In Carmen Reinhart and Ken Rogoff’s (R&R) famous and now largely discredited “Growth in a Time of Debt,” New Zealand’s -7.6 percent growth (wrongly transcribed as -7.9 percent) in 1951 played an outsized role in their conclusion that high debt led to sharply lower growth. This number carried inordinate weight because R&R had mistakenly left out 4 high debt years for New Zealand in which it had seen healthy growth. Using their country-weighted methodology (each country counts the same, regardless of size or years with high debt) this mistake by itself subtracted 1.5 percentage points from the growth rate of countries in years of high debt.
To make the story better, today I received a tweet that informed me that the -7.6 percent growth New Zealand experienced in 1951 was not in any obvious way attributable to its high debt. In fact, the country suffered from a labor dispute that led to a strike/lockout of waterfront workers that lasted 5 months. Perhaps this dispute can be linked to New Zealand’s high debt at the time, but the connection is far from obvious. This is the sort of problem you get when using very small samples.
In Carmen Reinhart and Ken Rogoff’s (R&R) famous and now largely discredited “Growth in a Time of Debt,” New Zealand’s -7.6 percent growth (wrongly transcribed as -7.9 percent) in 1951 played an outsized role in their conclusion that high debt led to sharply lower growth. This number carried inordinate weight because R&R had mistakenly left out 4 high debt years for New Zealand in which it had seen healthy growth. Using their country-weighted methodology (each country counts the same, regardless of size or years with high debt) this mistake by itself subtracted 1.5 percentage points from the growth rate of countries in years of high debt.
To make the story better, today I received a tweet that informed me that the -7.6 percent growth New Zealand experienced in 1951 was not in any obvious way attributable to its high debt. In fact, the country suffered from a labor dispute that led to a strike/lockout of waterfront workers that lasted 5 months. Perhaps this dispute can be linked to New Zealand’s high debt at the time, but the connection is far from obvious. This is the sort of problem you get when using very small samples.
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The NYT had a useful piece on the increase in the number of people working at part-time jobs who would like full-time employment. This is an important measure of under-employment in the downturn that is missed when people just look at the unemployment rate. Since part-time workers often lack benefits like health care insurance, this can be an especially important issue.
However the piece concludes by equating part-time work with flexibility for employers. This is not true. There is no direct relationship between part-time work and flexible hours. A worker who has a regular shift from 1:00-5:00, Monday to Friday, provides no more flexibility to an employer than a worker who works from 9:00-5:00 the same days.
The flexibility comes from the fact that part-time workers are likely to have less bargaining power than full-time workers and therefore may have to accept changes in work hours on short notice. But this is a different issue than being employed part-time.
The NYT had a useful piece on the increase in the number of people working at part-time jobs who would like full-time employment. This is an important measure of under-employment in the downturn that is missed when people just look at the unemployment rate. Since part-time workers often lack benefits like health care insurance, this can be an especially important issue.
However the piece concludes by equating part-time work with flexibility for employers. This is not true. There is no direct relationship between part-time work and flexible hours. A worker who has a regular shift from 1:00-5:00, Monday to Friday, provides no more flexibility to an employer than a worker who works from 9:00-5:00 the same days.
The flexibility comes from the fact that part-time workers are likely to have less bargaining power than full-time workers and therefore may have to accept changes in work hours on short notice. But this is a different issue than being employed part-time.
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The NYT had a piece on the precipitous fall in the price of Apple’s stock since last September. It explained the decline in part by the fact that an unusually large portion of its stockholders are individual investors. These investors were overly enthusiastic about the stock last year and now, according to the piece, excessively pessimistic. It tells readers;
“At its current price, investors are betting that Apple will grow more slowly than the average American company. And they are ignoring the enormous pile of cash that Apple has built up, which it could hand out to shareholders tomorrow if it wanted.”
These two sentences actually are in direct contradiction. Apple has accumulated an extraordinary amount of cash precisely because it does not see good investment opportunities. That is good reason to believe that its profits will grow less rapidly in the future than other companies. Rather than ignoring this cash, investors are likely focused very much on the fact that Apple does not seem able to find good places to use its money.
There is one other point that is worth making about the stock price. It is plausible to tell a story in which Apple’s stock price would be driven to extraordinary levels by ill-informed individual investors. (Although large investors could counter this run-up by shorting Apple stock.) It is less plausible that the price would be driven to irrationally low levels.
Institutional investors do own large amounts of Apple stock and in fact they have considerably less money in Apple today than they did eight months ago. If they viewed Apple stock as being seriously under-valued at its current price then they would rush in to take advantage of a bargain. The fact that this does not appear to be happening suggests that it is not just individual investors who view Apple’s stock price as being too high. The big institutional investors must share this view.
The NYT had a piece on the precipitous fall in the price of Apple’s stock since last September. It explained the decline in part by the fact that an unusually large portion of its stockholders are individual investors. These investors were overly enthusiastic about the stock last year and now, according to the piece, excessively pessimistic. It tells readers;
“At its current price, investors are betting that Apple will grow more slowly than the average American company. And they are ignoring the enormous pile of cash that Apple has built up, which it could hand out to shareholders tomorrow if it wanted.”
These two sentences actually are in direct contradiction. Apple has accumulated an extraordinary amount of cash precisely because it does not see good investment opportunities. That is good reason to believe that its profits will grow less rapidly in the future than other companies. Rather than ignoring this cash, investors are likely focused very much on the fact that Apple does not seem able to find good places to use its money.
There is one other point that is worth making about the stock price. It is plausible to tell a story in which Apple’s stock price would be driven to extraordinary levels by ill-informed individual investors. (Although large investors could counter this run-up by shorting Apple stock.) It is less plausible that the price would be driven to irrationally low levels.
Institutional investors do own large amounts of Apple stock and in fact they have considerably less money in Apple today than they did eight months ago. If they viewed Apple stock as being seriously under-valued at its current price then they would rush in to take advantage of a bargain. The fact that this does not appear to be happening suggests that it is not just individual investors who view Apple’s stock price as being too high. The big institutional investors must share this view.
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The Post had a lengthy piece about seniors being ripped off on their savings by scam artists promising high returns. While this is a serious problem, the article implies that the low interest rate policy by the Fed is a major factor pushing seniors in this direction.
Actually, very few seniors have large amounts of money in short-term accounts that would be hurt by the Fed’s low interest rate policy. According to Federal Reserve Board’s latest Survey of Consumer Finance, around 15 percent of seniors have $25,000 or more in short-term money. Most of these people are likely to also have money in stock, which has provided very good returns in the last three years. They may also hold longer term bonds, the price of which has risen sharply as interest rates fell.
Even if a senior just held their $25,000 in short-term money, the hit from the low interest rate policy would still be limited. If we consider a 3.0 percent interest rate to be normal and assume that they are now getting a near zero interest rate, the loss to a senior with $25,000 would be around $750 a year. This is approximately the same hit that a senior with a $20,000 annual Social Security benefit (roughly 30 percent above the average) would see after 13 years under President Obama’s proposal to change the base of the cost of living adjustment to the chained CPI.
Addendum:
I see from comments that folks really want to believe that this low interest rate policy is a horrible disaster because every senior you know has huge amounts of money in CDs. That’s nice, but I prefer arithmetic. My hypothetical case refers to someone with $25k in short-term money; a group that comprises around 15 percent of all seniors. I know that people want to say that seniors don’t hold any stocks or bonds, but the Fed’s data disagrees and there will be enormous overlap between the people who have substantial stock and bond wealth and those with $25k in short-term money. (Sorry, I don’t have time to analyze the micro data just now.)
This means that the number of people who are hit by the low interest rates and not seeing some offsetting benefit from higher stock or bond prices will be considerably less than 15 percent of seniors, let’s say between 5-10 percent of seniors. This group will be seeing a hit that is comparable to the hit from the chained CPI. Note, I did not say this was a small hit. My point is that it affects a relatively small share of seniors. The chained CPI will hit virtually all seniors, the vast majority of whom do not have $25,000 in financial assets of any type.
The Post had a lengthy piece about seniors being ripped off on their savings by scam artists promising high returns. While this is a serious problem, the article implies that the low interest rate policy by the Fed is a major factor pushing seniors in this direction.
Actually, very few seniors have large amounts of money in short-term accounts that would be hurt by the Fed’s low interest rate policy. According to Federal Reserve Board’s latest Survey of Consumer Finance, around 15 percent of seniors have $25,000 or more in short-term money. Most of these people are likely to also have money in stock, which has provided very good returns in the last three years. They may also hold longer term bonds, the price of which has risen sharply as interest rates fell.
Even if a senior just held their $25,000 in short-term money, the hit from the low interest rate policy would still be limited. If we consider a 3.0 percent interest rate to be normal and assume that they are now getting a near zero interest rate, the loss to a senior with $25,000 would be around $750 a year. This is approximately the same hit that a senior with a $20,000 annual Social Security benefit (roughly 30 percent above the average) would see after 13 years under President Obama’s proposal to change the base of the cost of living adjustment to the chained CPI.
Addendum:
I see from comments that folks really want to believe that this low interest rate policy is a horrible disaster because every senior you know has huge amounts of money in CDs. That’s nice, but I prefer arithmetic. My hypothetical case refers to someone with $25k in short-term money; a group that comprises around 15 percent of all seniors. I know that people want to say that seniors don’t hold any stocks or bonds, but the Fed’s data disagrees and there will be enormous overlap between the people who have substantial stock and bond wealth and those with $25k in short-term money. (Sorry, I don’t have time to analyze the micro data just now.)
This means that the number of people who are hit by the low interest rates and not seeing some offsetting benefit from higher stock or bond prices will be considerably less than 15 percent of seniors, let’s say between 5-10 percent of seniors. This group will be seeing a hit that is comparable to the hit from the chained CPI. Note, I did not say this was a small hit. My point is that it affects a relatively small share of seniors. The chained CPI will hit virtually all seniors, the vast majority of whom do not have $25,000 in financial assets of any type.
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Former students and admirers of Harvard professor Martin Feldstein, who was also the chief economist in the Reagan administration, were undoubtedly outraged to see him excluded from the NYT’s Economix blog list of top blunderers in economics. Professor Feldstein’s claim to fame in this category stems in large part from a 1974 article which purports to show that Social Security led to a reduction in private savings.
This article received considerable attention and played an important role in advancing Feldstein’s reputation as one of the top economists of his generation. However, it turned out that the result was attributable to a programming error. This error was eventually uncovered by Dean Leimer and Selig Lesnoy, two researchers at the Social Security Administration. When the error was corrected, the relationship between Social Security wealth and private saving turned out to be statistically insignificant.
Feldstein actually revisited the topic again in the 1990s and claimed that with two decades of additional data he was able to establish that he had been right all along. This one turned out not to be quite right either. My colleague David Rosnick and I tried to replicate his results without success. After repeated efforts to contact Professor Feldstein to better ascertain his methodology, he eventually gave us enough information to determine that we were running our regressions correctly.
Feldstein also added that it did not surprise him that we could not replicate his results, since saving data are subject to large revisions. This is true, but then it leads one to wonder why anyone would make major policy pronouncements based on results using the pre-revision data.
Addendum:
I am also reminded of this $12 trillion mistake back in 2003 by Michael Boskin, who had been the chief economist in the administration of the first President Bush. He was briefly convinced that money being withdrawn from tax sheltered accounts like 401(k)s would lead to huge budget surpluses. (Thanks to Charles McMillion for this one.)
There was also the time in 2007 when Boston University Professor Larry Kotlikoff, one of the country’s leading deficit scolds, was concerned that people were saving too much for retirement.
Former students and admirers of Harvard professor Martin Feldstein, who was also the chief economist in the Reagan administration, were undoubtedly outraged to see him excluded from the NYT’s Economix blog list of top blunderers in economics. Professor Feldstein’s claim to fame in this category stems in large part from a 1974 article which purports to show that Social Security led to a reduction in private savings.
This article received considerable attention and played an important role in advancing Feldstein’s reputation as one of the top economists of his generation. However, it turned out that the result was attributable to a programming error. This error was eventually uncovered by Dean Leimer and Selig Lesnoy, two researchers at the Social Security Administration. When the error was corrected, the relationship between Social Security wealth and private saving turned out to be statistically insignificant.
Feldstein actually revisited the topic again in the 1990s and claimed that with two decades of additional data he was able to establish that he had been right all along. This one turned out not to be quite right either. My colleague David Rosnick and I tried to replicate his results without success. After repeated efforts to contact Professor Feldstein to better ascertain his methodology, he eventually gave us enough information to determine that we were running our regressions correctly.
Feldstein also added that it did not surprise him that we could not replicate his results, since saving data are subject to large revisions. This is true, but then it leads one to wonder why anyone would make major policy pronouncements based on results using the pre-revision data.
Addendum:
I am also reminded of this $12 trillion mistake back in 2003 by Michael Boskin, who had been the chief economist in the administration of the first President Bush. He was briefly convinced that money being withdrawn from tax sheltered accounts like 401(k)s would lead to huge budget surpluses. (Thanks to Charles McMillion for this one.)
There was also the time in 2007 when Boston University Professor Larry Kotlikoff, one of the country’s leading deficit scolds, was concerned that people were saving too much for retirement.
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Thomas Edsall relies on some research which unfortunately in many cases is a bit dated to discuss the idea that middle wage jobs in the United States are disappearing due to technology. While there was some evidence that middle wage occupations were dwindling in the 1990s, this was reversed in the last decade. In that decade there were declines in employment shares for all but the lowest paying occupations. Since we saw the same pattern of wage polarization, with more income going to the top, in the 2000s and 1990s, this would seem to indicate that the loss of middle wage jobs was not the story in the 1990s either.
In considering the recent pattern of job growth the proliferation of low-paying jobs is most obviously explained by the weak economy. The economy also generates lots of bad jobs, however in a healthy labor market most people don’t take them. It is only when people have no other job options that take these low-paying jobs. Therefore the fact that a disproportionate share of the jobs created in the last 5 years are low-paying jobs is best explained by the fact that the economy is not creating very many jobs.
The piece also notes the shift of manufacturing jobs to China. This is not a result of inevitable globalization, but rather a policy decision to put manufacturing workers in direct competition with low-paid workers in the developing world, while maintaining or increasing protectionist barriers that allow doctors, lawyers, and other highly paid professsionals from avoid similar competition. The United States has also further disadvantaged manufacturing workers by pursuing a high dollar policy that makes it more difficult for them to compete internationally.
There is little reason to believe that there is anything inevitable about the loss of wages by middle class workers. Rather this is primarily a policy driven outcome.
Thomas Edsall relies on some research which unfortunately in many cases is a bit dated to discuss the idea that middle wage jobs in the United States are disappearing due to technology. While there was some evidence that middle wage occupations were dwindling in the 1990s, this was reversed in the last decade. In that decade there were declines in employment shares for all but the lowest paying occupations. Since we saw the same pattern of wage polarization, with more income going to the top, in the 2000s and 1990s, this would seem to indicate that the loss of middle wage jobs was not the story in the 1990s either.
In considering the recent pattern of job growth the proliferation of low-paying jobs is most obviously explained by the weak economy. The economy also generates lots of bad jobs, however in a healthy labor market most people don’t take them. It is only when people have no other job options that take these low-paying jobs. Therefore the fact that a disproportionate share of the jobs created in the last 5 years are low-paying jobs is best explained by the fact that the economy is not creating very many jobs.
The piece also notes the shift of manufacturing jobs to China. This is not a result of inevitable globalization, but rather a policy decision to put manufacturing workers in direct competition with low-paid workers in the developing world, while maintaining or increasing protectionist barriers that allow doctors, lawyers, and other highly paid professsionals from avoid similar competition. The United States has also further disadvantaged manufacturing workers by pursuing a high dollar policy that makes it more difficult for them to compete internationally.
There is little reason to believe that there is anything inevitable about the loss of wages by middle class workers. Rather this is primarily a policy driven outcome.
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It would have been helpful to note this fact in an article discussing the Obama administration’s proposal to cut Social Security benefits by adopting a chained consumer price index as the basis for Social Security cost of living adjustments (COLA). The piece notes claims that the chained CPI provides a more accurate measure of the rate of inflation, then tells readers:
“Some argue that the chained CPI would cheat seniors by understating inflation for the elderly, who spend more on health care. The nonpartisan Congressional Budget Office (CBO) has found conflicting evidence on that point.”
Actually the Congressional Budget Office did not find conflicting evidence on this point, it just noted that the evidence is not conclusive. If the White House was interested in an accurate measure of the rate of inflation seen by seniors then it could instruct the Bureau of Labor Statistics to construct a full elderly CPI that would track the actual consumption patterns of the elderly. It has steadfastly refused to consider this proposal, which could lead to a higher annual COLA.
The Post should have made this point so that readers would recognize that the goal of the Obama administration is to cut Social Security, not make the COLA more accurate. Some people may be confused on this point.
The article also misled readers when it asserted:
“Medicare, Medicaid and Social Security account for nearly 40 percent of federal spending and are growing rapidly, as they must provide benefits to all who qualify, regardless of cost.”
Actually the cost of Social Security is growing relatively slowly, having risen by roughly 1.0 percentage point of GDP over the last two decades. It is projected to rise another 1.0 percentage point over the next two decades, then stay roughly constant as a share of GDP over the rest of the century.
Medicare costs have been projected to rise more rapidly because of rapidly growing private sector health care costs. In fact, Medicare costs have risen quite slowly over the last 5 years, although CBO does not project this slower rate of growth to persist.
It would have been helpful to note this fact in an article discussing the Obama administration’s proposal to cut Social Security benefits by adopting a chained consumer price index as the basis for Social Security cost of living adjustments (COLA). The piece notes claims that the chained CPI provides a more accurate measure of the rate of inflation, then tells readers:
“Some argue that the chained CPI would cheat seniors by understating inflation for the elderly, who spend more on health care. The nonpartisan Congressional Budget Office (CBO) has found conflicting evidence on that point.”
Actually the Congressional Budget Office did not find conflicting evidence on this point, it just noted that the evidence is not conclusive. If the White House was interested in an accurate measure of the rate of inflation seen by seniors then it could instruct the Bureau of Labor Statistics to construct a full elderly CPI that would track the actual consumption patterns of the elderly. It has steadfastly refused to consider this proposal, which could lead to a higher annual COLA.
The Post should have made this point so that readers would recognize that the goal of the Obama administration is to cut Social Security, not make the COLA more accurate. Some people may be confused on this point.
The article also misled readers when it asserted:
“Medicare, Medicaid and Social Security account for nearly 40 percent of federal spending and are growing rapidly, as they must provide benefits to all who qualify, regardless of cost.”
Actually the cost of Social Security is growing relatively slowly, having risen by roughly 1.0 percentage point of GDP over the last two decades. It is projected to rise another 1.0 percentage point over the next two decades, then stay roughly constant as a share of GDP over the rest of the century.
Medicare costs have been projected to rise more rapidly because of rapidly growing private sector health care costs. In fact, Medicare costs have risen quite slowly over the last 5 years, although CBO does not project this slower rate of growth to persist.
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