Trade Deficits and the Dollar

May 14, 2013

14 Mayo 2013

In prior posts I have often referred to the run-up in the dollar engineered by the Clinton-Rubin-Summers team in the 1990s as being the root of all evils. The point is that their over-valued dollar policy led to a large trade deficit. The only way the demand lost as a result of the trade deficit (people spending their money overseas rather than here) could be offset was with asset bubbles. To fill this demand gap, the Clinton crew gave us the stock bubble in the 1990s and the Bush team gave us the housing bubble in the last decade. In both cases the bubbles crashed with disastrous consequences, the latter more than the former. (It took us almost 4 years to replace the jobs lost in the 2001 recession, so that downturn was not trivial either.) Anyhow, my take away from this story is that, using the advanced economics from Econ 101, we need to get the dollar down. I have made this point in the past and readers have often commented that trade does not appear to be responding as would be predicted from a falling dollar. I would argue otherwise. The graph below shows the non-oil trade deficit measured as a share of GDP against the real value of the dollar. Source: Bureau of Economic Analysis and the Federal Reserve Board

Corporate Boards Are Still Failing

By Dean BakerDean Baker

May 12, 2013

12 Mayo 2013

The median pay for a member of the board of a Fortune 500 company is almost $240,000 a year. This typically involves 4-8 meetings a year. One of the top priorities of the board is supposed to be ensuring that top management doesn’t rip off the company. They have not been doing a very good job as Gretchen Morgenson points out in her column today.

That raises the question of what exactly they get all this money for? Director Watch will be coming soon to a website near you.

The median pay for a member of the board of a Fortune 500 company is almost $240,000 a year. This typically involves 4-8 meetings a year. One of the top priorities of the board is supposed to be ensuring that top management doesn’t rip off the company. They have not been doing a very good job as Gretchen Morgenson points out in her column today.

That raises the question of what exactly they get all this money for? Director Watch will be coming soon to a website near you.

Low Unemployment in Germany: The Story Is Not GDP Growth

By Dean BakerDean Baker

May 11, 2013

11 Mayo 2013

Floyd Norris has a good piece today comparing trends in unemployment rates across countries in the downturn. He notes that Germany alone has seen a drop in its unemployment rate since the downturn began. While he notes that Germany has pursued work sharing policies that have encouraged employers to keep workers on the job working shorter hours, readers may not appreciate the full importance of this policy.

Growth in Germany and the United States have been virtually identical since the beginning of the downturn. While Germany has a large balance of trade surplus, in contrast to the deficit in the United States, its consumption growth has been weaker.

gdp-germany-us-growth-05-20

Source: International Monetary Fund.

Germany is helped in this story by the fact that it has a slower rate of labor force growth, but clearly the difference in growth rates does not explain the fact Germany’s unemployment rate has fallen by 2.5 percentage points while unemployment in the United States has risen by 3.0 percentage points.

Note: correction made –thanks ltr.

Floyd Norris has a good piece today comparing trends in unemployment rates across countries in the downturn. He notes that Germany alone has seen a drop in its unemployment rate since the downturn began. While he notes that Germany has pursued work sharing policies that have encouraged employers to keep workers on the job working shorter hours, readers may not appreciate the full importance of this policy.

Growth in Germany and the United States have been virtually identical since the beginning of the downturn. While Germany has a large balance of trade surplus, in contrast to the deficit in the United States, its consumption growth has been weaker.

gdp-germany-us-growth-05-20

Source: International Monetary Fund.

Germany is helped in this story by the fact that it has a slower rate of labor force growth, but clearly the difference in growth rates does not explain the fact Germany’s unemployment rate has fallen by 2.5 percentage points while unemployment in the United States has risen by 3.0 percentage points.

Note: correction made –thanks ltr.

Reinhart-Rogoff One More Time: Why the 90 Percent Never Should Have Been Taken Seriously

By Dean BakerDean Baker

May 11, 2013

11 Mayo 2013

As a general rule economists are not very good at economics. This is why almost none of them were able to recognize the $8 trillion housing bubble that sank the economy. (No, this isn't bragging, it only took simple arithmetic and basic logic.) Most economists are unable to conceptualize anything that someone with more standing in the profession did not already write about. This is the only reason that the Reinhart-Rogoff 90 percent debt-to-GDP threshold was ever taken seriously to begin with. The point that I have tried to make in the past, apparently with little success, is that debt is an arbitrary number. It is not something that is relatively fixed, like the age composition of the population or the supply of land. The country's debt is something that can and often is easily altered through simple steps. In this way the debt-to-GDP ratio can be thought of as something like the color of a house. Suppose Reinhart and Rogoff told us that people who lived in blue houses had 40 percent less income than people who lived in houses painted other colors. Presumably people would be skeptical of the results, but if their finding was really true, then we would probably want to encourage people in blue colored houses to paint them a different color. In effect, Reinhart and Rogoff were making the same sort of claim about debt and GDP. Let me try to explain this in a way that even an economist can understand it. I have often pointed out that the value of long-term debt fluctuates with the interest rate. I didn't think this is a secret, but apparently few economists have followed what happens to bond prices when interest rates change. The point is that the value of our debt will plummet if interest rates rise, as the Congressional Budget Office and other forecasters expect. This means that we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost. Yes, this is really stupid, but if you believed the Reinhart-Rogoff 90 percent debt cliff, then you believe that we can sharply raise growth rates by buying back long-term bonds at a discount. It's logic folks, it's not a debatable point -- think it through until you understand it.

Casey Mulligan on Work Sharing

By Dean BakerDean Baker

May 10, 2013

10 Mayo 2013

Casey Mulligan used his Economix blog post to discuss the topic of work sharing. It's always good to see work sharing get some attention and Mulligan raises many of the right issues. I will correct a couple of points. Mulligan tells readers: "It is also possible that work-sharing would reduce employment by making jobs less attractive to people who desire full-time work. One reason that people sometimes justify commuting long distances to work or enrolling in demanding training programs – trucking and nursing are two such occupations — is that they expect to recoup those cost by taking advantages of opportunities to earn extra by working long hours." Neither of these claims is quite right. Long commutes are a disincentive to short workdays, but one could easily imagine shorter working hours being associated with fewer working days rather than shorter work days. (Anyone hear of a 4-day week, say 4 days at 8-9 hours per day?) Of course, if most workers had fewer week days then we would all enjoy shorter commutes. The other point about fewer hours providing less incentive to train for jobs needs two important qualifications. First, if work sharing is a short-term alternative to layoffs, then it does not imply a reduction in average hours. It would simply reduce the risk of being unemployed and replace it with an increased risk of being forced to work fewer than desired hours. If we assume that most workers are risk averse, this should increase the desirability of training for jobs since there will be a lower probability of being out of work altogether. If we follow the route of Western Europe and have shorter work years (they work on average about 20 percent less than us), then it is important to keep in mind that no one is literally being prevented from working. In other words, in countries where the average work year is 1500 hours, no one arrests truck drivers or nurses who want to work extra hours. If they want to find a second part-time job in addition to their normal full-time job they are free to do so, just as many people in the United States work at more than one job.

Homeownership and Unemployment: Not So Fast

By Dean BakerDean Baker

May 10, 2013

10 Mayo 2013

Folks have been asking me about a new study showing a strong link between homeownership and unemployment. The study finds a long-term of elasticity of the unemployment rate with respect to homeownership close to 1. This means that if the homeownership rate in a state doubles then we should expect its unemployment rate to double. For the country as a whole, since the homeownership rate has risen by roughly 20 percent from its 1950 level we should expect the unemployment rate to be roughly 20 percent higher, after controlling for other factors.

These are striking results, but even as a critic of the cult of homeownership, I am not buying. The paper does include many tests for robustness, so there is no simple story of cherry-picking the data. But there are important questions of reverse causation. Suppose that states have weak economies so that many people leave for states with more job opportunities.

In this story the state losing people is likely to have a higher homeownership rate (homeowners are less likely to move) and the state getting people is likely to have a lower homeownership rate since the new arrivals are less likely to be homeowners. The study tries to control for this issue by having lags of up to 5 years, but it is certainly possible that trends in economic growth and stagnation are longer than this. It might have been useful to try lags of 10 years.

It is also striking that the states with the largest increase in homeownership are all in the south. If there was a rise in unemployment in these states was this a regional effect or due to homeownership? Including a regional variable might be helpful to see how it affects the results. In the same vein, immigrants are likely to be associated with both a lower unemployment rate (immigrants go to areas with jobs) and a lower rate of homeownership (recent immigrants don’t own homes). I may have missed it, but it doesn’t look like immigrant status is one of the control variables in the regressions.

One finding that may have a simple explanation is their finding that in the years 2000-2010 there was a strong tie between commute times and homeownership. I’ll be a bit of a cynic here. Areas like Los Vegas and Phoenix were booming in the bubble years, these states saw substantial increases in homeownership. This was probably associated with an increase in commute times. The bust and drop in homeownership was especially pronounced in these areas. My guess is that they also saw a drop in average commute times. I don’t know if this is really the story, but at first glance that would be my guess.

Anyhow, I can believe that homeownership has some negative impact on employment. There is the story of reducing mobility. This can be exaggerated (people do rent out homes and couples separate for work), but surely it is not zero. Also, policies that favor homeownership, like the mortgage interest deduction, undoubtedly pull capital away from productive investment. However, the relationships found in this paper seem too large to be plausible.

So chalk me up as a skeptic on this one, but it is an interesting paper that deserves serious consideration.

Note:

It is interesting to see that the union density variable in these regressions is always negative and sometimes significant. This would suggest that higher union density is associated with lower unemployment rates. Much as I might like to say this is the case, my guess is that something else is at work.

States like Michigan and Ohio saw the percentage of workers in unions fall at the same time they lost hundreds of thousands of jobs in the auto and related industries. This could give the sort of correlation found in these regressions. This is the same sort of reverse causation that I suspect we see with homeownership and unemployment rates.

Further Note:

Danny Blanchflower, a co-author of the paper, notified me that he ran a regression that included a variable for the southern states to pick up any regional effect. He said that this actually made the results stronger, so clearly their findings are not driven by some peculiarity of the south that led to both higher rates of homeownership and higher rates of unemployment in the region.

Folks have been asking me about a new study showing a strong link between homeownership and unemployment. The study finds a long-term of elasticity of the unemployment rate with respect to homeownership close to 1. This means that if the homeownership rate in a state doubles then we should expect its unemployment rate to double. For the country as a whole, since the homeownership rate has risen by roughly 20 percent from its 1950 level we should expect the unemployment rate to be roughly 20 percent higher, after controlling for other factors.

These are striking results, but even as a critic of the cult of homeownership, I am not buying. The paper does include many tests for robustness, so there is no simple story of cherry-picking the data. But there are important questions of reverse causation. Suppose that states have weak economies so that many people leave for states with more job opportunities.

In this story the state losing people is likely to have a higher homeownership rate (homeowners are less likely to move) and the state getting people is likely to have a lower homeownership rate since the new arrivals are less likely to be homeowners. The study tries to control for this issue by having lags of up to 5 years, but it is certainly possible that trends in economic growth and stagnation are longer than this. It might have been useful to try lags of 10 years.

It is also striking that the states with the largest increase in homeownership are all in the south. If there was a rise in unemployment in these states was this a regional effect or due to homeownership? Including a regional variable might be helpful to see how it affects the results. In the same vein, immigrants are likely to be associated with both a lower unemployment rate (immigrants go to areas with jobs) and a lower rate of homeownership (recent immigrants don’t own homes). I may have missed it, but it doesn’t look like immigrant status is one of the control variables in the regressions.

One finding that may have a simple explanation is their finding that in the years 2000-2010 there was a strong tie between commute times and homeownership. I’ll be a bit of a cynic here. Areas like Los Vegas and Phoenix were booming in the bubble years, these states saw substantial increases in homeownership. This was probably associated with an increase in commute times. The bust and drop in homeownership was especially pronounced in these areas. My guess is that they also saw a drop in average commute times. I don’t know if this is really the story, but at first glance that would be my guess.

Anyhow, I can believe that homeownership has some negative impact on employment. There is the story of reducing mobility. This can be exaggerated (people do rent out homes and couples separate for work), but surely it is not zero. Also, policies that favor homeownership, like the mortgage interest deduction, undoubtedly pull capital away from productive investment. However, the relationships found in this paper seem too large to be plausible.

So chalk me up as a skeptic on this one, but it is an interesting paper that deserves serious consideration.

Note:

It is interesting to see that the union density variable in these regressions is always negative and sometimes significant. This would suggest that higher union density is associated with lower unemployment rates. Much as I might like to say this is the case, my guess is that something else is at work.

States like Michigan and Ohio saw the percentage of workers in unions fall at the same time they lost hundreds of thousands of jobs in the auto and related industries. This could give the sort of correlation found in these regressions. This is the same sort of reverse causation that I suspect we see with homeownership and unemployment rates.

Further Note:

Danny Blanchflower, a co-author of the paper, notified me that he ran a regression that included a variable for the southern states to pick up any regional effect. He said that this actually made the results stronger, so clearly their findings are not driven by some peculiarity of the south that led to both higher rates of homeownership and higher rates of unemployment in the region.

Post Continues Jihad Against Social Security and Medicare

By Dean BakerDean Baker

May 10, 2013

10 Mayo 2013

The Washington Post continued to use its news section to advance its agenda for cutting Social Security and Medicare. It headlined an AP article on how these programs have not been cut by the sequester, “entitlement programs thrive amid gridlock, shifting money from younger generations to older.”

The headline and the article wrongly imply that cuts to programs will benefit the young and increase economic growth. This is not true. The proximate cause for these cuts is a decision by political leaders to have lower budget deficits. The headline would have more accurately read “pursuit of deficit reduction is taking away money from young.”

The notion of a shift to older generations is especially bizarre because none of the programs benefiting the elderly have been expanded notably in recent years. (The Medicare drug benefit is being made more generous, but the cost is covered by reduced payments to drug companies.) The assertion of a redistribution to the elderly would be like claiming there has been a redistribution to people living in North after reporting on a crop failure in the South. Certainly the fact that the South is worse off means that the North is relatively better off, but to describe this as a redistribution to the North is highly misleading, as is the claim of a redistribution to the elderly.

Also, even within whatever deficit targets are set one could just as credibly say that there has been a redistribution from children to Wall Street banks since the Wall Street banks are using their political power to block any effort to tax their financial speculation. Such a tax could easily cover the cost of the programs that are now being cut. The Post has decided not to frame the issue this way.

The Washington Post continued to use its news section to advance its agenda for cutting Social Security and Medicare. It headlined an AP article on how these programs have not been cut by the sequester, “entitlement programs thrive amid gridlock, shifting money from younger generations to older.”

The headline and the article wrongly imply that cuts to programs will benefit the young and increase economic growth. This is not true. The proximate cause for these cuts is a decision by political leaders to have lower budget deficits. The headline would have more accurately read “pursuit of deficit reduction is taking away money from young.”

The notion of a shift to older generations is especially bizarre because none of the programs benefiting the elderly have been expanded notably in recent years. (The Medicare drug benefit is being made more generous, but the cost is covered by reduced payments to drug companies.) The assertion of a redistribution to the elderly would be like claiming there has been a redistribution to people living in North after reporting on a crop failure in the South. Certainly the fact that the South is worse off means that the North is relatively better off, but to describe this as a redistribution to the North is highly misleading, as is the claim of a redistribution to the elderly.

Also, even within whatever deficit targets are set one could just as credibly say that there has been a redistribution from children to Wall Street banks since the Wall Street banks are using their political power to block any effort to tax their financial speculation. Such a tax could easily cover the cost of the programs that are now being cut. The Post has decided not to frame the issue this way.

It's So Hard to Find Good Help: Businessweek Edition

By Dean BakerDean Baker

May 10, 2013

10 Mayo 2013

Businessweek tells us that homebuilders would be building more homes, if only they could find qualified construction workers. Hmmm, that must mean that wages for construction workers are soaring as the shortage causes employers to bid up wages in an effort to grab workers away from competitors or hold on to their current workforce.

That’s not what the data say. According to data from the Bureau of Labor Statistics, after adjusting for inflation the average hourly wage in construction has risen by just 0.9 percent in the five years from 2007 to 2012. Note that this a total increase of 0.9 percent over these five years, not an annual increase. If there is a labor shortage, it’s not showing up in wages for some reason. (Of course the unemployment rate for construction workers was reported at 13.2 percent in April, which also does not seem to indicate a labor shortage.)

The more obvious explanation for the fact that construction remains depressed is the near record vacancy rates. Presumably many of these empty homes will have to be filled before builders get more aggressive about building new ones.

Businessweek tells us that homebuilders would be building more homes, if only they could find qualified construction workers. Hmmm, that must mean that wages for construction workers are soaring as the shortage causes employers to bid up wages in an effort to grab workers away from competitors or hold on to their current workforce.

That’s not what the data say. According to data from the Bureau of Labor Statistics, after adjusting for inflation the average hourly wage in construction has risen by just 0.9 percent in the five years from 2007 to 2012. Note that this a total increase of 0.9 percent over these five years, not an annual increase. If there is a labor shortage, it’s not showing up in wages for some reason. (Of course the unemployment rate for construction workers was reported at 13.2 percent in April, which also does not seem to indicate a labor shortage.)

The more obvious explanation for the fact that construction remains depressed is the near record vacancy rates. Presumably many of these empty homes will have to be filled before builders get more aggressive about building new ones.

• Affordable Care Act

Someone Notices the Decline in Hours

By Dean BakerDean Baker

May 08, 2013

08 Mayo 2013

Most coverage of the April jobs report celebrated the 165,000 new jobs reported for the month which was somewhat better than consensus predictions. Almost no one noticed the decline in the length of the average workweek. As a result of the fall in average hours, the April reduction in the index for total hours worked tied for the largest drop in the recovery. Catherine Rampell does pick up on this point in a NYT Economix blog post today. Noting the decline, she raises the possibility that it is related to the Affordable Care Act, which requires firms that employ more than 50 full-time workers to either provide health insurance or to pay a penalty. Since the cutoff for a full-time worker in this provision is 30 hours per week, there would be an incentive to keep hours under this cutoff. While Rampell expresses skepticism of this explanation, it probably deserves even less credence than she gives it. It is important to remember that this issue would only be relevant for firms that employ more than 50 workers and don't currently provide health insurance for their workers. The overwhelming majority of firms that employ more than 50 workers already provide health insurance. Furthermore, most workers are employed at firms that employ fewer than 50 workers and are not close to this cutoff. The share of the workforce that could plausibly be affected by this cutoff would almost certainly be well under 10 percent. This means that we would have to see very large movements in hours for this group of workers in order to move the overall average. Also, this issue just became relevant in 2013 which will provide the basis for the firms' obligations when this provision of the ACA comes into effect next year. If the ACA is a big factor in the general trend in hours then we should be seeing a very different pattern in 2013 than we did in 2012. We don't.

Why Does the Post Think It's Bad News that the Republican Budget Strategy is Falling Apart?

By Dean BakerDean Baker

May 08, 2013

08 Mayo 2013

That is what readers of a front page Washington Post news story on the budget must be asking. The piece notes the sharp decline in the budget deficit, then tells readers:

“That might seem like good news, but it is unraveling Republican plans to force a budget deal before Congress takes its August break (emphasis added).”

It’s not obvious why the piece would use “but” in this sentence as opposed to “and.” Obviously the Post considers it bad news that the Republican strategy is unraveling. Most papers would leave such comments for the opinion pages.

The piece later adds that the lower deficits are reducing pressure on Democrats to consider:

“far-reaching changes to Medicare and the U.S. tax code that Republicans see as fundamental building blocks of a deal.”

The use of “changes” is misleading. The Republicans have advocated cuts in Medicare compared with baseline levels of spending. It is understandable that the Republicans would prefer a euphemism, but the Post should be trying to inform its readers.

Also, the Post does not know what Republicans actually “see” as fundamental to a deal. It only knows what they say they view as being fundamental. Politicians sometimes don’t say what they really believe.

It is also striking that this piece makes no reference to recent developments in economics that have seriously undermined the case for deficit reduction. Readers of this piece would believe that budget policy is unaffected by economic considerations. That may be true, but it would be worth highlighting this fact. Most readers probably would be interesting in knowing that members of Congress apparently only care about budget targets and do not give a damn about growth and jobs.