Sometimes a question can be really annoying. Try asking a homeless person why he doesn’t have a nice apartment or Al Gore why he lost the election in 2000. David Leonhardt got in the game of really annoying questions when he speculated as to why wages aren’t rising this week. Is it really necessary to ask?
The economy is still way below potential GDP. If Leonhardt ever looked at the data from the Bureau of Labor Statistics or read his own paper, he would know that the employment to population ratio is still close to 4.0 percentage points below its pre-recession level. Even if we restrict the question to prime age workers (people between the ages of 25-54), to eliminate the issue of retirement, the drop is still 3.0 percentage points. The share of the workforce involuntarily working part-time is still more than 50 percent above its pre-recession level. In other words, there is still a large amount of slack in the labor market.
When there is slack in the labor market most workers are not able to get wage gains because they lack bargaining power. That was true in the 1980s, it was true in the 1990s, and surprise surprise, it’s still true in this decade. That was the main point of my book with Jared Bernstein.
With the answer right in front of him, like the French colonel in Casablanca, Leonhardt rushes to round up the usual suspects, naturally seizing on education. Unfortunately, the data refuse to cooperate with him. The unemployment rate for college grads is still almost 50 percent higher than its pre-recession level. The wages for recent college grads has fallen sharply since 2000. Believers in supply and demand would know that more college grads should put even further downward pressure on the wages of college grads. How does this help the wage story?
The obvious issue is that we need more demand in the economy. That can be most easily accomplished with more government spending. We could also get the trade deficit down by lowering the value of the dollar, making our goods more competitive internationally. Alternatively, we could go the path of Germany and try to reduce labor supply with work sharing, paid family and parental leave, and paid vacations.
But the real story here is about as simple as it gets. (Yeah, it might be complicated for economists who couldn’t see an $8 trillion housing bubble.) We can understand the need to create more jobs, but creating confusion about simple economic points is not a good make-work project.
Sometimes a question can be really annoying. Try asking a homeless person why he doesn’t have a nice apartment or Al Gore why he lost the election in 2000. David Leonhardt got in the game of really annoying questions when he speculated as to why wages aren’t rising this week. Is it really necessary to ask?
The economy is still way below potential GDP. If Leonhardt ever looked at the data from the Bureau of Labor Statistics or read his own paper, he would know that the employment to population ratio is still close to 4.0 percentage points below its pre-recession level. Even if we restrict the question to prime age workers (people between the ages of 25-54), to eliminate the issue of retirement, the drop is still 3.0 percentage points. The share of the workforce involuntarily working part-time is still more than 50 percent above its pre-recession level. In other words, there is still a large amount of slack in the labor market.
When there is slack in the labor market most workers are not able to get wage gains because they lack bargaining power. That was true in the 1980s, it was true in the 1990s, and surprise surprise, it’s still true in this decade. That was the main point of my book with Jared Bernstein.
With the answer right in front of him, like the French colonel in Casablanca, Leonhardt rushes to round up the usual suspects, naturally seizing on education. Unfortunately, the data refuse to cooperate with him. The unemployment rate for college grads is still almost 50 percent higher than its pre-recession level. The wages for recent college grads has fallen sharply since 2000. Believers in supply and demand would know that more college grads should put even further downward pressure on the wages of college grads. How does this help the wage story?
The obvious issue is that we need more demand in the economy. That can be most easily accomplished with more government spending. We could also get the trade deficit down by lowering the value of the dollar, making our goods more competitive internationally. Alternatively, we could go the path of Germany and try to reduce labor supply with work sharing, paid family and parental leave, and paid vacations.
But the real story here is about as simple as it gets. (Yeah, it might be complicated for economists who couldn’t see an $8 trillion housing bubble.) We can understand the need to create more jobs, but creating confusion about simple economic points is not a good make-work project.
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Yes folks, they pay people to ask such questions. Steven Mufson uses a Wonkblog piece to speculate on why it is that even though we have been in a recovery for more than five years people are still not happy about the economy. He tells us that President Obama has the same problem as President Bush (I), who got trashed on the economy even though revised data show it had been growing rapidly at the start of 1992.
While Mufson seeks out expert analysis to try to resolve this paradox, he might try looking at the data for a moment. No one sees the economy. They don’t what the rate of growth is unless they read about it in the newspaper. What they do know is whether they have a job, whether their job is secure, and their pay is rising.
If you ask about these questions the only mystery is why Mufson is wasting our time. In 1992 the employment to population ratio was still 1.5 percentage points below its pre-recession level. That would translate into roughly 3.2 million fewer people having jobs in today’s labor market. The current employment to population ratio is down by close to 4.0 percentage points from pre-recession levels, translating into more than 9.0 million fewer people with jobs. (Some of this is due to retirement of baby boomers.) Wages for most workers have been stagnant or declining in the last five years as was the case in 1992.
So the real question here is why any serious people would have any question about why the public is sour on the economy. People care about their living standards and security, they don’t care about GDP numbers produced by the Bureau of Economic Analysis.
Yes folks, they pay people to ask such questions. Steven Mufson uses a Wonkblog piece to speculate on why it is that even though we have been in a recovery for more than five years people are still not happy about the economy. He tells us that President Obama has the same problem as President Bush (I), who got trashed on the economy even though revised data show it had been growing rapidly at the start of 1992.
While Mufson seeks out expert analysis to try to resolve this paradox, he might try looking at the data for a moment. No one sees the economy. They don’t what the rate of growth is unless they read about it in the newspaper. What they do know is whether they have a job, whether their job is secure, and their pay is rising.
If you ask about these questions the only mystery is why Mufson is wasting our time. In 1992 the employment to population ratio was still 1.5 percentage points below its pre-recession level. That would translate into roughly 3.2 million fewer people having jobs in today’s labor market. The current employment to population ratio is down by close to 4.0 percentage points from pre-recession levels, translating into more than 9.0 million fewer people with jobs. (Some of this is due to retirement of baby boomers.) Wages for most workers have been stagnant or declining in the last five years as was the case in 1992.
So the real question here is why any serious people would have any question about why the public is sour on the economy. People care about their living standards and security, they don’t care about GDP numbers produced by the Bureau of Economic Analysis.
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Neil Irwin has a piece today on the causes and consequences of the recent run-up in the dollar. He argues that the rise is largely due to the fact that the U.S. economy seems to be doing better in recent months than most other major economies, especially the euro zone and Japan. In those cases, the central banks are looking to ease up further in the foreseeable future, while the Fed is debating when to tighten.
This is certainly a plausible explanation for most of the rise (doesn’t work well for the British pound), but the consequences are not as benign as Irwin’s piece might lead readers to believe. The main consequence of a higher dollar is a larger trade deficit and therefore slower job growth and fewer jobs.
To get an idea of the magnitude of this effect, last month Goldman Sachs estimated that the 3.0 percent rise in the dollar we had seen by that point (it’s a bit more now) will shave 0.1 to 0.15 percentage points off GDP growth in each of the next two years (sorry, no link). That translates into lost jobs. If the economy is 0.25 percent smaller in 2016 due to the higher dollar that would imply a loss of roughly 350,000 jobs.
In considering whether this job loss is a big deal, remember that the country has less than 80,000 people employed in coal mining. There have been frequent news stories warning of the dire job impact of measures to reduce greenhouse gas emissions, which would lead to substantial job loss in the coal industry. Just as a matter of arithmetic, if the coal industry were completely wiped out by environmental measures, the job loss in the coal industry would be less than one fourth as much as the job loss implied by Goldman’s estimate of the impact of the rise in the dollar.
In fairness to Irwin, he does note there will be winners and losers:
“If you frequently fill up your car with imported oil or drink French wine, it’s good news. If you are Boeing competing against Airbus, or General Electric competing against Siemens, or Cadillac competing with Mercedes-Benz, it is terrible news.”
We might add to his list of winners people who frequently take vacations in Europe or other foreign countries. A high percentage of the people involved in crafting economic policy (e.g. congressional and administration staffers, reporters, economists) fit into this category. It is probably also worth mentioning that the financial industry generally likes a stronger dollar since it means less risk of inflation and their money goes farther overseas. And, companies like Walmart that bet big on low cost imports are also happy with a higher dollar.
For these reasons, the high dollar may not be portrayed as a matter of concern in the media, even if the impact on jobs is far larger than other issues to which they have devoted considerable attention.
Neil Irwin has a piece today on the causes and consequences of the recent run-up in the dollar. He argues that the rise is largely due to the fact that the U.S. economy seems to be doing better in recent months than most other major economies, especially the euro zone and Japan. In those cases, the central banks are looking to ease up further in the foreseeable future, while the Fed is debating when to tighten.
This is certainly a plausible explanation for most of the rise (doesn’t work well for the British pound), but the consequences are not as benign as Irwin’s piece might lead readers to believe. The main consequence of a higher dollar is a larger trade deficit and therefore slower job growth and fewer jobs.
To get an idea of the magnitude of this effect, last month Goldman Sachs estimated that the 3.0 percent rise in the dollar we had seen by that point (it’s a bit more now) will shave 0.1 to 0.15 percentage points off GDP growth in each of the next two years (sorry, no link). That translates into lost jobs. If the economy is 0.25 percent smaller in 2016 due to the higher dollar that would imply a loss of roughly 350,000 jobs.
In considering whether this job loss is a big deal, remember that the country has less than 80,000 people employed in coal mining. There have been frequent news stories warning of the dire job impact of measures to reduce greenhouse gas emissions, which would lead to substantial job loss in the coal industry. Just as a matter of arithmetic, if the coal industry were completely wiped out by environmental measures, the job loss in the coal industry would be less than one fourth as much as the job loss implied by Goldman’s estimate of the impact of the rise in the dollar.
In fairness to Irwin, he does note there will be winners and losers:
“If you frequently fill up your car with imported oil or drink French wine, it’s good news. If you are Boeing competing against Airbus, or General Electric competing against Siemens, or Cadillac competing with Mercedes-Benz, it is terrible news.”
We might add to his list of winners people who frequently take vacations in Europe or other foreign countries. A high percentage of the people involved in crafting economic policy (e.g. congressional and administration staffers, reporters, economists) fit into this category. It is probably also worth mentioning that the financial industry generally likes a stronger dollar since it means less risk of inflation and their money goes farther overseas. And, companies like Walmart that bet big on low cost imports are also happy with a higher dollar.
For these reasons, the high dollar may not be portrayed as a matter of concern in the media, even if the impact on jobs is far larger than other issues to which they have devoted considerable attention.
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At some point when we are growing up most of us discover that people don’t always tell the truth. Apparently, some folks at the NYT have not learned this lesson.
In an article reporting on Walmart’s decision to stop providing health insurance for 30,000 part-time workers, the NYT told readers:
“In scaling back coverage for part-time employees, Walmart joins retailers including Home Depot, Target and Trader Joe’s, which have dropped benefits in response to the Affordable Care Act, the health care overhaul enacted by the Obama administration.”
Actually, the NYT doesn’t know that the Affordable Care Act (ACA) is the reason these retailers cut their health care coverage. Retailers have been cutting health care coverage, along with wages and other benefits, for more than a quarter century. While the ACA may have been a factor in these recent benefit cuts, it is entirely possible that these stores would have cut health coverage even if the ACA had never passed. That would be the case even if the companies may have told the NYT that the ACA was the reason they were ending coverage.
Addendum:
I should mention that in standard economic theory, payments for health care are seen as coming out of wages. This means that if Walmart is cutting its health care because workers can now get access to insurance through Medicaid or the exchanges, we should expect to see a roughly equal increase in their wages. On the other hand, if Walmart is just cutting benefits with no increase in wages, this is in effect just a cut in pay. Since the piece makes no reference to any planned pay increases, it sounds like the latter.
At some point when we are growing up most of us discover that people don’t always tell the truth. Apparently, some folks at the NYT have not learned this lesson.
In an article reporting on Walmart’s decision to stop providing health insurance for 30,000 part-time workers, the NYT told readers:
“In scaling back coverage for part-time employees, Walmart joins retailers including Home Depot, Target and Trader Joe’s, which have dropped benefits in response to the Affordable Care Act, the health care overhaul enacted by the Obama administration.”
Actually, the NYT doesn’t know that the Affordable Care Act (ACA) is the reason these retailers cut their health care coverage. Retailers have been cutting health care coverage, along with wages and other benefits, for more than a quarter century. While the ACA may have been a factor in these recent benefit cuts, it is entirely possible that these stores would have cut health coverage even if the ACA had never passed. That would be the case even if the companies may have told the NYT that the ACA was the reason they were ending coverage.
Addendum:
I should mention that in standard economic theory, payments for health care are seen as coming out of wages. This means that if Walmart is cutting its health care because workers can now get access to insurance through Medicaid or the exchanges, we should expect to see a roughly equal increase in their wages. On the other hand, if Walmart is just cutting benefits with no increase in wages, this is in effect just a cut in pay. Since the piece makes no reference to any planned pay increases, it sounds like the latter.
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That’s the story that we may hear based on new data on job openings and hires. The data showed a rise in the number of job openings in August, coupled with a fall in the number of hires.
This might seem to fit the skills mismatch story that many folks are pushing. The idea is that the jobs are out there, but unemployed workers just don’t have the necessary skills to fill them. If that’s the case, then we apparently need more people with the skills to work as retail clerks and table servers.
The gap in retail between openings and hires increased by 123,000 last month, as hiring fell by 83,000, in spite of a 40,000 increase in job openings. Job openings in accommodation and food services increased by 73,000 while hiring fell by 5,000, adding 78,000 to the gap. (There was also a sharp fall in hiring in construction in August, but this just partially reversed an extraordinary rise reported in July.)
Anyhow, if you want to believe the skills mismatch story, you have to believe that the mismatch is most serious in sectors that we don’t typically think require many skills.
That’s the story that we may hear based on new data on job openings and hires. The data showed a rise in the number of job openings in August, coupled with a fall in the number of hires.
This might seem to fit the skills mismatch story that many folks are pushing. The idea is that the jobs are out there, but unemployed workers just don’t have the necessary skills to fill them. If that’s the case, then we apparently need more people with the skills to work as retail clerks and table servers.
The gap in retail between openings and hires increased by 123,000 last month, as hiring fell by 83,000, in spite of a 40,000 increase in job openings. Job openings in accommodation and food services increased by 73,000 while hiring fell by 5,000, adding 78,000 to the gap. (There was also a sharp fall in hiring in construction in August, but this just partially reversed an extraordinary rise reported in July.)
Anyhow, if you want to believe the skills mismatch story, you have to believe that the mismatch is most serious in sectors that we don’t typically think require many skills.
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The Wall Street Journal ran a short piece headlined, “Dudley [N.Y. Federal Reserve Bank President William Dudley] elevates the strong dollar in the Fed’s policy outlook.” The point is supposed to be that the rise of the dollar in recent weeks will both put downward pressure on inflation and increase the U.S. trade deficit, as U.S. goods become less competitive. Unfortunately, the piece couldn’t quite keep the story straight. The second paragraph told readers:
“First, Mr. Dudley has elevated the strength of the dollar and soft global growth as factors affecting the Fed’s policy thinking. He said the weak dollar puts downward pressure on U.S. inflation and dims U.S. near-term export prospects, factors that keep the Fed patient about raising rates even as the job market improves (emphasis added). It’s unusual for a senior Fed official to speak so directly about the impact of the currency on his thinking, in part because the currency is supposed to be the domain of the U.S. Treasury.”
Yes, it is unusual for a Fed official to talk so openly about the impact of the value of the dollar on the economy, which is why it is important to get the story right. Obviously this was just a typo, but it is an extremely unfortunate one.
Note: I see that the WSJ has corrected the typo.
The Wall Street Journal ran a short piece headlined, “Dudley [N.Y. Federal Reserve Bank President William Dudley] elevates the strong dollar in the Fed’s policy outlook.” The point is supposed to be that the rise of the dollar in recent weeks will both put downward pressure on inflation and increase the U.S. trade deficit, as U.S. goods become less competitive. Unfortunately, the piece couldn’t quite keep the story straight. The second paragraph told readers:
“First, Mr. Dudley has elevated the strength of the dollar and soft global growth as factors affecting the Fed’s policy thinking. He said the weak dollar puts downward pressure on U.S. inflation and dims U.S. near-term export prospects, factors that keep the Fed patient about raising rates even as the job market improves (emphasis added). It’s unusual for a senior Fed official to speak so directly about the impact of the currency on his thinking, in part because the currency is supposed to be the domain of the U.S. Treasury.”
Yes, it is unusual for a Fed official to talk so openly about the impact of the value of the dollar on the economy, which is why it is important to get the story right. Obviously this was just a typo, but it is an extremely unfortunate one.
Note: I see that the WSJ has corrected the typo.
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That would be the logic of his Wonkblog column arguing that specialty drugs are worth the cost. The basic point is that some of these specialty drugs constitute radical breakthroughs that substantially extend or improve the quality of life. The $84,000 Hepatitis C drug Sovaldi is the case in point. After all, isn’t it worth a great deal of money to save a life?
By this same logic when the firefighter shows up at our burning house with our family and dogs inside we would gladly pay her millions of dollars if we had the money or insurance that covered the cost. Certainly saving their lives would be worth the cost.
Of course we don’t typically pay firefighters millions of dollars a year. Rather than negotiating a payment at the point where our house is burning down and our families’ lives are at stake we pay them a salary. Saving the lives of our family members is part of their jobs. We don’t hand over our life savings when they show up at the door, they have already been paid.
If we had a little clear thinking in policy circles it would be the same story with prescription drugs. It doesn’t cost Gilead Sciences (the patent holder for Sovaldi) $84,000 to manufacture each patient’s dosage. Based on the price of generics elsewhere, it probably only costs about 1 percent of this amount. Almost all of this $84,000 price tag is ostensibly due to Gilead Sciences need to recoup research costs, which it can do because the government issued it a patent monopoly. (This means competitors get arrested if they try to produce the drug without Gilead Sciences’ permission.)
Financing drug research with patent monopolies is equivalent to arranging terms to pay firefighters when they show up at our burning house, except it makes less sense. Unlike the case of the burning house, which we can usually see pretty clearly, patients don’t really know how effective the drugs are that the pharmaceutical companies try to sell us. After all, they are the ones who did the research. The have to show results to the Food and Drug Administration to get approval, but what they disclose to the public is up to them. And when you can make $83,000 on every sale ($84,000 minus $1,000 for production costs) there is a substantial incentive not to disclose information that may raise questions about your drug’s safety and effectiveness. And, if you don’t think drug companies would conceal information, then you probably have not been alive very long.
We would be stuck if patent monopolies were the only way to finance research, but fortunately they are not. There are many other ways to support research funding, most obviously through public funding, like the $30 billion that goes to the National Institutes of Health (NIH) every year. There is no reason in principle that the public money used to support research could not be doubled or tripled. The research could even be done by the same drug companies who do research now. The difference is that they would be paid upfront. In this situation all their findings would be fully available to the public and all patents would be placed in the public domain. Then we could all buy generic Sovaldi at $1000 a dosage and we wouldn’t have to waste so much time debating the value of a human life.
The drug industry will of course fight this change to the death. They will pay billions to politicians and advocates to argue that we could never have successful research without patents. After all, if government bureaucrats touch the money then it is worthless (except for the $30 billion that goes to NIH, which they always lobby to increase).
Anyhow, we all recognize the power of the pharmaceutical industry and the corruption of the political system. But folks should know that the problem of high-priced specialty drugs is a result of this corruption, not some inherent paradox of modern life.
That would be the logic of his Wonkblog column arguing that specialty drugs are worth the cost. The basic point is that some of these specialty drugs constitute radical breakthroughs that substantially extend or improve the quality of life. The $84,000 Hepatitis C drug Sovaldi is the case in point. After all, isn’t it worth a great deal of money to save a life?
By this same logic when the firefighter shows up at our burning house with our family and dogs inside we would gladly pay her millions of dollars if we had the money or insurance that covered the cost. Certainly saving their lives would be worth the cost.
Of course we don’t typically pay firefighters millions of dollars a year. Rather than negotiating a payment at the point where our house is burning down and our families’ lives are at stake we pay them a salary. Saving the lives of our family members is part of their jobs. We don’t hand over our life savings when they show up at the door, they have already been paid.
If we had a little clear thinking in policy circles it would be the same story with prescription drugs. It doesn’t cost Gilead Sciences (the patent holder for Sovaldi) $84,000 to manufacture each patient’s dosage. Based on the price of generics elsewhere, it probably only costs about 1 percent of this amount. Almost all of this $84,000 price tag is ostensibly due to Gilead Sciences need to recoup research costs, which it can do because the government issued it a patent monopoly. (This means competitors get arrested if they try to produce the drug without Gilead Sciences’ permission.)
Financing drug research with patent monopolies is equivalent to arranging terms to pay firefighters when they show up at our burning house, except it makes less sense. Unlike the case of the burning house, which we can usually see pretty clearly, patients don’t really know how effective the drugs are that the pharmaceutical companies try to sell us. After all, they are the ones who did the research. The have to show results to the Food and Drug Administration to get approval, but what they disclose to the public is up to them. And when you can make $83,000 on every sale ($84,000 minus $1,000 for production costs) there is a substantial incentive not to disclose information that may raise questions about your drug’s safety and effectiveness. And, if you don’t think drug companies would conceal information, then you probably have not been alive very long.
We would be stuck if patent monopolies were the only way to finance research, but fortunately they are not. There are many other ways to support research funding, most obviously through public funding, like the $30 billion that goes to the National Institutes of Health (NIH) every year. There is no reason in principle that the public money used to support research could not be doubled or tripled. The research could even be done by the same drug companies who do research now. The difference is that they would be paid upfront. In this situation all their findings would be fully available to the public and all patents would be placed in the public domain. Then we could all buy generic Sovaldi at $1000 a dosage and we wouldn’t have to waste so much time debating the value of a human life.
The drug industry will of course fight this change to the death. They will pay billions to politicians and advocates to argue that we could never have successful research without patents. After all, if government bureaucrats touch the money then it is worthless (except for the $30 billion that goes to NIH, which they always lobby to increase).
Anyhow, we all recognize the power of the pharmaceutical industry and the corruption of the political system. But folks should know that the problem of high-priced specialty drugs is a result of this corruption, not some inherent paradox of modern life.
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