Frank Bruni Wants Lower Quality Public School Teachers

August 19, 2014

19 Agosto 2014

That’s what can be inferred from his column calling for an end to tenure for public school teachers. Job security is part of the pay package for public school teachers. If they can expect less job security, it effectively amounts to a cut in pay. This would be expected to make teaching a less attractive career path compared with the alternative choices.

As a practical matter, there are few (if any) school districts that do not have provisions that allow even tenured teachers to be fired if they are not competent. This may not happen in many cases because their principals are too lazy to document the incompetence, or the higher ups in the school district don’t provide them the resources they would need to ensure that classes are being well-taught. These latter problems will not be addressed by the ending of tenure.

That’s what can be inferred from his column calling for an end to tenure for public school teachers. Job security is part of the pay package for public school teachers. If they can expect less job security, it effectively amounts to a cut in pay. This would be expected to make teaching a less attractive career path compared with the alternative choices.

As a practical matter, there are few (if any) school districts that do not have provisions that allow even tenured teachers to be fired if they are not competent. This may not happen in many cases because their principals are too lazy to document the incompetence, or the higher ups in the school district don’t provide them the resources they would need to ensure that classes are being well-taught. These latter problems will not be addressed by the ending of tenure.

Job Polarization Was a Story of the 1990s, Not the 2000s

By Dean BakerDean Baker

August 18, 2014

18 Agosto 2014

The Washington Post had an article reporting on the more rapid job growth in higher paying sectors of the economy in the last six years. At one point the piece tells readers:

“Even before the recession began, the economy was experiencing what academics call job polarization: growth at the high and low ends of the pay scale, but not much movement in the middle. Two major factors drove this shift: new technologies that replaced some skilled workers and increased competition from the international labor market.”

Actually this is not true. Since 2000 both high and middle wage occupations were declining as a share of total employment. Only low-paying occupations saw an increase in their share of total employment.

The Washington Post had an article reporting on the more rapid job growth in higher paying sectors of the economy in the last six years. At one point the piece tells readers:

“Even before the recession began, the economy was experiencing what academics call job polarization: growth at the high and low ends of the pay scale, but not much movement in the middle. Two major factors drove this shift: new technologies that replaced some skilled workers and increased competition from the international labor market.”

Actually this is not true. Since 2000 both high and middle wage occupations were declining as a share of total employment. Only low-paying occupations saw an increase in their share of total employment.

Stock Returns: Between Shiller and DeLong

By Dean BakerDean Baker

August 18, 2014

18 Agosto 2014

Robert Shiller had a piece in the Sunday NYT noting that the S&P 500 was unusually high relative to his measure of trailing earnings. He calculated a ratio above 25, far above the historic average of 15. Shiller said that in the past, each time this ratio crossed 25 the market took a plunge shortly thereafter. He concludes his piece by seeing it as a mystery that the market remains as high as it does. Brad DeLong picks up on Shiller's analysis and points out that in most cases in the past where Shiller's ratio had exceeded 25, people who held onto their stock over the next decade would still have seen a positive real return. He notes the examples in the 1960s when investors would have seen a negative ten-year return, even though Shiller's ratio was below the critical 25 level. He therefore concludes there is no issue. I would argue there is an issue, although not quite as much as Shiller suggests. To get at the problem, we have to recognize that stock returns, at least over a long period, are not just random numbers. Both Shiller and DeLong treat this as a question of guessing whether an egg will turn into a lizard or chicken based on the distribution of past hatchings that we have witnessed. That would be a reasonable strategy if that is the only information we have. But if we saw that one of the eggs was laid by a hen, then we may want to up our probability estimate that it will hatch into a chicken. In the case of stock returns we can generate projections based on projections of GDP growth, profit growth, and future price to earnings ratios. For example, we may note that the ratio of stock prices to after-tax corporate profits for the economy as a whole was 22.3 at the end of 2013. (This takes the value of stock from the Financial Accounts of the United States, Table L.213, lines 2 plus 4 for market valuation. After-tax corporate profits are from the National Income and Product Accounts, Table 1.10, Line 17). This means that earnings are roughly 4.5 percent of the share price. If companies pay out 70 percent of their earnings as dividends or share buybacks (roughly the average), this translates into a 3.1 percent real return in the current year.

Washington Post Reports Medicare Spent 0.14 Percent of Its Budget of Motorized Wheel Chairs, Much of Which Was Fraudulent

By Dean BakerDean Baker

August 17, 2014

17 Agosto 2014

The Washington Post had a major front page story reporting on scammers pushing unneeded motorized wheelchairs to seniors. Medicare pays roughly $5,000 for each chair, which allows for a large profit to suppliers as well as payments to intermediaries who would push the chairs to people who did not need or want a motorized wheelchair.

The piece is a useful exposure of a major scam operation, however it never puts the cost of the scam in a perspective that would be meaningful to most readers. At one point it tells readers that Medicare spent a Really Big Number ($8.2 billion) on these motorized wheelchairs since 1999. It would have been helpful to inform readers that this amounted to 0.14 percent of the $5.8 trillion that Medicare paid out over this period.

Of course not all of the payments were made for unnecessary wheel chairs. If 60-70 percent of the wheel chairs were not needed, then fraudulent sales would come to roughly 0.1 percent of Medicare spending over this period.

This is hardly a trivial sum, but by failing put the numbers in context readers may wrongly be lead to believe that the Medicare program is grossly inefficient because of such scams. In fact, because the program has much lower administrative costs than the private sector (@ 2 percent for Medicare compared to 15-20 percent for private insurers), the country is still saving an enormous amount of money because the government is providing Medicare rather than private insurers.

If administrative costs were at the level of the insurance industry, Medicare would have cost between $600 billion and $900 billion more since 1999. It is also worth noting that private insurers are also often victims of scams.

Note: The figure for administrative costs for Medicare refers to the traditional fee for service Medicare program. Parts C and D, which are administered by private insurers, have considerably higher costs.

The Washington Post had a major front page story reporting on scammers pushing unneeded motorized wheelchairs to seniors. Medicare pays roughly $5,000 for each chair, which allows for a large profit to suppliers as well as payments to intermediaries who would push the chairs to people who did not need or want a motorized wheelchair.

The piece is a useful exposure of a major scam operation, however it never puts the cost of the scam in a perspective that would be meaningful to most readers. At one point it tells readers that Medicare spent a Really Big Number ($8.2 billion) on these motorized wheelchairs since 1999. It would have been helpful to inform readers that this amounted to 0.14 percent of the $5.8 trillion that Medicare paid out over this period.

Of course not all of the payments were made for unnecessary wheel chairs. If 60-70 percent of the wheel chairs were not needed, then fraudulent sales would come to roughly 0.1 percent of Medicare spending over this period.

This is hardly a trivial sum, but by failing put the numbers in context readers may wrongly be lead to believe that the Medicare program is grossly inefficient because of such scams. In fact, because the program has much lower administrative costs than the private sector (@ 2 percent for Medicare compared to 15-20 percent for private insurers), the country is still saving an enormous amount of money because the government is providing Medicare rather than private insurers.

If administrative costs were at the level of the insurance industry, Medicare would have cost between $600 billion and $900 billion more since 1999. It is also worth noting that private insurers are also often victims of scams.

Note: The figure for administrative costs for Medicare refers to the traditional fee for service Medicare program. Parts C and D, which are administered by private insurers, have considerably higher costs.

The Skills Gap is Most Evident in Retail Trade and Restaurants

By Dean BakerDean Baker

August 16, 2014

16 Agosto 2014

Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reported openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent.

While Norris doesn’t make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don’t have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.

If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables.

Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reported openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent.

While Norris doesn’t make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don’t have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.

If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables.

A Rapidly Aging Population Is Not a Depression Problem

By Dean BakerDean Baker

August 15, 2014

15 Agosto 2014

Matt O’Brien had a good piece in Wonkblog pointing out that the current downturn in the euro zone has been worse for these countries than the Great Depression. However it does get part of the story wrong.

At one point it outlines the troubles of the region:

“The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a “lowflationary” trap that makes it hard to grow, and is even harder to escape from. That’s what happened to Japan in the 1990s, and now, 20 years later, its nominal GDP is actually smaller than it was then.”

The aging of the population, and therefore a slow-growing or declining labor force, does not belong on the list of problems here. What matters for well-being is per capita growth. (That is not the only thing that matters, but insofar as GDP matters it is GDP per capita.) If the population is growing very slowly or even shrinking slowly, it will likely be associated with lower overall growth, but not necessarily with lower per capita GDP growth.

Germany has managed to get its unemployment rate down to 5.1 percent, compared to 7.8 percent before the downturn, in spite of having considerably lower growth than the United States over this period. Its employment rate for prime age workers (ages 25-54) has risen by 3.0 percentage points, compared to a drop of 3.5 percentage points in the United States.

As a result of its slow population growth, few in Germany would see its slow economic growth as being a problem. In fact, most view the economy as being relatively prosperous right now. This is one of the reasons that the country is reluctant to support measures that would help its neighbors, since Germany is not really sharing in their pain at the moment. Similiarly, Japan’s slow population growth meant that most people in the country were not suffering in the way that its weak GDP growth may have suggested.

Matt O’Brien had a good piece in Wonkblog pointing out that the current downturn in the euro zone has been worse for these countries than the Great Depression. However it does get part of the story wrong.

At one point it outlines the troubles of the region:

“The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a “lowflationary” trap that makes it hard to grow, and is even harder to escape from. That’s what happened to Japan in the 1990s, and now, 20 years later, its nominal GDP is actually smaller than it was then.”

The aging of the population, and therefore a slow-growing or declining labor force, does not belong on the list of problems here. What matters for well-being is per capita growth. (That is not the only thing that matters, but insofar as GDP matters it is GDP per capita.) If the population is growing very slowly or even shrinking slowly, it will likely be associated with lower overall growth, but not necessarily with lower per capita GDP growth.

Germany has managed to get its unemployment rate down to 5.1 percent, compared to 7.8 percent before the downturn, in spite of having considerably lower growth than the United States over this period. Its employment rate for prime age workers (ages 25-54) has risen by 3.0 percentage points, compared to a drop of 3.5 percentage points in the United States.

As a result of its slow population growth, few in Germany would see its slow economic growth as being a problem. In fact, most view the economy as being relatively prosperous right now. This is one of the reasons that the country is reluctant to support measures that would help its neighbors, since Germany is not really sharing in their pain at the moment. Similiarly, Japan’s slow population growth meant that most people in the country were not suffering in the way that its weak GDP growth may have suggested.

Martin Feldstein and Robert Rubin Discover Bubbles

By Dean BakerDean Baker

August 15, 2014

15 Agosto 2014

In one of the more remarkable shows of chutzpah in modern economic policy, Martin Feldstein and Robert Rubin penned a joint oped in the Wall Street Journal warning that the Fed needs to take seriously the risk of asset bubbles. The basis for the chutzpah is that this column is appearing in the summer of 2014 instead of the summer of 2004, when it could have saved the United States and the world from an enormous amount of suffering.

Had these men written a similar column in 2004 warning about the housing bubble (as some of us were desperately trying to do at the time) it undoubtedly would have received enormous attention in both the policy and financial community. Both men were considered the pillars of economic wisdom for their respective parties. Feldstein served as head of the Council of Economic Advisers under President Reagan and had trained most of the other leading lights of conservative economics. Rubin has served as Treasury Secretary under President Clinton and had advanced the careers of figures like Larry Summers and Timothy Geithner.

Unfortunately, instead of warning of the bubble, they were profiting from it. Rubin was a top executive at Citigroup, which was one of the biggest actors in the securitization of subprime mortgages. Feldstein was on the board of AIG, which was issuing credit default swaps on mortgage backed securities with a nominal value well into the hundreds of billions.

For what its worth, their current warnings are misplaced. The Fed has to concentrate on trying to promote growth and getting people back to work. The risk from inflated asset prices that they identify are primarily a risk that some hedge funds and other investors may take a bath when asset prices (like junk bonds) move to levels that are more consistent with the fundamentals.

Unlike the housing bubble, these inflated asset prices are not driving the economy. This means that the economic repercussions of a decline in the price of assets like junk bonds will be largely limited to the losses of the people who invested in them. That is the way a market economy works. People make bets and some lose, so what?

It is also worth noting that Federal Reserve Chair Janet Yellen is far ahead of Feldstein and Rubin on the problem of bubbles. Last month she warned of the over-valuation of some assets in her congressional testimony. Since then the price of these assets, notably junk bonds, has fallen, reducing the potential risk they pose to the financial sector. It makes far more sense to deal with out of line asset prices by trying to use targeted actions to bring them back into line than to throw millions of people out of work, and reduce the bargaining power of tens of millions more, by raising interest rates.

In one of the more remarkable shows of chutzpah in modern economic policy, Martin Feldstein and Robert Rubin penned a joint oped in the Wall Street Journal warning that the Fed needs to take seriously the risk of asset bubbles. The basis for the chutzpah is that this column is appearing in the summer of 2014 instead of the summer of 2004, when it could have saved the United States and the world from an enormous amount of suffering.

Had these men written a similar column in 2004 warning about the housing bubble (as some of us were desperately trying to do at the time) it undoubtedly would have received enormous attention in both the policy and financial community. Both men were considered the pillars of economic wisdom for their respective parties. Feldstein served as head of the Council of Economic Advisers under President Reagan and had trained most of the other leading lights of conservative economics. Rubin has served as Treasury Secretary under President Clinton and had advanced the careers of figures like Larry Summers and Timothy Geithner.

Unfortunately, instead of warning of the bubble, they were profiting from it. Rubin was a top executive at Citigroup, which was one of the biggest actors in the securitization of subprime mortgages. Feldstein was on the board of AIG, which was issuing credit default swaps on mortgage backed securities with a nominal value well into the hundreds of billions.

For what its worth, their current warnings are misplaced. The Fed has to concentrate on trying to promote growth and getting people back to work. The risk from inflated asset prices that they identify are primarily a risk that some hedge funds and other investors may take a bath when asset prices (like junk bonds) move to levels that are more consistent with the fundamentals.

Unlike the housing bubble, these inflated asset prices are not driving the economy. This means that the economic repercussions of a decline in the price of assets like junk bonds will be largely limited to the losses of the people who invested in them. That is the way a market economy works. People make bets and some lose, so what?

It is also worth noting that Federal Reserve Chair Janet Yellen is far ahead of Feldstein and Rubin on the problem of bubbles. Last month she warned of the over-valuation of some assets in her congressional testimony. Since then the price of these assets, notably junk bonds, has fallen, reducing the potential risk they pose to the financial sector. It makes far more sense to deal with out of line asset prices by trying to use targeted actions to bring them back into line than to throw millions of people out of work, and reduce the bargaining power of tens of millions more, by raising interest rates.

Robert Samuelson Reports on Incompetent Business Owners

By Dean BakerDean Baker

August 14, 2014

14 Agosto 2014

Every now and then someone inadvertently says something that is truer than intended. Such is the case with a quote that appears in Robert Samuelson’s column today.

The piece is devoted to bemoaning the reduction in entrepreneurship which Samuelson somehow thinks is tied to slower job creation. (This relationship is pretty damn weak, but no reason to waste time here.) At one point Samuelson list five possible reasons for the decline in entrepreneurship. Number one is:

“Schools — K-12 plus colleges and universities — aren’t turning out enough skilled workers. ‘I have jobs,’ said one Texas entrepreneur. ‘I just don’t have the talent to fill them.'”

This entrepreneur is likely closer to the mark than he or she realized. The way you find skilled workers is by offering higher wages than your competitors. There are undoubtedly people in the country who have the skills that this entrepreneur needs. If he can’t get them to work for him then obviously he is not offering a high enough wage, or as he said, “I just don’t have the talent to fill them.”

Of course it is possible that this entrepreneur could not afford to offer a high enough wage to attract the skilled workers, but then he really doesn’t have the jobs. This would be like someone complaining that they couldn’t get a doctor to treat them, without noting the fact that they were only willing to pay $30 an hour. The problem in that case is that the person is unwilling to pay the going wage for doctors.

This story is about as simple as economics gets. If there were a shortage of skilled workers then their wages would be rising. As it is, there is no major group of workers who are seeing rapidly rising wages, therefore it is not plausible that there are shortages of skilled workers.

The problem is likely just what Samuelson quotes the entrepreneur as saying, he lacks the talent to properly run a business.

(Btw, if Samuelson is really looking for causes for the decline of entrepreneurship, the collapse of anti-trust enforcement should probably be on his list.)