There is a popular and ungodly silly line about new businesses being responsible for some very high share of new jobs in the U.S. economy. A version appears in this NYT article on the economic ripple effects of student loan debt. It cites a study showing that recent graduates with large amounts of student debt are less likely to start a business, then adds:
“Considering that 60 percent of jobs are created by small business, ‘if you shut down the ability to create new businesses, you’re going to harm the economy,’ Professor Ambrose [one of the authors of the study] said.”
The problem with Professor Ambrose’s comment is that small businesses also account for close to 60 percent of the job loss in the economy. On a gross basis small businesses do create many more jobs than larger firms, but they also are far more likely to go out of business and therefore lose jobs than large firms. On net, firms of all sizes add jobs at approximately the same rate.
This doesn’t mean that we shouldn’t be concerned about student debt restricting young people’s ability to start businesses and in other ways limit their career choices. It does mean that the consequences for the economy may not be as large as implied by this comment.
Note: link fixed.
There is a popular and ungodly silly line about new businesses being responsible for some very high share of new jobs in the U.S. economy. A version appears in this NYT article on the economic ripple effects of student loan debt. It cites a study showing that recent graduates with large amounts of student debt are less likely to start a business, then adds:
“Considering that 60 percent of jobs are created by small business, ‘if you shut down the ability to create new businesses, you’re going to harm the economy,’ Professor Ambrose [one of the authors of the study] said.”
The problem with Professor Ambrose’s comment is that small businesses also account for close to 60 percent of the job loss in the economy. On a gross basis small businesses do create many more jobs than larger firms, but they also are far more likely to go out of business and therefore lose jobs than large firms. On net, firms of all sizes add jobs at approximately the same rate.
This doesn’t mean that we shouldn’t be concerned about student debt restricting young people’s ability to start businesses and in other ways limit their career choices. It does mean that the consequences for the economy may not be as large as implied by this comment.
Note: link fixed.
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The Post ran a piece highlighting research by M.I.T. economist David Autor that purportedly shows the wage premium earned by college grads is the main source of inequality in the economy today.This is presented as a counter to much analysis showing that the income gains of the richest 1 percent has been the major source of inequality. The data presented in the piece do not support Autor’s claim.
In the case of full-time male workers, Autor’s data show that full-time male workers with a college degree have seen an increase in real wages of just 3.0 percent from their peak in 1973 to 2012. This was a period in which productivity almost doubled. Women college grads did considerably better over this period, but even women with college degrees saw essentially no wage gain from 2001 to 2012, a period in which productivity increased by more than 25 percent.
Autor’s data indicate that most college grads have not shared evenly in the economy’s growth over the last four decades. The much smaller segment of the workforce with advanced degrees have done considerably better, but this puts the cutoff between winners and losers at advanced degrees and everyone else, not between college grads at everyone else.
The Post ran a piece highlighting research by M.I.T. economist David Autor that purportedly shows the wage premium earned by college grads is the main source of inequality in the economy today.This is presented as a counter to much analysis showing that the income gains of the richest 1 percent has been the major source of inequality. The data presented in the piece do not support Autor’s claim.
In the case of full-time male workers, Autor’s data show that full-time male workers with a college degree have seen an increase in real wages of just 3.0 percent from their peak in 1973 to 2012. This was a period in which productivity almost doubled. Women college grads did considerably better over this period, but even women with college degrees saw essentially no wage gain from 2001 to 2012, a period in which productivity increased by more than 25 percent.
Autor’s data indicate that most college grads have not shared evenly in the economy’s growth over the last four decades. The much smaller segment of the workforce with advanced degrees have done considerably better, but this puts the cutoff between winners and losers at advanced degrees and everyone else, not between college grads at everyone else.
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The continuing weakness of the housing market is a regular theme of the business media. They seem as eager to display their ignorance now as they were during the housing bubble years.
The Post gave us another item in this series in an AP article on existing home sales in April, which ran at 4.65 million annual rate, according to data from the National Association of Realtors. The fourth paragraph told readers:
“Nearly five years into the recovery from the Great Recession, real estate sales have yet to return to their historic averages.”
If we go back to the pre-bubble years of the mid-1990s, we find that existing home sales averaged just over 3.4 million in the years from 1993-1995. Adjusting this figure upward by 20 percent for population growth would still get is to less than 4.2 million, well below the sales rate reported for April.
New home sales are still running below historic averages, so that would bring the total sales close to their pre-bubble levels but there is not much of a case that they are lower than what should be expected. Furthermore, if we consider the aging of the population, the excuse given by many economists for the drop in labor force participation, we should expect a drop in the ratio of home sales to population.
Older people less frequently buy homes than younger people. It is perhaps an inconvenient truth for economists, but the population that comprises the potential labor force is the same population that comprises the group of potential home buyers.
The continuing weakness of the housing market is a regular theme of the business media. They seem as eager to display their ignorance now as they were during the housing bubble years.
The Post gave us another item in this series in an AP article on existing home sales in April, which ran at 4.65 million annual rate, according to data from the National Association of Realtors. The fourth paragraph told readers:
“Nearly five years into the recovery from the Great Recession, real estate sales have yet to return to their historic averages.”
If we go back to the pre-bubble years of the mid-1990s, we find that existing home sales averaged just over 3.4 million in the years from 1993-1995. Adjusting this figure upward by 20 percent for population growth would still get is to less than 4.2 million, well below the sales rate reported for April.
New home sales are still running below historic averages, so that would bring the total sales close to their pre-bubble levels but there is not much of a case that they are lower than what should be expected. Furthermore, if we consider the aging of the population, the excuse given by many economists for the drop in labor force participation, we should expect a drop in the ratio of home sales to population.
Older people less frequently buy homes than younger people. It is perhaps an inconvenient truth for economists, but the population that comprises the potential labor force is the same population that comprises the group of potential home buyers.
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I’m back (thanks for all the kind comments) and I see I have to correct some seriously misleading commentary from Robert Samuelson earlier in the week. Samuelson concluded a discussion of Timothy Geithner’s new book:
“This is the central lesson of the crisis. Success at stabilizing and stimulating the economy in the short run can destabilize it in the long run. This also happened in the 1960s, when the belief that economists could control the business cycle led to inflation and instability in the 1970s and early 1980s. But the lesson is not acknowledged because its implications are unpopular (an obsession with short-term stability may backfire), and it’s ignored — or even denied — by the post-crisis narratives, including Geithner’s.”
Sorry, this one is not quite right. The pain suffered by people in the 1970s is not in the same ballpark as with the Great Recession. In the 1970s the stock market tanked, but since most people own little or no stock, who gives a damn? The economy generated 19.7 million jobs in the decade, an increase of 27.6 percent. By contrast in the 14 years from January of 2000 to January of 2014 the economy created just 6.5 million jobs, an increase of just 5.0 percent.
Most of this difference is explained by demographics (the baby boomers were entering the labor force in the 1970s, they are starting to leave now), but it was still an impressive feat to accommodate such a large expansion of the labor force in a relatively short period of time. In addition, the economy was hit by two large oil shocks that made the process considerably more difficult.
There was no prolonged period in which the economy was below its potential level of output in the 1970s. In fact, the Congressional Budget Office (CBO) puts the economy as operating above potential output for part of the decade. By contrast, CBO calculates that the economy has been roughly 6 percent below potential GDP for most of the last 5 years (@ $1 trillion a year). This represents a massive amount of lost output.
And, in direct contradiction of Samuelson’s assertion, the failure to deal with the short-term can lead to serious long-term consequences. A recent paper by the Fed calculates that that potential GDP has fallen sharply as a result of the prolonged downturn. This implies that the failure to carry through short-term stabilization can lead to serious long-term consequences.
In short, Samuelson’s central lesson lacks any evidence or logic to support it.
I’m back (thanks for all the kind comments) and I see I have to correct some seriously misleading commentary from Robert Samuelson earlier in the week. Samuelson concluded a discussion of Timothy Geithner’s new book:
“This is the central lesson of the crisis. Success at stabilizing and stimulating the economy in the short run can destabilize it in the long run. This also happened in the 1960s, when the belief that economists could control the business cycle led to inflation and instability in the 1970s and early 1980s. But the lesson is not acknowledged because its implications are unpopular (an obsession with short-term stability may backfire), and it’s ignored — or even denied — by the post-crisis narratives, including Geithner’s.”
Sorry, this one is not quite right. The pain suffered by people in the 1970s is not in the same ballpark as with the Great Recession. In the 1970s the stock market tanked, but since most people own little or no stock, who gives a damn? The economy generated 19.7 million jobs in the decade, an increase of 27.6 percent. By contrast in the 14 years from January of 2000 to January of 2014 the economy created just 6.5 million jobs, an increase of just 5.0 percent.
Most of this difference is explained by demographics (the baby boomers were entering the labor force in the 1970s, they are starting to leave now), but it was still an impressive feat to accommodate such a large expansion of the labor force in a relatively short period of time. In addition, the economy was hit by two large oil shocks that made the process considerably more difficult.
There was no prolonged period in which the economy was below its potential level of output in the 1970s. In fact, the Congressional Budget Office (CBO) puts the economy as operating above potential output for part of the decade. By contrast, CBO calculates that the economy has been roughly 6 percent below potential GDP for most of the last 5 years (@ $1 trillion a year). This represents a massive amount of lost output.
And, in direct contradiction of Samuelson’s assertion, the failure to deal with the short-term can lead to serious long-term consequences. A recent paper by the Fed calculates that that potential GDP has fallen sharply as a result of the prolonged downturn. This implies that the failure to carry through short-term stabilization can lead to serious long-term consequences.
In short, Samuelson’s central lesson lacks any evidence or logic to support it.
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Actually, he probably doesn’t, but that would be the logic of his complaint (taken from Gene Steuerle) that “dead men” have established priorities for federal spending. After all, dead men made the decision to borrow the money that constitutes the debt, which thereby obligates the country to pay back the interest and principal.
But Samuelson’s complaint is not about the interest and principal being paid back to rich people like Peter Peterson, Samuelson is upset about the money being paid out to ordinary workers (mostly retirees) for Social Security, Medicare, and Medicaid.
“In 1990, Social Security, Medicare and Medicaid (health insurance for the poor) totaled 6.7 percent of national income, or gross domestic product. By 2010, they were 10 percent of GDP. Using plausible assumptions, the Congressional Budget Office estimates this spending (including the Affordable Care Act) at 15.2 percent of GDP by 2038.”
There are several immediate problems with Samuelson’s complaint.
First, if we are counting the spending on the Affordable Care Act, it is hardly a story of “dead men.” The folks who made this into law are almost all still alive, and the person who pushed it through Congress, Nancy Pelosi, is not a man. In other words, this spending reflects priorities of people who very recently represented public opinion.
The second problem is that including Social Security in the arithmetic simply confuses the issue. Almost all of the rise in spending over this period is due to rising payments for health care programs, not Social Security. In 1990, the government was spending 4.3 percent of GDP on Social Security (it had spent as much as 4.9 percent in the early 1980s). It is projected to spend 6.2 percentage points of GDP on Social Security in 2038.
Furthermore, taxes were raised explicitly to pay for this increase. While Samuelson may think it’s reasonable to tax people for Social Security and then use the money to pay for the military or other purposes, most of the public does not share his perspective. According to Steuerle, people will be paying slightly more money in Social Security taxes than they receive in benefits, so there doesn’t seem much basis for his complaint about “giveaway politics.”
The real story here is health care and there is a real giveaway, but not to the folks in Samuelson’s rifle scope. The United States pays more than twice as much per person for its health care than people in other wealthy countries. It has nothing to show for this additional spending in outcomes. If we spent the same amount per person as Germany, Canada, the U.K., or any other wealthy country, the government would be looking at large budget surpluses for the rest of the century.
The additional costs are due to fact that our doctors get paid twice as much as doctors elsewhere, we pay twice as much for drugs and medical equipment, and we have an insurance system that drains away almost 20 percent of spending on needless administrative costs. Unfortunately these groups are so powerful that the excessive costs they impose on the government and the country rarely even come up in public debate. (Increasing trade in physician services is not even on the agenda in current trade agreements and a main goal is increasing the cost of prescription drugs.)
In short, there is a very simple story here that Samuelson is grossly misrepresenting by including Social Security in the discussion. We are being badly ripped off by our health care system. And, the beneficiaries are so powerful they mostly prevent the ripoff from even being discussed. Instead, we get people like Samuelson who want us to beat up seniors.
Actually, he probably doesn’t, but that would be the logic of his complaint (taken from Gene Steuerle) that “dead men” have established priorities for federal spending. After all, dead men made the decision to borrow the money that constitutes the debt, which thereby obligates the country to pay back the interest and principal.
But Samuelson’s complaint is not about the interest and principal being paid back to rich people like Peter Peterson, Samuelson is upset about the money being paid out to ordinary workers (mostly retirees) for Social Security, Medicare, and Medicaid.
“In 1990, Social Security, Medicare and Medicaid (health insurance for the poor) totaled 6.7 percent of national income, or gross domestic product. By 2010, they were 10 percent of GDP. Using plausible assumptions, the Congressional Budget Office estimates this spending (including the Affordable Care Act) at 15.2 percent of GDP by 2038.”
There are several immediate problems with Samuelson’s complaint.
First, if we are counting the spending on the Affordable Care Act, it is hardly a story of “dead men.” The folks who made this into law are almost all still alive, and the person who pushed it through Congress, Nancy Pelosi, is not a man. In other words, this spending reflects priorities of people who very recently represented public opinion.
The second problem is that including Social Security in the arithmetic simply confuses the issue. Almost all of the rise in spending over this period is due to rising payments for health care programs, not Social Security. In 1990, the government was spending 4.3 percent of GDP on Social Security (it had spent as much as 4.9 percent in the early 1980s). It is projected to spend 6.2 percentage points of GDP on Social Security in 2038.
Furthermore, taxes were raised explicitly to pay for this increase. While Samuelson may think it’s reasonable to tax people for Social Security and then use the money to pay for the military or other purposes, most of the public does not share his perspective. According to Steuerle, people will be paying slightly more money in Social Security taxes than they receive in benefits, so there doesn’t seem much basis for his complaint about “giveaway politics.”
The real story here is health care and there is a real giveaway, but not to the folks in Samuelson’s rifle scope. The United States pays more than twice as much per person for its health care than people in other wealthy countries. It has nothing to show for this additional spending in outcomes. If we spent the same amount per person as Germany, Canada, the U.K., or any other wealthy country, the government would be looking at large budget surpluses for the rest of the century.
The additional costs are due to fact that our doctors get paid twice as much as doctors elsewhere, we pay twice as much for drugs and medical equipment, and we have an insurance system that drains away almost 20 percent of spending on needless administrative costs. Unfortunately these groups are so powerful that the excessive costs they impose on the government and the country rarely even come up in public debate. (Increasing trade in physician services is not even on the agenda in current trade agreements and a main goal is increasing the cost of prescription drugs.)
In short, there is a very simple story here that Samuelson is grossly misrepresenting by including Social Security in the discussion. We are being badly ripped off by our health care system. And, the beneficiaries are so powerful they mostly prevent the ripoff from even being discussed. Instead, we get people like Samuelson who want us to beat up seniors.
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Some folks have pointed out to me that the housing cost calculator that David Leonhardt has in the Upshot section of the NYT looks a lot like the one that CEPR developed years ago to try to warn people about the housing bubble. Yes, it does, and if memory serves me correctly David had asked me about it when he originally designed another version a few years back. Anyhow, glad to see the idea has caught on.
Some folks have pointed out to me that the housing cost calculator that David Leonhardt has in the Upshot section of the NYT looks a lot like the one that CEPR developed years ago to try to warn people about the housing bubble. Yes, it does, and if memory serves me correctly David had asked me about it when he originally designed another version a few years back. Anyhow, glad to see the idea has caught on.
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I am out of here. I’ll be back on Thursday, May 22. Remember, until then don’t believe anything you read in the newspaper.
I am out of here. I’ll be back on Thursday, May 22. Remember, until then don’t believe anything you read in the newspaper.
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A front page Washington Post article fundamentally misrepresented the main impact of the Johnson-Crapo bill that would privatize Fannie Mae and Freddie Mac. The article told readers that the bill:
“would dismantle the companies in a bid to shift the risks of mortgage lending from the taxpayers to the private sector.”
Actually, the government would still be on the hook for 90 percent of the value of privately issued mortgage backed securities (MBS). As a result of the perverse incentives created by the system envisioned under the bill, this would likely mean more risk to the taxpayers rather than less. Private investment banks would stand to profit from securitizing bad mortgages. Unlike the years of the housing bubble, when investors stood to lose 100 percent of what they paid for a MBS, investment banks could tell their customers that in a worst case scenario they would only lose 10 percent of their investment with the government picking up the rest of the tab.
For this reason it is hard to see Johnson-Crapo as a “bid to shift the risks of mortgage lending” to the private sector. The most obvious way to accomplish such a shift would be to simply get the government out of the business.
The most obvious effect of Johnson-Crapo is to shift the profits that Fannie and Freddie are now earning to the financial industry. Presumably the bill’s proponents recognize this fact.
A front page Washington Post article fundamentally misrepresented the main impact of the Johnson-Crapo bill that would privatize Fannie Mae and Freddie Mac. The article told readers that the bill:
“would dismantle the companies in a bid to shift the risks of mortgage lending from the taxpayers to the private sector.”
Actually, the government would still be on the hook for 90 percent of the value of privately issued mortgage backed securities (MBS). As a result of the perverse incentives created by the system envisioned under the bill, this would likely mean more risk to the taxpayers rather than less. Private investment banks would stand to profit from securitizing bad mortgages. Unlike the years of the housing bubble, when investors stood to lose 100 percent of what they paid for a MBS, investment banks could tell their customers that in a worst case scenario they would only lose 10 percent of their investment with the government picking up the rest of the tab.
For this reason it is hard to see Johnson-Crapo as a “bid to shift the risks of mortgage lending” to the private sector. The most obvious way to accomplish such a shift would be to simply get the government out of the business.
The most obvious effect of Johnson-Crapo is to shift the profits that Fannie and Freddie are now earning to the financial industry. Presumably the bill’s proponents recognize this fact.
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In a mostly useful article on the problems facing the euro zone economy, Neil Irwin again raises the prospect that a shock could turn the inflation rate negative.
“The lowflation, as people have taken to calling it, is particularly dangerous in that it could easily turn into outright deflation, or falling prices, should one nasty shock come along. For example, if tension between Ukraine and Russia boils over into a full-scale war, it could easily tip the European economy back into recession and send prices tumbling.”
It’s not clear what he is talking about here. If a war between Russia and Ukraine threw the European economy into a recession it would be just as bad news for the countries of the region if the inflation rate were now 2.0 percent instead of 0.5 percent. The problem would be a new recession in an area that is already suffering from very high unemployment. The decline in the inflation rate from a low positive to a low negative is a non-issue.
The inflation rate is already lower than would be desired, any further fall makes matters worse, but crossing zero means nothing except for numerologists. Accelerating deflation could be a problem, but we have seen exactly zero instances of this phenomenon in the last 70 years in wealthy countries.
It is worth noting that many economists if they are honest in their beliefs (I know, absurd proposition) must already think that the euro zone inflation rate is negative. The Boskin Commission, which was warmly received by the leading lights in the economics profession, claimed that the consumer price index in the United States overstated inflation by 1.1 percentage points annually. Most of the problems they identified are still present and likely to be worse with European price measurements than in the United States.
In a mostly useful article on the problems facing the euro zone economy, Neil Irwin again raises the prospect that a shock could turn the inflation rate negative.
“The lowflation, as people have taken to calling it, is particularly dangerous in that it could easily turn into outright deflation, or falling prices, should one nasty shock come along. For example, if tension between Ukraine and Russia boils over into a full-scale war, it could easily tip the European economy back into recession and send prices tumbling.”
It’s not clear what he is talking about here. If a war between Russia and Ukraine threw the European economy into a recession it would be just as bad news for the countries of the region if the inflation rate were now 2.0 percent instead of 0.5 percent. The problem would be a new recession in an area that is already suffering from very high unemployment. The decline in the inflation rate from a low positive to a low negative is a non-issue.
The inflation rate is already lower than would be desired, any further fall makes matters worse, but crossing zero means nothing except for numerologists. Accelerating deflation could be a problem, but we have seen exactly zero instances of this phenomenon in the last 70 years in wealthy countries.
It is worth noting that many economists if they are honest in their beliefs (I know, absurd proposition) must already think that the euro zone inflation rate is negative. The Boskin Commission, which was warmly received by the leading lights in the economics profession, claimed that the consumer price index in the United States overstated inflation by 1.1 percentage points annually. Most of the problems they identified are still present and likely to be worse with European price measurements than in the United States.
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In its coverage of Fed Chair Janet Yellen’s testimony before the Joint Economic Committee, the NYT told readers:
“Ms. Yellen, in a similar exchange with Representative Richard Hanna, a New York Republican, strongly defended the Fed’s commitment to control inflation. She said the high inflation of the 1970s had been a formative experience for the entirety of the Fed’s leadership, and they were determined to keep inflation below the 2 percent annual pace the Fed has described as its target.”
This statement implies that the Yellen is treating 2.0 inflation as a ceiling rather than an average. If so, this would be a marked departure from past statements of Fed policy and imply a considerably more hawkish stance of the Fed toward inflation. With inflation running below 2.0 percent for the last five years the Fed could allow the inflation rate to rise above 2.0 percent for a period of time and still maintain a 2.0 percent average.
If the Fed now views 2.0 percent inflation as a ceiling, it means that it would have to act earlier and more strongly to slow economic growth and prevent the unemployment rate from falling. The implication would be that many more workers would remain unemployed or underemployed and that tens of millions would have less bargaining power to boost their wages. This Fed policy would be helping to foster the upward redistribution of income we have been seeing over the last three decades.
In its coverage of Fed Chair Janet Yellen’s testimony before the Joint Economic Committee, the NYT told readers:
“Ms. Yellen, in a similar exchange with Representative Richard Hanna, a New York Republican, strongly defended the Fed’s commitment to control inflation. She said the high inflation of the 1970s had been a formative experience for the entirety of the Fed’s leadership, and they were determined to keep inflation below the 2 percent annual pace the Fed has described as its target.”
This statement implies that the Yellen is treating 2.0 inflation as a ceiling rather than an average. If so, this would be a marked departure from past statements of Fed policy and imply a considerably more hawkish stance of the Fed toward inflation. With inflation running below 2.0 percent for the last five years the Fed could allow the inflation rate to rise above 2.0 percent for a period of time and still maintain a 2.0 percent average.
If the Fed now views 2.0 percent inflation as a ceiling, it means that it would have to act earlier and more strongly to slow economic growth and prevent the unemployment rate from falling. The implication would be that many more workers would remain unemployed or underemployed and that tens of millions would have less bargaining power to boost their wages. This Fed policy would be helping to foster the upward redistribution of income we have been seeing over the last three decades.
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