A NYT article on the dwindling size of the middle class noted that seniors are more likely to be middle class than in the past. It told readers:
“Today’s seniors have better retirement benefits than previous generations. Also, older Americans are increasingly working past traditional retirement age.”
In fact, seniors on average almost certainly have worse retirement benefits. The increase in the normal retirement age from 65 to 66 is equiavlent to a 6 percent cut in Social Security benefits. In addition, changes in the methodology used for calculating the consumer price index reduced the size of the annual cost-of-living (COLA) adjustment by 0.3-0.5 percentage points compared to the increases in the early and mid-1990s. (This means that for the same actual rate of inflation, seniors would see a COLA that is 0.3-0.5 percentage points less than what they would have received in the early and mid-1990s.)
In addition, today’s seniors are less likely to have a defined benefit pension, as these are dwindling rapidly. Defined contribution pensions have not come close to making up the loss. Seniors also are far less likely to have retiree health insurance to cover non-Medicare expenses. Medicare has also become less generous in many respects, although the addition of the Medicare drug benefits (Part D) has been a big help to seniors.
The main reason seniors have more income is that they are working later in life. This is a positive insofar as it is the result of the voluntary decision of people in good health who enjoy their work. However in many cases, this is almost certainly not true. Many older workers are staying in the workforce because they have no other way to make ends meet.
A NYT article on the dwindling size of the middle class noted that seniors are more likely to be middle class than in the past. It told readers:
“Today’s seniors have better retirement benefits than previous generations. Also, older Americans are increasingly working past traditional retirement age.”
In fact, seniors on average almost certainly have worse retirement benefits. The increase in the normal retirement age from 65 to 66 is equiavlent to a 6 percent cut in Social Security benefits. In addition, changes in the methodology used for calculating the consumer price index reduced the size of the annual cost-of-living (COLA) adjustment by 0.3-0.5 percentage points compared to the increases in the early and mid-1990s. (This means that for the same actual rate of inflation, seniors would see a COLA that is 0.3-0.5 percentage points less than what they would have received in the early and mid-1990s.)
In addition, today’s seniors are less likely to have a defined benefit pension, as these are dwindling rapidly. Defined contribution pensions have not come close to making up the loss. Seniors also are far less likely to have retiree health insurance to cover non-Medicare expenses. Medicare has also become less generous in many respects, although the addition of the Medicare drug benefits (Part D) has been a big help to seniors.
The main reason seniors have more income is that they are working later in life. This is a positive insofar as it is the result of the voluntary decision of people in good health who enjoy their work. However in many cases, this is almost certainly not true. Many older workers are staying in the workforce because they have no other way to make ends meet.
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The Washington Post had a major business section piece on the “winners and losers of a stronger dollar” which never explicitly discussed its impact on the trade deficit. This is truly remarkable since the $500 billion plus annual trade deficit (@3 percent of GDP) is the main cause of the economy’s weakness and continued high unemployment.
The logic of this is straightforward. The deficit is money that is income that is generated in the United States but is creating demand overseas. It has the same impact on the U.S. economy as if consumers decided to stuff $500 billion every year under their mattresses instead of spending it.
This is the main cause of the “secular stagnation” that has been widely discussed, even in the pages of the Washington Post. There is no easy mechanism for replacing this $500 billion in lost annual demand. We could do it with larger budget deficits, but deficit hawks like the folks at the Post, get hysterical at such suggestions.
In the last decade we replaced the demand lost from the trade deficit with the demand from a housing bubble, which generated record levels of construction spending (measured as a share of GDP) and an unprecedented consumption boom. In the late 1990s we filled the hole with the demand created by a stock bubble, which spurred investment and a slightly smaller consumption boom. However without another bubble, there is no plausible mechanism for filling this hole in demand.
The rising dollar will make things worse since the value of the dollar is the main determinant of the trade deficit. A rise in the dollar will make U.S. goods and services more expensive to foreigners, meaning they will buy less of our exports. It makes foreign goods and services cheaper for people living in the United States, causing us to buy more imports. The net effect will be a larger trade deficit and a loss of jobs.
The piece also makes a common mistake by implying that it matters that oil is generally priced in dollars:
“Oil prices are falling everywhere, but because the commodity is priced in dollars, American drivers are seeing a bigger discount than drivers in other countries.”
Actually, the story would be exactly the same if oil were priced in euros or yen and we saw a similar run-up in the dollar against the value of other currencies. The fact that the price of oil is generally quoted in dollars is of no consequence.
The Washington Post had a major business section piece on the “winners and losers of a stronger dollar” which never explicitly discussed its impact on the trade deficit. This is truly remarkable since the $500 billion plus annual trade deficit (@3 percent of GDP) is the main cause of the economy’s weakness and continued high unemployment.
The logic of this is straightforward. The deficit is money that is income that is generated in the United States but is creating demand overseas. It has the same impact on the U.S. economy as if consumers decided to stuff $500 billion every year under their mattresses instead of spending it.
This is the main cause of the “secular stagnation” that has been widely discussed, even in the pages of the Washington Post. There is no easy mechanism for replacing this $500 billion in lost annual demand. We could do it with larger budget deficits, but deficit hawks like the folks at the Post, get hysterical at such suggestions.
In the last decade we replaced the demand lost from the trade deficit with the demand from a housing bubble, which generated record levels of construction spending (measured as a share of GDP) and an unprecedented consumption boom. In the late 1990s we filled the hole with the demand created by a stock bubble, which spurred investment and a slightly smaller consumption boom. However without another bubble, there is no plausible mechanism for filling this hole in demand.
The rising dollar will make things worse since the value of the dollar is the main determinant of the trade deficit. A rise in the dollar will make U.S. goods and services more expensive to foreigners, meaning they will buy less of our exports. It makes foreign goods and services cheaper for people living in the United States, causing us to buy more imports. The net effect will be a larger trade deficit and a loss of jobs.
The piece also makes a common mistake by implying that it matters that oil is generally priced in dollars:
“Oil prices are falling everywhere, but because the commodity is priced in dollars, American drivers are seeing a bigger discount than drivers in other countries.”
Actually, the story would be exactly the same if oil were priced in euros or yen and we saw a similar run-up in the dollar against the value of other currencies. The fact that the price of oil is generally quoted in dollars is of no consequence.
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I have had several readers send me a blogpost from Scott Sumner saying that the Keynesians have been dishonest in not owning up to the fact that they were wrong in predicting a recession in 2013. The argument is that supposedly us Keynesian types all said that the budget cuts and the ending of the payroll tax cut at the start of 2013 would throw the economy back into recession. (Jeffrey Sachs has made similar claims.)
That isn’t my memory of what I said at the time, but hey we can check these things. I looked at a few of my columns from the fall of 2012 and they mostly ran in the opposite direction. The Washington insider types were hyping the threat of the “fiscal cliff” in the hope of pressuring President Obama and the Democrats to make big concessions on Social Security and Medicare. They were saying that even the risk of falling off the cliff could have a big impact on growth in the third and fourth quarter of 2012.
My columns and blogposts (e.g. here, here, here, here, and here) were largely devoted to saying this was crap. I certainly agreed that budget cutbacks and the end of the payroll tax cuts would dampen growth, but the number was between 0.5-0.8 percentage points. This left us far from recession. (All my columns and blogposts from this time are at the CEPR website, so folks can verify that I didn’t do any cherry picking here.)
I know Paul Krugman is the real target here, not me, but we’ve been seeing the economy pretty much the same way since the beginning of the recession. If he had a different story at the time I think I would remember it. But his columns and blogposts are archived too. I really don’t think anyone will find him predicting a recession in 2013, although I’m sure he also said that budget cuts and tax increases would dampen growth.
Anyhow, I’m generally happy to stand behind the things I’ve said, and when they are proven wrong I hope I own up to it. But I don’t see any apologies in order. No recession happened in 2013 and none was predicted here.
Addendum
I see that Alex Tabarrok has found a quote from me from May of 2013 in which argued that the economy would not grow fast enough to make a significant dent in the unemployment rate in the near future:
“It is absurd to think that the economy has enough momentum to make any substantial dent in unemployment in the foreseeable future.”
Since that time, the unemployment rate has fallen by roughly 2.0 percentage points. That would certainly qualify as a “substantial dent.” Interestingly, growth over this period averaged just 2.8 percent. With potential growth generally put between 2.2-2.4 percent (potential growth is the rate needed to keep pace with the growth of the labor force) this difference of between 0.4-0.6 percentage points would ordinarily not be enough to make a substantial dent in the unemployment rate. In fact, if we look at the employment to population ratio (EPOP), the percentage of the population with jobs, it rose by just 0.6 percentage points over this period. At that rate, it would take approximately a decade to get back to the pre-recession EPOPs.
What I had not anticipated is the large number of people who would give up looking for work and drop out of the labor force over the next year and a half. The labor force participation rate fell from 63.4 percent in April of 2013 (the most recent data available when I wrote the column) to 62.7 percent in December of 2014. This drop corresponds to roughly 1.7 million people leaving the labor force. In past recoveries the labor force participation rate rose as more people got jobs.
Anyhow, I will own up to having gotten this one badly wrong. I did not expect people to be leaving the labor force as the economy recovered. I expected that participation rates would follow past trends. I still expect that this will be the case going forward, so I do think both the EPOP and the labor force participation will rise in the next couple of years, assuming that the economy continues on its modest growth path.
I have had several readers send me a blogpost from Scott Sumner saying that the Keynesians have been dishonest in not owning up to the fact that they were wrong in predicting a recession in 2013. The argument is that supposedly us Keynesian types all said that the budget cuts and the ending of the payroll tax cut at the start of 2013 would throw the economy back into recession. (Jeffrey Sachs has made similar claims.)
That isn’t my memory of what I said at the time, but hey we can check these things. I looked at a few of my columns from the fall of 2012 and they mostly ran in the opposite direction. The Washington insider types were hyping the threat of the “fiscal cliff” in the hope of pressuring President Obama and the Democrats to make big concessions on Social Security and Medicare. They were saying that even the risk of falling off the cliff could have a big impact on growth in the third and fourth quarter of 2012.
My columns and blogposts (e.g. here, here, here, here, and here) were largely devoted to saying this was crap. I certainly agreed that budget cutbacks and the end of the payroll tax cuts would dampen growth, but the number was between 0.5-0.8 percentage points. This left us far from recession. (All my columns and blogposts from this time are at the CEPR website, so folks can verify that I didn’t do any cherry picking here.)
I know Paul Krugman is the real target here, not me, but we’ve been seeing the economy pretty much the same way since the beginning of the recession. If he had a different story at the time I think I would remember it. But his columns and blogposts are archived too. I really don’t think anyone will find him predicting a recession in 2013, although I’m sure he also said that budget cuts and tax increases would dampen growth.
Anyhow, I’m generally happy to stand behind the things I’ve said, and when they are proven wrong I hope I own up to it. But I don’t see any apologies in order. No recession happened in 2013 and none was predicted here.
Addendum
I see that Alex Tabarrok has found a quote from me from May of 2013 in which argued that the economy would not grow fast enough to make a significant dent in the unemployment rate in the near future:
“It is absurd to think that the economy has enough momentum to make any substantial dent in unemployment in the foreseeable future.”
Since that time, the unemployment rate has fallen by roughly 2.0 percentage points. That would certainly qualify as a “substantial dent.” Interestingly, growth over this period averaged just 2.8 percent. With potential growth generally put between 2.2-2.4 percent (potential growth is the rate needed to keep pace with the growth of the labor force) this difference of between 0.4-0.6 percentage points would ordinarily not be enough to make a substantial dent in the unemployment rate. In fact, if we look at the employment to population ratio (EPOP), the percentage of the population with jobs, it rose by just 0.6 percentage points over this period. At that rate, it would take approximately a decade to get back to the pre-recession EPOPs.
What I had not anticipated is the large number of people who would give up looking for work and drop out of the labor force over the next year and a half. The labor force participation rate fell from 63.4 percent in April of 2013 (the most recent data available when I wrote the column) to 62.7 percent in December of 2014. This drop corresponds to roughly 1.7 million people leaving the labor force. In past recoveries the labor force participation rate rose as more people got jobs.
Anyhow, I will own up to having gotten this one badly wrong. I did not expect people to be leaving the labor force as the economy recovered. I expected that participation rates would follow past trends. I still expect that this will be the case going forward, so I do think both the EPOP and the labor force participation will rise in the next couple of years, assuming that the economy continues on its modest growth path.
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Paul Krugman joined in ridiculing billionaire Jeff Greene, a person who richly deserves to be ridiculed. (He wants people to get used to lower living standards.) However people are wrongly attacking Greene when they complain about his betting against subprime mortgage backed securities.
Subprime mortgage backed securities were the fuel for the housing bubble that entrapped tens of millions of people, laid the basis for the economic collapse, and ruined millions of lives. The securities were in fact bad. Greene betting against them made that clear in the markets somewhat sooner than would have otherwise been the case, bringing down the bubble earlier and more rapidly.
This is good. It meant that fewer people were caught up in it than if the bubble had continued to grow for another six months or year. It would have saved people an enormous amount of pain if there had been lots of Jeff Greenes betting against subprime mortgage backed securities in 2003-2004. They could have prevented the housing bubble from ever growing to such dangerous proportions. Certainly his actions were much more commendable in this one that the profiteers and enablers like Robert Rubin, Alan Greenspan, and Timothy Geithner.
Just to be clear, Greene was acting out of greed, not a desire to help the economy and society. But this is a case where greed was good. Of course he is still a wretched person, flying across the Atlantic in his private jet with two nannies to tell the rest of us that we will have to get used to a lower standard of living.
Note: Name corrected — thanks John Wright.
Paul Krugman joined in ridiculing billionaire Jeff Greene, a person who richly deserves to be ridiculed. (He wants people to get used to lower living standards.) However people are wrongly attacking Greene when they complain about his betting against subprime mortgage backed securities.
Subprime mortgage backed securities were the fuel for the housing bubble that entrapped tens of millions of people, laid the basis for the economic collapse, and ruined millions of lives. The securities were in fact bad. Greene betting against them made that clear in the markets somewhat sooner than would have otherwise been the case, bringing down the bubble earlier and more rapidly.
This is good. It meant that fewer people were caught up in it than if the bubble had continued to grow for another six months or year. It would have saved people an enormous amount of pain if there had been lots of Jeff Greenes betting against subprime mortgage backed securities in 2003-2004. They could have prevented the housing bubble from ever growing to such dangerous proportions. Certainly his actions were much more commendable in this one that the profiteers and enablers like Robert Rubin, Alan Greenspan, and Timothy Geithner.
Just to be clear, Greene was acting out of greed, not a desire to help the economy and society. But this is a case where greed was good. Of course he is still a wretched person, flying across the Atlantic in his private jet with two nannies to tell the rest of us that we will have to get used to a lower standard of living.
Note: Name corrected — thanks John Wright.
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By almost every measure there continues to be a great deal of slack in the labor market. Unemployment rates remain high even for college graduates and even college graduates with degrees in the STEM fields have since little increase in wages in recent years.
Given this backdrop, it is not clear what information the NYT thinks it is giving readers when it reports :
“His company [a cable start-up based in Denver] has created about 60 jobs in the past year, but Mr. Binder said that vacancies often showed the structural problems in the economy. His business sometimes struggles to find qualified candidates for technologically demanding positions, but it is deluged with 700 applicants when it needs to hire an accountant.”
The normal way in which businesses attract qualified candidates is by offering higher pay. Clearly these candidates exist, they just might work for Mr. Binder’s competitors. Insofar as Mr. Binder’s difficulties in getting qualified candidates for technologically demanding positions is evidence of a structural problem, the problem is that we have people in top positions in businesses who apparently do not understand how the labor market works.
By almost every measure there continues to be a great deal of slack in the labor market. Unemployment rates remain high even for college graduates and even college graduates with degrees in the STEM fields have since little increase in wages in recent years.
Given this backdrop, it is not clear what information the NYT thinks it is giving readers when it reports :
“His company [a cable start-up based in Denver] has created about 60 jobs in the past year, but Mr. Binder said that vacancies often showed the structural problems in the economy. His business sometimes struggles to find qualified candidates for technologically demanding positions, but it is deluged with 700 applicants when it needs to hire an accountant.”
The normal way in which businesses attract qualified candidates is by offering higher pay. Clearly these candidates exist, they just might work for Mr. Binder’s competitors. Insofar as Mr. Binder’s difficulties in getting qualified candidates for technologically demanding positions is evidence of a structural problem, the problem is that we have people in top positions in businesses who apparently do not understand how the labor market works.
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Other news sources just told us what the Republicans said in reaction to President Obama’s State of the Union Address, National Public Radio told us what they really thought. Its top of the hours news summary on Morning Edition (sorry, no link) told listeners that Republicans “see it as more tax and spend.”
Other news sources just told us what the Republicans said in reaction to President Obama’s State of the Union Address, National Public Radio told us what they really thought. Its top of the hours news summary on Morning Edition (sorry, no link) told listeners that Republicans “see it as more tax and spend.”
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I thought that reporters had finally learned that monthly wage data are erratic and best ignored, but noooooooo, they apparently still believe that they give us real information about the rate of growth of wages. The immediate cause for complaint is a Morning Edition State of the Union fact check segment in which Scott Horsley told listeners that wages rose in November, but then fell in December.
As I tried to explain after the big wage jump in November was reported, the monthly changes are dominated by noise in the data. The 0.4 percent nominal wage rise reported in the month followed a month where the wage reportedly rose by just 0.1 percent and a prior month where it did not rise at all. Employer pay patterns in the economy as a whole do not change that much from month to month, it should have been obvious this was just noise in the data.
The wage drop reported in December should have further confirmed this. Horsley tried to explain the drop as a composition story, that we hired more people in lower paying industries. This is hard for two reasons. First, we added 48,000 jobs in the high-paying construction industry in December, compared to just 20,000 in November. We added only 7,700 jobs in the low-paying retail sector in December, compared to 55,700 jobs in November. In other words, the mix story seems to go the wrong way.
The other reason is the mix from month to month can only make a marginal difference in average wages. To see this, let’s take an extreme case. The gap in pay between the construction sector and the overall average is just over $2 an hour. By contrast, pay in the leisure and hospitality sector is about $10 an hour less than the average. Suppose that we saw 100,000 new jobs in construction and no other jobs in any other sector. This is equal to approximately 0.07 percent of total employment. This means this jump in construction employment would raise wages by less that 0.2 cents an hour. By contrast, the surge in restaurant employment would lower the average hourly wage by 1.0 cent.
In other words, even these extraordinary shifts in composition would have no measurable effect on the pace of wage growth. Anyone looking to explain month to month changes in wages by job mix is looking in the wrong place. The only responsible way to report on the wage data is to take averages over longer periods, the monthly changes simply don’t mean anything.
I thought that reporters had finally learned that monthly wage data are erratic and best ignored, but noooooooo, they apparently still believe that they give us real information about the rate of growth of wages. The immediate cause for complaint is a Morning Edition State of the Union fact check segment in which Scott Horsley told listeners that wages rose in November, but then fell in December.
As I tried to explain after the big wage jump in November was reported, the monthly changes are dominated by noise in the data. The 0.4 percent nominal wage rise reported in the month followed a month where the wage reportedly rose by just 0.1 percent and a prior month where it did not rise at all. Employer pay patterns in the economy as a whole do not change that much from month to month, it should have been obvious this was just noise in the data.
The wage drop reported in December should have further confirmed this. Horsley tried to explain the drop as a composition story, that we hired more people in lower paying industries. This is hard for two reasons. First, we added 48,000 jobs in the high-paying construction industry in December, compared to just 20,000 in November. We added only 7,700 jobs in the low-paying retail sector in December, compared to 55,700 jobs in November. In other words, the mix story seems to go the wrong way.
The other reason is the mix from month to month can only make a marginal difference in average wages. To see this, let’s take an extreme case. The gap in pay between the construction sector and the overall average is just over $2 an hour. By contrast, pay in the leisure and hospitality sector is about $10 an hour less than the average. Suppose that we saw 100,000 new jobs in construction and no other jobs in any other sector. This is equal to approximately 0.07 percent of total employment. This means this jump in construction employment would raise wages by less that 0.2 cents an hour. By contrast, the surge in restaurant employment would lower the average hourly wage by 1.0 cent.
In other words, even these extraordinary shifts in composition would have no measurable effect on the pace of wage growth. Anyone looking to explain month to month changes in wages by job mix is looking in the wrong place. The only responsible way to report on the wage data is to take averages over longer periods, the monthly changes simply don’t mean anything.
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