesn’t factor in the cost of failures, as does DiMasi’s estimate.)

That would be an implication of research by Tufts University professor Joseph DiMasi. He found that it cost an average of $2.6 billion to develop a new drug in the United States. By contrast, the Wall Street Journal reported that a company in China developed a new cancer drug for just $70 million, less than 3 percent of DiMasi’s estimate.

Given the enormous difference in costs, the United States and the world economy would be much better served if we shifted drug development to efficient countries like China. The United States should instead focus on producing goods and services in which it has a comparative advantage. Unfortunately, our trade deals have been pushing in the opposite direction, trying quite explicitly to protect the U.S. drug industry by increasing the strength of patent and related protection. Of course the best outcome would be to move away from research financed by patent monopolies and moving toward more modern and efficient mechanisms.

(The $70 million estimate may not include any discounting for money spent in the past. The proper methodology would impute interest to money spent ten years ago as opposed to yesterday. It also is only the cost for a successful drug. It doesn’t factor in the cost of failures, as does DiMasi’s estimate.)

Secular Stagnation and Retiring Baby Boomers: Can Economists Get Anything Right?

By Dean BakerDean Baker

April 03, 2015

03 Abril 2015

Suppose our leading physicists told us that fire will either lead to high temperatures that will cause burns or very low temperatures that would lead to hypothermia and frostbite, they couldn’t be sure. This would be pretty much the state of macroeconomic debate in the United States and the world.

For decades we have heard endless accounts of how the retirement of the baby boomers was going to devastate the economy. The story was that the cost of their Medicare and Social Security would be an enormous drain of resources from the rest of the economy. We would have to raise taxes and/or run large budget deficits. We would have to pull away resources from infrastructure, educating our children and other vital needs. This is a story of too much demand.

Now we have a story of secular stagnation that is also suppose to stem from retiring baby boomers. This is a story whereby the slower growth in the labor force leads to less need for investment. With less investment there is less demand in the economy, leaving the economy well below its full employment level of output. This is a story of too little demand.

The incredible part of this story for folks standing by as observers should be that they are being told directly opposing stories by people who have great standing in the economics profession. The amazing part of the story is that almost no one seems to recognize this simple fact.

(My answer is that both sides are largely wrong. We will have plenty of resources to cover the costs of the baby boomers retirement. The impact of the growth in the ratio of retirees to workers is swamped by the impact of productivity growth. On the demand side, the impact of the trade deficit swamps the impact of any demographic related investment slowdown.)

Suppose our leading physicists told us that fire will either lead to high temperatures that will cause burns or very low temperatures that would lead to hypothermia and frostbite, they couldn’t be sure. This would be pretty much the state of macroeconomic debate in the United States and the world.

For decades we have heard endless accounts of how the retirement of the baby boomers was going to devastate the economy. The story was that the cost of their Medicare and Social Security would be an enormous drain of resources from the rest of the economy. We would have to raise taxes and/or run large budget deficits. We would have to pull away resources from infrastructure, educating our children and other vital needs. This is a story of too much demand.

Now we have a story of secular stagnation that is also suppose to stem from retiring baby boomers. This is a story whereby the slower growth in the labor force leads to less need for investment. With less investment there is less demand in the economy, leaving the economy well below its full employment level of output. This is a story of too little demand.

The incredible part of this story for folks standing by as observers should be that they are being told directly opposing stories by people who have great standing in the economics profession. The amazing part of the story is that almost no one seems to recognize this simple fact.

(My answer is that both sides are largely wrong. We will have plenty of resources to cover the costs of the baby boomers retirement. The impact of the growth in the ratio of retirees to workers is swamped by the impact of productivity growth. On the demand side, the impact of the trade deficit swamps the impact of any demographic related investment slowdown.)

The Housing Bubble and the Financial Crisis #25,452

By Dean BakerDean Baker

April 02, 2015

02 Abril 2015

It’s always a great day when I have the opportunity to have a substantive exchange with the incredibly erudite Brad DeLong, especially when I am quite sure that I am right. Brad is convinced that the fiinancial crisis is the evil doer responsible for our prolonged downturn instead of the good old-fashioned housing bubble often featured in these pages. He points to the surge in non-residential investment coming in 2007 and 2008. He argues that this surge, along with a rise in exports, would have offset the fall in residential construction and consumption, had it not been for the financial crisis.

I see a somewhat different picture.

Bubble 6310 image001

Source: Bureau of Economic Analysis.

The difference between my graph and Brad’s is that I have pulled out construction from non-residential investment and shown net exports, rather than just exports. This is helpful because it shows that the surge in non-residential investment was entirely a surge in non-residential construction. This component rose from 2.6 percent of GDP at the start of 2005 to 3.8 percent of GDP in the fourth quarter of 2008. The rest of the non-residential investment component hovered near 9.6 percent over this period. In other words, it was going nowhere.

So what explains this enormous surge (almost a 50 percent increase in own terms) in non-residential construction? It’s called a bubble. It would take me a moment to grab the data, but there was a surge in the price of non-residential properties just as the price of housing was going into reverse. Does this sound too dumb for words? Of course it is, but no one ever said that the folks in the banking system had a clue. We saw massive overbuilding in most areas of non-residential construction in this period. Even seven years later you can walk around the downtown of a relatively prosperous city like Washington and still see vacant retail and office space everywhere. This bubble was destined to burst, with or without a financial crisis.

What about net exports? I actually had some hope for net exports filling the gap, with the assumption that the dollar would drop, increasing the relative competitiveness of U.S. goods and services. There is some story here. The dollar had actually been falling since the beginning of the decade. (The over-valued dollar was an evil legacy of the Clinton years.) But the problem was that there were bubbles elsewhere in the world, most notably Europe. This meant a major export market was not going to be there for us. I don’t see how we can blame the financial crisis for Europe’s housing bubble.

Just to repeat my basic line, if we look at the economy after the financial markets had stabilized (2011 or 2012, pick your year) and ask what component of GDP would be higher if we did not have the financial crisis, it’s hard to see a candidate. Brad’s pick of non-residential investment doesn’t hold water. Perhaps we can claim a bit better picture on net exports if people had not turned to the dollar as a safe haven, but this involved many factors other than the financial crisis. Also, the conscious decision of foreign central banks to prop up the dollar to sustain their export markets has to swamp this effect.

I stand by my housing bubble assessment.

Addendum:

Here’s that commercial real estate price index I was looking for. Looks like it might be a good time to start worrying, especially if you’re in the U.K.

Second Addendum:

I would also question the extent to which the further decline in house prices and construction was due to the financial crisis, as claimed by Brad in his post. It is not surprising that coming out of a bubble markets overshoot on the downside. It happened following the stock crash in 2000-2002. There was no financial crisis then. And the further decline in construction is easily explained by the overbuilding of the bubble years and the record vacancy rates. No need to talk about a financial crisis here either.

Note: typo corrected, thanks Marko.

It’s always a great day when I have the opportunity to have a substantive exchange with the incredibly erudite Brad DeLong, especially when I am quite sure that I am right. Brad is convinced that the fiinancial crisis is the evil doer responsible for our prolonged downturn instead of the good old-fashioned housing bubble often featured in these pages. He points to the surge in non-residential investment coming in 2007 and 2008. He argues that this surge, along with a rise in exports, would have offset the fall in residential construction and consumption, had it not been for the financial crisis.

I see a somewhat different picture.

Bubble 6310 image001

Source: Bureau of Economic Analysis.

The difference between my graph and Brad’s is that I have pulled out construction from non-residential investment and shown net exports, rather than just exports. This is helpful because it shows that the surge in non-residential investment was entirely a surge in non-residential construction. This component rose from 2.6 percent of GDP at the start of 2005 to 3.8 percent of GDP in the fourth quarter of 2008. The rest of the non-residential investment component hovered near 9.6 percent over this period. In other words, it was going nowhere.

So what explains this enormous surge (almost a 50 percent increase in own terms) in non-residential construction? It’s called a bubble. It would take me a moment to grab the data, but there was a surge in the price of non-residential properties just as the price of housing was going into reverse. Does this sound too dumb for words? Of course it is, but no one ever said that the folks in the banking system had a clue. We saw massive overbuilding in most areas of non-residential construction in this period. Even seven years later you can walk around the downtown of a relatively prosperous city like Washington and still see vacant retail and office space everywhere. This bubble was destined to burst, with or without a financial crisis.

What about net exports? I actually had some hope for net exports filling the gap, with the assumption that the dollar would drop, increasing the relative competitiveness of U.S. goods and services. There is some story here. The dollar had actually been falling since the beginning of the decade. (The over-valued dollar was an evil legacy of the Clinton years.) But the problem was that there were bubbles elsewhere in the world, most notably Europe. This meant a major export market was not going to be there for us. I don’t see how we can blame the financial crisis for Europe’s housing bubble.

Just to repeat my basic line, if we look at the economy after the financial markets had stabilized (2011 or 2012, pick your year) and ask what component of GDP would be higher if we did not have the financial crisis, it’s hard to see a candidate. Brad’s pick of non-residential investment doesn’t hold water. Perhaps we can claim a bit better picture on net exports if people had not turned to the dollar as a safe haven, but this involved many factors other than the financial crisis. Also, the conscious decision of foreign central banks to prop up the dollar to sustain their export markets has to swamp this effect.

I stand by my housing bubble assessment.

Addendum:

Here’s that commercial real estate price index I was looking for. Looks like it might be a good time to start worrying, especially if you’re in the U.K.

Second Addendum:

I would also question the extent to which the further decline in house prices and construction was due to the financial crisis, as claimed by Brad in his post. It is not surprising that coming out of a bubble markets overshoot on the downside. It happened following the stock crash in 2000-2002. There was no financial crisis then. And the further decline in construction is easily explained by the overbuilding of the bubble years and the record vacancy rates. No need to talk about a financial crisis here either.

Note: typo corrected, thanks Marko.

Krugman and Summers Versus Bernanke on Secular Stagnation

By Dean BakerDean Baker

April 02, 2015

02 Abril 2015

I see that Paul Krugman and Larry Summers are debating Ben Bernanke on the relative importance of weak domestic demand and our trade deficit in explaining shortfalls in demand. I have a busy morning, but let me throw in a quick tidbit and pronounce our former Fed chair the winner.

Suppose that our trade deficit was 1.0 percent of GDP (@$180 billion) instead of 3.0 percent of GDP (@$540 billion). Does anyone doubt that this difference of two percentage points of GDP would make a massive difference in employment and output in the United States? Where I come from it would have the same impact as a $360 billion (@ $4 trillion over a decade) government infrastructure program. That would go far towards getting us to full employment.

I see that Paul Krugman and Larry Summers are debating Ben Bernanke on the relative importance of weak domestic demand and our trade deficit in explaining shortfalls in demand. I have a busy morning, but let me throw in a quick tidbit and pronounce our former Fed chair the winner.

Suppose that our trade deficit was 1.0 percent of GDP (@$180 billion) instead of 3.0 percent of GDP (@$540 billion). Does anyone doubt that this difference of two percentage points of GDP would make a massive difference in employment and output in the United States? Where I come from it would have the same impact as a $360 billion (@ $4 trillion over a decade) government infrastructure program. That would go far towards getting us to full employment.

Postal Banking: Charles Lane Edition

By Dean BakerDean Baker

April 02, 2015

02 Abril 2015

Charles Lane doesn't want the Postal Service to get involved in banking. That much is clear from his column, even if his argument doesn't necessarily support the case. The argument seems mostly that the government can't compete with the dynamic private sector, although he also seems to worry about the opposite: "(Yes, postal banking also undermines check-cashing liquor stores and pawn shops, a desirable goal if you buy into the stereotype that these are unscrupulous exploiters, as opposed to family-run small businesses, that the government would be crushing.)" Hmmm, some of these operations are sizable chains. But yes, some are also family run, like the juice loan racket. Not sure of the point here exactly, but certainly a well-run postal bank would put a lot of sleazy operators out of business.