The NYT has a good piece noting factors that are likely to lead to somewhat stronger growth for the 4th quarter of 2011, but which will not be present in 2012. As a result, it suggests that we will see growth close to 3.7 percent in the fourth quarter, but this will fall back to 1.5-2.0 percent in the first half of 2012.
It is worth noting that even at a 3.7 percent annual growth rate it will take us until almost 2017 to get back to the economy’s potential GDP. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential level of output. With a potential annual growth rate of 2.5 percent, 3.7 percent growth GDP growth reduces this gap by 1.2 percentage points a year. That means it will take roughly five years of growth at this rate to close the gap.
Following steep recessions in the 70s and 80s, the economy had years of growth between 6-8 percent. In this context, a 3.7 percent growth rate does not look especially strong, even if it is more rapid than the economy is likely to see over the next couple of years.
The NYT has a good piece noting factors that are likely to lead to somewhat stronger growth for the 4th quarter of 2011, but which will not be present in 2012. As a result, it suggests that we will see growth close to 3.7 percent in the fourth quarter, but this will fall back to 1.5-2.0 percent in the first half of 2012.
It is worth noting that even at a 3.7 percent annual growth rate it will take us until almost 2017 to get back to the economy’s potential GDP. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential level of output. With a potential annual growth rate of 2.5 percent, 3.7 percent growth GDP growth reduces this gap by 1.2 percentage points a year. That means it will take roughly five years of growth at this rate to close the gap.
Following steep recessions in the 70s and 80s, the economy had years of growth between 6-8 percent. In this context, a 3.7 percent growth rate does not look especially strong, even if it is more rapid than the economy is likely to see over the next couple of years.
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Some of us may have thought the dispute over the extension of the payroll tax cut involves maneuvering between politicians who are looking to get re-elected next fall. They all have important interest groups who they rely upon for votes and/or campaign contributions.
However the Post told us that we are wrong to think this. Its lead front page article yesterday told readers that:
“at its heart, the fight over the tax cut is only the latest incarnation of the same ideological clash that has afflicted Congress for the past year, over what the government should fund and how it should be paid for.
Once again, Democrats and Republicans foundered over whether to fund an initiative by cutting entitlements and other spending or by raising taxes on the wealthy.”
Isn’t it great that the Post can get into politicians’ minds and determine the real motives for their actions? Ordinary people would just think of them as people who seek power, who say and do whatever is necessary to advance their careers, but the Post can tell us their innermost thoughts. That is why we need newspapers like the Washington Post.
Some of us may have thought the dispute over the extension of the payroll tax cut involves maneuvering between politicians who are looking to get re-elected next fall. They all have important interest groups who they rely upon for votes and/or campaign contributions.
However the Post told us that we are wrong to think this. Its lead front page article yesterday told readers that:
“at its heart, the fight over the tax cut is only the latest incarnation of the same ideological clash that has afflicted Congress for the past year, over what the government should fund and how it should be paid for.
Once again, Democrats and Republicans foundered over whether to fund an initiative by cutting entitlements and other spending or by raising taxes on the wealthy.”
Isn’t it great that the Post can get into politicians’ minds and determine the real motives for their actions? Ordinary people would just think of them as people who seek power, who say and do whatever is necessary to advance their careers, but the Post can tell us their innermost thoughts. That is why we need newspapers like the Washington Post.
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We made John Nichols’ Honor Roll for “Most Valuable Economic News Source” over at the Nation. I’d like to get a mention for most accurate, but no one gives awards for that.
We made John Nichols’ Honor Roll for “Most Valuable Economic News Source” over at the Nation. I’d like to get a mention for most accurate, but no one gives awards for that.
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Politifact told its readers about the “Echo Chamber Nation” in its follow up to its “Lie of the Year” story, but not quite in the way they intended. To remind readers, the Politifact Lie of the Year was the Democrats’ claim that the Ryan plan approved by the Republican House would end Medicare. The Ryan plan would in fact replace the fee for service Medicare that has been in place since the program was created in 1966 with a system of “premium supports,” which most people would call vouchers.
This is comparable to replacing a traditional defined benefit pension with a 401(k). Most people would probably say that if a company had done this that they had ended their pension. However, if anyone said this, Politifact would call them a “liar” and possibly even the “liar of the year.”
Yes, calling such a person a liar may make sense in some circles. This passes for wisdom in that narrow group of Washington elites who think that they are balanced because they can criticize both Democrats and Republicans without paying any attention to the evidence. Within this Echo Chamber, saying the Republicans voted to end Medicare could be the Lie of the Year, but not in reality land.
Politifact told its readers about the “Echo Chamber Nation” in its follow up to its “Lie of the Year” story, but not quite in the way they intended. To remind readers, the Politifact Lie of the Year was the Democrats’ claim that the Ryan plan approved by the Republican House would end Medicare. The Ryan plan would in fact replace the fee for service Medicare that has been in place since the program was created in 1966 with a system of “premium supports,” which most people would call vouchers.
This is comparable to replacing a traditional defined benefit pension with a 401(k). Most people would probably say that if a company had done this that they had ended their pension. However, if anyone said this, Politifact would call them a “liar” and possibly even the “liar of the year.”
Yes, calling such a person a liar may make sense in some circles. This passes for wisdom in that narrow group of Washington elites who think that they are balanced because they can criticize both Democrats and Republicans without paying any attention to the evidence. Within this Echo Chamber, saying the Republicans voted to end Medicare could be the Lie of the Year, but not in reality land.
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The NYT reported that the Republicans in the House want the federal government to allow states to use unemployment insurance tax revenue to pay for job training. It quotes Representative James B. Renacci on this topic:
“In this uncertain economy, using unemployment dollars to subsidize the training of a new employee to re-enter the work force is just good public policy.”
It would have been worth pointing out that there is no major sector of the economy that seems to be short of workers. Real wages are flat or declining in every major occupational grouping. There is no occupation where job openings are especially high relative to job seekers (the overall average is more than 4 to 1).
If there are not obvious jobs for which to train workers, government training programs sound like a great example of ill-considered social engineering.
The NYT reported that the Republicans in the House want the federal government to allow states to use unemployment insurance tax revenue to pay for job training. It quotes Representative James B. Renacci on this topic:
“In this uncertain economy, using unemployment dollars to subsidize the training of a new employee to re-enter the work force is just good public policy.”
It would have been worth pointing out that there is no major sector of the economy that seems to be short of workers. Real wages are flat or declining in every major occupational grouping. There is no occupation where job openings are especially high relative to job seekers (the overall average is more than 4 to 1).
If there are not obvious jobs for which to train workers, government training programs sound like a great example of ill-considered social engineering.
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The Post has another piece showing some pre-mature optimism on the housing market. The proximate cause was the jump in housing starts that the Commerce Department reported for last month. As the piece notes, this jump was driven almost entirely by an increase in starts reported for multi-family units. In fact, most of the gain was attributable to sharp rises in starts in the Northeast and West. The gains in the South were modest and starts in the Midwest actually fell.
In fact, housing starts, especially for multi-family units and near the end of the year, are highly erratic. For example, multi-family starts jumped 92.8 percent in January of this year. These erratic movements are often related to tax or regulatory changes that can make it desirable to rush ahead with a project before the end of the year or to delay it into the next year. This is why it is desirable to see several months data before assuming that the reported change is real.
The other items cited as evidence of a recovering housing market are also dubious. The piece asserts that house prices have stabilized. Actually, the Case-Shiller 20-City index shows prices falling since April. The piece reports a rise in rents, but this is largely due to the impact of higher utility prices. The owner equivalent rent index, which excludes utilities, has increased at just a 1.9 percent annual rate over the last 3 months and a 2.1 percent rate over the last six months. The latter is almost identical to the overall rate of inflation over this period.
The piece also argues that shortages of housing are starting to appear because the 1.2 million trend annual rate of household formation is wearing away at the excess supply created by the building boom of the bubble years. Actually, the trend rate is almost certainly well below 1.2 million given the country’s current demographics. The Congressional Budget Office projects labor force growth at around 1 million a year. This would put us at a considerably slower rate of household growth even if every new worker started their own household. In terms of the underlying balance of supply and demand, the Commerce Department shows that vacancy rates are still at a near record high.
(Note: some have raising doubts about the vacancy data. These calculations failed to note that when dilapidated housing is put back into use or non-residential property is converted to residential use, these units do not appear in the housing start data.)
The Post has another piece showing some pre-mature optimism on the housing market. The proximate cause was the jump in housing starts that the Commerce Department reported for last month. As the piece notes, this jump was driven almost entirely by an increase in starts reported for multi-family units. In fact, most of the gain was attributable to sharp rises in starts in the Northeast and West. The gains in the South were modest and starts in the Midwest actually fell.
In fact, housing starts, especially for multi-family units and near the end of the year, are highly erratic. For example, multi-family starts jumped 92.8 percent in January of this year. These erratic movements are often related to tax or regulatory changes that can make it desirable to rush ahead with a project before the end of the year or to delay it into the next year. This is why it is desirable to see several months data before assuming that the reported change is real.
The other items cited as evidence of a recovering housing market are also dubious. The piece asserts that house prices have stabilized. Actually, the Case-Shiller 20-City index shows prices falling since April. The piece reports a rise in rents, but this is largely due to the impact of higher utility prices. The owner equivalent rent index, which excludes utilities, has increased at just a 1.9 percent annual rate over the last 3 months and a 2.1 percent rate over the last six months. The latter is almost identical to the overall rate of inflation over this period.
The piece also argues that shortages of housing are starting to appear because the 1.2 million trend annual rate of household formation is wearing away at the excess supply created by the building boom of the bubble years. Actually, the trend rate is almost certainly well below 1.2 million given the country’s current demographics. The Congressional Budget Office projects labor force growth at around 1 million a year. This would put us at a considerably slower rate of household growth even if every new worker started their own household. In terms of the underlying balance of supply and demand, the Commerce Department shows that vacancy rates are still at a near record high.
(Note: some have raising doubts about the vacancy data. These calculations failed to note that when dilapidated housing is put back into use or non-residential property is converted to residential use, these units do not appear in the housing start data.)
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The NYT had a good piece on Sunday on how the American Bar Association limits the numbers of law schools and lawyers in the country. This inflates the salaries of lawyers.
This sort of restriction should be viewed the same way as a tariff on imported steel. It has all the same negative effects on consumers and the economy. The main differences are that the restrictions on lawyers redistribute income upward to the top 5 percent or even 1 percent and the economic distortions are almost certainly much larger. The other major difference is that the protectionism that benefits lawyers gets much less attention from economists, reporters, and columnists.
The NYT had a good piece on Sunday on how the American Bar Association limits the numbers of law schools and lawyers in the country. This inflates the salaries of lawyers.
This sort of restriction should be viewed the same way as a tariff on imported steel. It has all the same negative effects on consumers and the economy. The main differences are that the restrictions on lawyers redistribute income upward to the top 5 percent or even 1 percent and the economic distortions are almost certainly much larger. The other major difference is that the protectionism that benefits lawyers gets much less attention from economists, reporters, and columnists.
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After being the big optimist who was bashing the double-dip gang in the summer and fall, I am now back to being the killjoy who refuses to join in the celebrations over the November data on housing starts reported yesterday. The point that I made in a prior post is that these numbers are highly erratic. This is especially true of the monthly data on starts of multi-family units, which were driving the jump reported for November.
This chart gives the basic picture.
Click for Larger Image
Source: Census Bureau.
This chart shows three important pieces of information. First construction of both single family units and multi-family units has plummeted since the peak of the bubble in 2006. Second, the monthly data on starts are far more volatile for multi-family units than single family units. Third, in the last year, starts of multi-family units have recovered much more than starts for single family units, which are still near their 2009 trough.
Combining points 2 and point 3, we can conclude that the monthly number on starts will be far more volatile now that multifamily units account for around one-third of all starts as compared to the good old days when they accounted for less than one-fifth. So this is why I am not celebrating just yet (except for Hanukkah).
After being the big optimist who was bashing the double-dip gang in the summer and fall, I am now back to being the killjoy who refuses to join in the celebrations over the November data on housing starts reported yesterday. The point that I made in a prior post is that these numbers are highly erratic. This is especially true of the monthly data on starts of multi-family units, which were driving the jump reported for November.
This chart gives the basic picture.
Click for Larger Image
Source: Census Bureau.
This chart shows three important pieces of information. First construction of both single family units and multi-family units has plummeted since the peak of the bubble in 2006. Second, the monthly data on starts are far more volatile for multi-family units than single family units. Third, in the last year, starts of multi-family units have recovered much more than starts for single family units, which are still near their 2009 trough.
Combining points 2 and point 3, we can conclude that the monthly number on starts will be far more volatile now that multifamily units account for around one-third of all starts as compared to the good old days when they accounted for less than one-fifth. So this is why I am not celebrating just yet (except for Hanukkah).
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Marketplace Radio had a segment on the proposed merger of AT&T and T-Mobile. It reported that AT&T argued that the acquisition of T-Mobile would allow it to better serve consumers by giving it a large number of cell phone towers in areas where AT&T currently provides inadequate coverage. The segment then said that the Federal Communications Commission (FCC) saw things differently. They blocked the merger because they argued it would lead to excessive concentration and higher prices for consumers.
Actually, there is no conflict between these views. AT&T was arguing that there are substantial economies of scale in the industry that can still be gained even for a firm that already has a 25 percent market share. The FCC argued that allowing firms to gain an even larger market share would imply substantial monopoly pricing power.
These are totally consistent positions. This is why phone companies have historically been either publicly owned or subject to government regulation. The argument is that the nature of the technology would lead to natural monopolies (in the old days, no one was going to lay a parallel set of wires to the old AT&T network).
It is desirable to let firms take advantage of all the available economies of scale to reduce their costs. However, if left unregulated they would take advantage of the lack of competition to gouge consumers. The answer is to have regulators set their prices based on an assessment of their actual costs. It is remarkable that this standard economic solution has not been raised in the public debate over the merger.
Marketplace Radio had a segment on the proposed merger of AT&T and T-Mobile. It reported that AT&T argued that the acquisition of T-Mobile would allow it to better serve consumers by giving it a large number of cell phone towers in areas where AT&T currently provides inadequate coverage. The segment then said that the Federal Communications Commission (FCC) saw things differently. They blocked the merger because they argued it would lead to excessive concentration and higher prices for consumers.
Actually, there is no conflict between these views. AT&T was arguing that there are substantial economies of scale in the industry that can still be gained even for a firm that already has a 25 percent market share. The FCC argued that allowing firms to gain an even larger market share would imply substantial monopoly pricing power.
These are totally consistent positions. This is why phone companies have historically been either publicly owned or subject to government regulation. The argument is that the nature of the technology would lead to natural monopolies (in the old days, no one was going to lay a parallel set of wires to the old AT&T network).
It is desirable to let firms take advantage of all the available economies of scale to reduce their costs. However, if left unregulated they would take advantage of the lack of competition to gouge consumers. The answer is to have regulators set their prices based on an assessment of their actual costs. It is remarkable that this standard economic solution has not been raised in the public debate over the merger.
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Charles Lane tells Washington Post readers that:
“Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth. Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece.”
An argument based on a sample of one may fit the standards of the Washington Post, but it is not the sort of thing that normal people would find compelling. If we look the IMF’s data on per capita GDP growth since 1980 one would be hard-pressed to find a clear relationship between inequality and growth.
The United States, an outlier for being unequal, does do relatively well in this picture. However, the much more egalitarian Swedes and Dutch fared even better by this measure. In fact, the per capita GDP growth record of most West European countries was not very differently from the U.S. over this period.
It is also worth noting that most Western European countries took much of the gains of higher productivity in the form of shorter work hours. It is now standard across the continent for workers to have 4-6 weeks a year of vacation. As a result of more vacations and benefits like paid family leave and paid sick days, the average work year for workers in West Europe is around 20 percent shorter than for workers in the United States. When we adjust for hours worked, it would be difficult to identify any growth dividend in the United States from its greater inequality.
The fact that there is no clear link between inequality and growth suggests that inequality is the result of the institutional and political structure, not the dynamics of the economy. For example, in the United States we allow banks to enjoy the benefit of too big to fail insurance from the government, which means that they can take big risks with money borrowed from creditors. When the bets pay off, the executives get huge paychecks. When they don’t, the taxpayers get the bill. This policy promotes rent-seeking, not growth.
Also, unlike Europe and Asia, we have rules of corporate governance that allow top executives to rip off their corporations by paying themselves huge salaries, even when they fail. This policy also does not contribute to growth.
We also have a policy of making it difficult for foreign professionals to compete with highly paid professionals in the United States. This raises the cost of health care and other services, by forcing people to pay more for doctors, lawyers and other highly paid professionals.
And, we have a policy that gives patent monopolies to drug companies. This allows the drug companies and their top executives to make large amounts of money at the expense of patients. These monopolies increase the annual cost of drugs by more than $250 billion a year, approximately 5 times the amount at stake with the Bush tax cuts to the wealthy.
These and other policies that redistribute income upward do not promote growth. Unfortunately, these policies will almost never be discussed in the pages of the Washington Post which restricts itself to the sort of simplistic growth versus inequality nonsense presented by Lane.
Charles Lane tells Washington Post readers that:
“Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth. Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece.”
An argument based on a sample of one may fit the standards of the Washington Post, but it is not the sort of thing that normal people would find compelling. If we look the IMF’s data on per capita GDP growth since 1980 one would be hard-pressed to find a clear relationship between inequality and growth.
The United States, an outlier for being unequal, does do relatively well in this picture. However, the much more egalitarian Swedes and Dutch fared even better by this measure. In fact, the per capita GDP growth record of most West European countries was not very differently from the U.S. over this period.
It is also worth noting that most Western European countries took much of the gains of higher productivity in the form of shorter work hours. It is now standard across the continent for workers to have 4-6 weeks a year of vacation. As a result of more vacations and benefits like paid family leave and paid sick days, the average work year for workers in West Europe is around 20 percent shorter than for workers in the United States. When we adjust for hours worked, it would be difficult to identify any growth dividend in the United States from its greater inequality.
The fact that there is no clear link between inequality and growth suggests that inequality is the result of the institutional and political structure, not the dynamics of the economy. For example, in the United States we allow banks to enjoy the benefit of too big to fail insurance from the government, which means that they can take big risks with money borrowed from creditors. When the bets pay off, the executives get huge paychecks. When they don’t, the taxpayers get the bill. This policy promotes rent-seeking, not growth.
Also, unlike Europe and Asia, we have rules of corporate governance that allow top executives to rip off their corporations by paying themselves huge salaries, even when they fail. This policy also does not contribute to growth.
We also have a policy of making it difficult for foreign professionals to compete with highly paid professionals in the United States. This raises the cost of health care and other services, by forcing people to pay more for doctors, lawyers and other highly paid professionals.
And, we have a policy that gives patent monopolies to drug companies. This allows the drug companies and their top executives to make large amounts of money at the expense of patients. These monopolies increase the annual cost of drugs by more than $250 billion a year, approximately 5 times the amount at stake with the Bush tax cuts to the wealthy.
These and other policies that redistribute income upward do not promote growth. Unfortunately, these policies will almost never be discussed in the pages of the Washington Post which restricts itself to the sort of simplistic growth versus inequality nonsense presented by Lane.
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