Regular readers of BTP know that expressing budget numbers without context is a pet peeve of mine. The practice is infuriating since almost no readers have any knowledge of the size of the total budget, so they have no clue what it means to cut food stamps by $40 billion over a decade or to spend $180 billion on transportation over the next six years. This problem can be easily remedied expressing budget numbers as a percent of the total budget or as per person expenditures. This would make these numbers instantly understandable to most readers.

I have raised this with numerous reporters and the NYT public editor, Margaret Sullivan. No one has ever tried to claim that these context-less numbers are meaningful to more than a tiny minority of readers. Ms. Sullivan actually embraced the cause and even got then Washington editor David Leonhardt to agree. But nothing seems to have changed.

Today the NYT ran an Associated Press piece that begins:

"France's Socialist government has detailed a 21 billion-euro ($26.5 billion) cost-cutting plan, the deepest-ever spending cuts in the country's modern history."

It later tells us the plan calls for cutting 3.2 billion euros from health spending and 700 million euros from family benefits. So everyone know how important these cuts will be to the French people and economy?

The article is not clear that these are one year cuts, but assuming they are, the 21 billion euro cut would be 1.7 percent of projected spending in 2015. The cut to the health budget would be a bit less that 0.3 percent of spending and the cut to family benefits would be roughly 0.06 percent of total spending. It might be nice to know how large these cuts are relative to total spending in these areas, but that would involve more work than I am prepared to do at this hour. 

Justin Wolfers tells us that economists are unanimous in supporting Uber and Lyft in a NYT piece this morning. He notes a survey of prominent economists which found that 100 percent either agreed or strongly agreed with the proposition:

"Letting car services such as Uber or Lyft compete with taxi firms on equal footing regarding genuine safety and insurance requirements, but without restrictions on prices or routes, raises consumer welfare."

This seems like a proposition that it would be difficult to disagree with, albeit with a few caveats. First, I suspect that many economists would want to see some guarantees about handicap access including in the "equal footing" standard. Most cities require that taxi companies have some number of cabs that are handicap accessible. Uber and Lyft make no commitment to serve the handicapped.

Some economists might also like to see some rules on labor conditions applied to Uber and Lyft. For example, should their drivers be able to organize unions like employees? Also, should there be a guarantee that drivers earn at least the minimum wage after covering expenses? It seems rather foolish to have minimum wage laws if companies can just evade them by setting up their employees as independent contractors. (Some folks may claim that Uber and Lyft can't control what their drivers actually earn, but with modern technology this is not really a difficult calculation. If these companies have problems, then perhaps they can be replaced with more computer literate competitors.)

Finally, it is important to realize that at this point Uber and Lyft are largely not subject to the same safety and insurance restrictions as traditional taxis. The latter may be too stringent, but I really doubt that any of these economists would oppose uniform standards.

One last point on the wisdom of economists: how many of these people saw the economic crash coming in 2008?


Note: Typos corrected, thanks Robert Salzberg.

Eduardo Porter has a good piece discussing the increasing problem of the evasion of corporate income taxes. At one point he notes that some people have called for eliminating the corporate income tax altogether and making up the lost revenue with higher taxes on the wealthy. 

Porter dismisses this idea by saying that it would be politically difficult to raise taxes on wealthy individuals by enough to make up the lost revenue. He then adds:

"Mr. Saint-Amans [the head of the OECD's Center for Tax Policy and Administration] said he feared that without the corporate income tax, income taxation would fall apart entirely as the wealthy could avoid taxation by becoming companies, inserting several corporate layers between themselves and their money."

This problem should be reasonably manageable. If there was some minimal annual fee that companies paid for tax exempt status (I had previously suggested $1 million but $250k might be sufficient), very few people would find it profitable to engage in such tax gaming. This should make it relatively easy for the I.R.S. to investigate the companies that file for this status and ensure that they are real companies and not just tax scams. The problem would not be qualitatively different than what the I.R.S. faces now with 501(c) tax exempt organizations.

This would also likely have minimal impact on real businesses. The small businesses that might not find this worthwhile likely would not be owned by people in top tax brackets anyhow, or alternatively have few profits to show in their first years. Many of these businesses are not now incorporated, so little would change in their situation. The point is that a real business of any size would have no problem paying this fee without impairing its operations.

The issue about the politics of raising individual tax rates is real, but it should be possible to design a system that would minimize the opportunities for gaming of the sort described here.

In her Washington Post column Catherine Rampell raises an obvious but generally neglected point in discussions of Uber and Lyft. Many cities strictly regulate the number of taxis on the road with a medallion system. The cost of these medallions, which license someone to operate a taxi, typically run into the hundreds of thousands of dollars. Economists are prone to see this system as a form of protectionism, which is designed to increase the profits of the cab companies and perhaps to raise the wages of drivers. 

This view is correct, however it doesn't follow that we should necessarily want as many cabs on the road as possible. As I noted earlier this week, we may want to ensure that drivers can at least earn the minimum wage, which likely would involve some restriction on supply. 

However there also is a very important environmental issue. The more cabs we have sitting around waiting for passengers, or worse driving through the streets, the more will be the emissions of greenhouse gases (GHG). The effect will amplified by the fact that cabs will add to congestion, slowing down traffic and causing other cars to emit more GHG. Also, as Rampell notes, lower cost and more readily available cabs will encourage people to use taxis instead of taking public transit, walking, or riding a bike.

These externalities can be addressed with appropriate carbon taxes and subsidies for public transportation, but we don't have appropriate carbon taxes and subsidies for public transportation, nor are we likely to have them for the foreseeable future. Therefore, regulation of taxi services like Uber needs to take these externalities into account.

Failing to take these externalities into account is just bad economics, no matter how many prominent economists say otherwise.


Bloomberg News did a thing of simple and rare beauty. It went to the 23 economists who signed a letter to Fed Chair Ben Bernanke in November of 2010 warning of inflation and other dire consequences from its policy of quantitative easing. It urged him to reverse course.

In fact, not only did Bernanke not reverse course, he doubled down with two subsequent rounds of quantitative easing. And four years later the inflation rate is still below the Fed's 2.0 percent target. So Bloomberg decided to ask the 23 signers whether they had been mistaken. While most of the signers declined to comment, the ten who did all insisted that they had been right. Obviously these folks have no intention of letting reality influence their views about the world.

I was reminded of this issue when I read Michael Gerson's column on the need of low-income children for attention from adults who care. Gerson notes that most low-income parents are overwhelmed with the struggles of making ends meet and it's not reasonable to expect more from them.

While Gerson's realism on this point should be appreciated, there has been an important change in this area that deserves attention. There has been a sharp increase in the percentage of young parents who voluntarily work part-time. The obvious explanation is the availability of insurance through Obamacare. These parents can now either get insurance through the exchanges or the expansion of Medicaid.

Now that parents don't need to work full-time to get insurance many appear to be choosing to work part-time so they can spend more time with their kids. That would seem to be good news from almost anyone's perspective. After all, as Gerson reminds us, it isn't just liberals who think that it's a good thing that parents have the time to look after their kids. 

So now that we are getting evidence that Obamacare is not just extending insurance coverage and helping to contain health care costs, but also making it easier for parents to balance the demands of work and family, will we see the opponents changing their minds?


Note: Typo in headline corrected, thanks L.ol.

Christopher Ingraham had a piece in the Post's Wonkblog in which he reports on a Pew poll showing the public has no idea where their tax dollars are going. The poll found that one third of respondents thought foreign aid was the biggest item in the budget. In fact, it accounts for less than one percent of spending.

While we can decry the ignorance of the American people, the media deserves much of the blame in the same way that teachers are held responsible for the poor performance of their students. (Actually, there is a far better case against the media.) News outlets like the Post routinely report on budget items in millions and billions of dollars. Often the sums refer to multi-year expenditures, sometimes not even making the time period covered clear to readers.

For the vast majority of readers these numbers are completely meaningless. Even well-educated people have no idea what it means when they see that we are going to spend $190 billion on transportation over the next six years.

The media could be far more informative in their reporting if they made a point of putting these numbers in some context, most obviously expressing them as a share of the total budget. Most people would understand what it meant if an article said that we were spending 1.0 percent of the budget on transportation over the next six years.

In effect, the Post is the bad teacher making fun of their student for not knowing anything. It ain't pretty.

That is perhaps an unfair headline for a comment on a generally interesting and useful piece on the sources of future job growth by Jim Tankersley, but the general pattern of reporting in the Post and elsewhere seems to demand it. Tankersley's piece is asking what we should expect to be the drivers of job growth in the decade ahead. He notes that in the past increased consumption had been the main driver of growth. The piece argues that the consumption share of GDP is unlikely to rise further in the future (safe bet), but then says that the changing composition of consumption may be a force driving job growth. Specifically, a turn away from purchases of goods, many of which are imported, to services like education and health care may mean that more people are employed in the United States.

The essential part missing from this discussion is any mention of the trade deficit. One of the reasons that consumption grew so rapidly in the prior twenty years was that the United States had a large trade deficit. This was in turn made possible by an over-valued dollar, which was the result of explicit government policy both here (Robert Rubin touted his "high dollar" policy) and abroad (think of countries like China buying up hundreds of billions of U.S. government bonds).

For those who never had any economics or are in high level policy positions, an over-valued dollar has an enormous effect on the balance of trade. If the dollar is over-valued by 20 percent it has roughly the same impact as imposing a 20 percent tariff on all U.S. exports and providing a 20 percent subsidy on imports. There is nothing in policymakers' bag of tricks that can come close to having the same impact on trade as a reduction in the value of the dollar. Anyone who argues otherwise (think of people pushing the TPP or TTIP) are either showing their ignorance or not telling the truth.

Furthermore, the trade deficit is the main reason the economy is below its potential and we are not at full employment. We currently have a trade deficit of more than 3 percent of GDP (@ $520 billion a year). This is money people in the United States are spending that is creating demand in other countries, not in the United States. That creates a huge gap in demand. If we count the multiplier effects, it would come to around 4.5 percent of GDP ($780 billion a year), which would translate into more than 6 million jobs. This gap can be filled with more government spending, more investment, or bubble driven housing construction, but as a practical matter it is not easy to raise these other components of demand. (The obstacle to increased government spending is political not economic.)

This is all basic national income accounting. In other words, it is definitional, it can't be wrong. The only problem is that people don't understand it. And it seems that many of the people who don't understand it are in policymaking positions.

Kevin Carey had a good piece in Upshot on the college programs training people as "medical assistant." The point of the piece is that the market for people with this training is saturated, so that most of the people coming out of these programs are not able to find full-time work. It notes that almost a third of the students who graduated the program in one school ended up defaulting on their loans.

The blame here clearly rests with schools that are deceptive about the job prospects of graduates. This is especially the case with the for-profit colleges that thrive off government loans and then leave students and taxpayers with the bill.

However the part that many may find disturbing is that the ostensible pot of gold here is the median annual wage currently earned by medical assistants is just $29,100. While Carey's point is that most new grads can't hope to earn anything like this sum, earning $29,100 hardly seems like hitting the jackpot. If this is based on a full-time full-year job it comes to roughly $14.50 an hour. If the minimum wage had kept pace with productivity growth over the last 45 years it would be around $17 an hour. 

Carey is right that the government should crack down on colleges that rip off both students and taxpayers, but it speaks volumes about the current state of the labor market that a job paying $14.50 an hour is something that young people would aspire to get. 

I am not usually inclined to defend the economics profession, but Robert Samuelson brings out my defensive impulse in his discussion of Financial Time columnist Martin Wolf's new book (which I have not read). Before getting to the main matter at hand, it's worth making a couple of other points.

First, Samuelson tells us that Wolf's explanation of the financial crisis goes via the way of the U.S. trade deficit:

"The trade-surplus countries couldn’t spend all their export earnings, so they plowed the excesses into dollar investments (prominently: U.S. Treasury bonds) and euro securities. This flood of money reduced interest rates. The resulting easy credit induced dubious lending, led by housing mortgages."

This is partly right and partly wrong. (I don't know if the problem is in Wolf's book or Samuels' retelling.) The wrong part is the claim that the trade surplus countries couldn't spend all their export earnings. This makes no sense on its face. They have no need to spend their export earnings. If they have dollars that they don't want they just dump the dollars. It's just like if someone who has shares of a stock they don't want. They dump the stock.

What happened in this period is that foreign central banks bought the dollars from their exporters and then used the money to buy up U.S. government bonds. This was a conscious decision to prop up the value of the dollar against their currencies. This was done to preserve their export advantages.

If they had just sat back and let the market clear, the dollar would have fallen and the U.S. trade deficit would have shrunk. This is all pretty much econ 101 stuff that Wolf should have gotten straight (perhaps he did).

The part that is completely right is that the gap in demand created by the trade deficit (our spending was creating demand in Europe and China, not the United States) created a huge hole in demand that could be filled by the housing bubble. If we had something closer to balanced trade back in the middle of the last decade then the buildup of a housing bubble would have almost certainly led to higher interest rates and higher inflation. This would have choked off the bubble before it grew too large. So in this sense, Wolf is 100 percent on the money in blaming the bubble on the trade deficit.

It might help editorial page editor Fred Hiatt understand how the budget works. He is appalled because "reactionary defenders" of Social Security think that seniors should be able to get the benefits they paid for. (I wonder if it's reactionary to think that Peter Peterson type billionaires should be able to get the interest on the government bonds that they paid for.)

Anyhow, the basis for Hiatt's fury is that John Podesta, now a top advisor to President Obama, is boasting about entitlements having been brought under control. To Hiatt this is outrageous.

"Federal debt has reached 74 percent of the economy’s annual output (GDP), 'a higher percentage than at any point in U.S. history except a brief period around World War II,' the CBO says, 'and almost twice the percentage at the end of 2008.' With no change in policy, that percentage will hold steady or decline a bit for a couple of years and then start rising again, to a dangerous 78 percent by 2024 and an insupportable 106 percent by 2039."

Yep, the debt is much higher today than in 2008, so what? Millions of people lost their jobs due to the collapse of the economy. The deficits of the last six years created demand that would not otherwise have been there. It led to more growth and put people back to work. To those in the real world, people losing their jobs and losing their homes, would be the big story. This means kids growing up with unemployed parents and maybe hustling from house to house or even living on the street. But hey, Fred Hiatt wants us to worry about the deficit in 2039.

Just to be clear, the gloom and doom story is all Hiatt's not CBO's, although some readers may be confused by the presentation. There is no obvious negative consequence to a debt to GDP ratio of 74 percent, although readers can get that Fred Hiatt doesn't like it. Nor is there any obvious negative consequence to a debt to GDP of 78 percent by 2024, even if Fred Hiatt calls it "dangerous."

And the assertion that a debt to GDP ratio of 106 percent is insupportable is just Fred Hiatt's invention. There are many countries that have much higher debt to GDP ratios today (Japan's is more than twice as high) and continue to pay very low interest rates on long-term debt. In other words, Fred Hiatt is just like the little kid who who is worried about the monster under his bed when the lights are turned off. Undoubtedly it is very real to him, but when you turn on the lights you can see there is nothing there.

That would be the logic of his Wonkblog column arguing that specialty drugs are worth the cost. The basic point is that some of these specialty drugs constitute radical breakthroughs that substantially extend or improve the quality of life. The $84,000 Hepatitis C drug Sovaldi is the case in point. After all, isn't it worth a great deal of money to save a life?

By this same logic when the firefighter shows up at our burning house with our family and dogs inside we would gladly pay her millions of dollars if we had the money or insurance that covered the cost. Certainly saving their lives would be worth the cost.

Of course we don't typically pay firefighters millions of dollars a year. Rather than negotiating a payment at the point where our house is burning down and our families' lives are at stake we pay them a salary. Saving the lives of our family members is part of their jobs. We don't hand over our life savings when they show up at the door, they have already been paid.

If we had a little clear thinking in policy circles it would be the same story with prescription drugs. It doesn't cost Gilead Sciences (the patent holder for Sovaldi) $84,000 to manufacture each patient's dosage. Based on the price of generics elsewhere, it probably only costs about 1 percent of this amount. Almost all of this  $84,000 price tag is ostensibly due to Gilead Sciences need to recoup research costs, which it can do because the government issued it a patent monopoly. (This means competitors get arrested if they try to produce the drug without Gilead Sciences' permission.)

Financing drug research with patent monopolies is equivalent to arranging terms to pay firefighters when they show up at our burning house, except it makes less sense. Unlike the case of the burning house, which we can usually see pretty clearly, patients don't really know how effective the drugs are that the pharmaceutical companies try to sell us. After all, they are the ones who did the research. The have to show results to the Food and Drug Administration to get approval, but what they disclose to the public is up to them. And when you can make $83,000 on every sale ($84,000 minus $1,000 for production costs) there is a substantial incentive not to disclose information that may raise questions about your drug's safety and effectiveness. And, if you don't think drug companies would conceal information, then you probably have not been alive very long.

We would be stuck if patent monopolies were the only way to finance research, but fortunately they are not. There are many other ways to support research funding, most obviously through public funding, like the $30 billion that goes to the National Institutes of Health (NIH) every year. There is no reason in principle that the public money used to support research could not be doubled or tripled. The research could even be done by the same drug companies who do research now. The difference is that they would be paid upfront. In this situation all their findings would be fully available to the public and all patents would be placed in the public domain. Then we could all buy generic Sovaldi at $1000 a dosage and we wouldn't have to waste so much time debating the value of a human life.

The drug industry will of course fight this change to the death. They will pay billions to politicians and advocates to argue that we could never have successful research without patents. After all, if government bureaucrats touch the money then it is worthless (except for the $30 billion that goes to NIH, which they always lobby to increase).

Anyhow, we all recognize the power of the pharmaceutical industry and the corruption of the political system. But folks should know that the problem of high-priced specialty drugs is a result of this corruption, not some inherent paradox of modern life.


Back in the good old days newspapers used to try to keep their opinions on the editorial page and try to stick to the facts on the news page. (I know, that's never neutral.) But the NYT didn't look like it was trying in its profile of Emmanuel Macron, the newly appointed minister of the economy in France.

As the piece tells us, Mr. Macron is pro-business. That seems to be agreed upon by all. However it also tells us that he "is bent on modernizing the country’s social model." It's clear that Macron wants to make cuts in France's social spending. Does that necessarily mean "modernizing." If this distinction is difficult to follow, imagine someone who advocates cutting the military budget in the United States or to breaking up the large banks and taxing the financial sector in a way that treated it like other sectors (as advocated by the I.M.F.). Is it plausible the NYT would describe such a person as wanting to "modernize" defense or finance?

In a similar vein the piece makes pronouncements on economic policy for which it has no obvious justification. It told readers:

"But behind the scenes, he called on Mr. Macron as an informal adviser to assure the business community that he was also open to reforms that would help companies create jobs and lift France from moribund growth.

"Mr. Macron’s first move was to urge Mr. Hollande to drop a proposal to tax incomes above €1 million at 75 percent, warning it would damage France’s image and turn the country into 'Cuba without the sun.'"

Is there any evidence stopping the 75 percent tax rate on very high income individuals would cost jobs? The NYT could make a major splash in the economics profession if it produced such evidence. (It is a disputed topic, but many of the countries' top public finance economists, like Peter Diamond and Emmanual Saez, have supported tax rates this high.) While there is no doubt that this tax rate would hurt folks like Mr. Macron's former colleagues at Rothschild, it's economic impact is far from clear.

The piece also tried to cover up an incredible statement from someone in a high political position in France. It told readers:

"It did not help that Mr. Macron made a major faux pas right out of the gate, in a radio interview, referring to the plight of 'illiterate' workers at a factory that was closing in northern France, because they would have few other options. The remark, though perhaps well intentioned, deepened an impression that he was out of touch with the Socialist base."

An important fact that the paper should have told readers is that these workers were almost certainly not illiterate. While they certainly did not enjoy the same elite education as Mr. Macron, France has a highly-educated workforce. While he is right that due to economic mismanagement these workers likely have few job options, it is unusual for a top political official to publicly and wrongly denigrate a significant segment within society. 

The Bureau of Labor Statistics came out with new projections of consumption driven employment. This seems to have created serious confusion at the NYT. Contrary to what the article seems to imply, this study is not making projections of macroeconomic growth. It is assuming a growth rate (2.6 percent annual average over the next decade) and then indicating how it will be divided. By contrast, the article seems to be asking whether the growth assumption is plausible.

Even for this latter purpose the article is badly off. It never once mentions the saving rate. If we want to assess the rate of consumption growth we really do need to know the saving rate. If it is very low, as was the case at the peak of the bubble, it means that it is unlikely that consumption growth will keep pace with income growth and extremely unlikely that it will exceed the rate of income growth. (Some of the discussion seems to imply that there is a question as to whether consumption will increase, as opposed to the rate of increase. There is no question on the former. It will be higher ten years from now than it is today.)

Finally, the piece never discusses the trade deficit. This must be a reflection of the ban on discussing the trade deficit in elite circles. This is unfortunate since graduates of intro econ classes everywhere know that net exports are one of the components of demand. Currently they are a large drain on demand since the country has an annual trade deficit of around $500 billion a year (@ 3 percent of GDP). This has the same impact on demand as if consumers were spending $500 billion less a year (actually more, since much of that spending would go to imports). It is incredible that a piece discussing job growth over the next decade would never mention the trade deficit.


Andrew Ross Sorkin tells us that the fact the AIG bailout was about helping Goldman Sachs and other big banks is not news because we knew it all along. This is one that gets the blood flowing early in the morning.

This brings to mind the old line, what's this "we" jazz, white man? Yes, it was knowable that the AIG bailout was about saving the banks and many of us argued that at the time. But this money was not generally included on the list of handouts to Goldman Sachs and its CEO Lloyd Blankfein, who takes home $20 million a year. (That's roughly equal to what 12,700 food stamp beneficiaries receive.) So yes, many of us did call the AIG bailout a backdoor handout to the banks, but that was not something generally conceded in policy circles.

It matters because if everyone understood that the $192 billion injected into AIG was largely about keeping big banks from failing then there might have been more political support for breaking up the big banks and in other ways restricting their conduct. Conceding this point now that the debate over financial reform is largely in the past seems more than a bit dishonest.

If I can be allowed a brief digression, back in the mid-1990s the Washington Post ran a major front page article that bemoaned the fact that U.S. soldiers who had died in the civil war in El Salvador had not received proper military honors. The problem was that the Reagan administration was trying to conceal that we had troops in combat situations, so it couldn't acknowledge the true fate of these soldiers. Incredibly, the piece only discussed the plight of the soldiers and their families. It acted as though we all knew that the Reagan administration had lied about the involvement of U.S. troops in combat.

Of course many people did believe that the Reagan administration was lying back in the 1980s, but there had never been any major stories in the Washington Post, or any other major newspaper, that told readers that the Reagan administration was lying. In the same vein, it has not been the generally accepted backdrop in reporting that the AIG bailout was about rescuing the big banks, even though many of us did know this at the time.

Finally, Sorkin again makes the annoying assertion on the AIG bailout that, "we got our money back — with more than $22 billion in profit."

This one deserves derision. Access to liquidity back in 2008-2009 carried an enormous premium. We gave $192 billion to AIG at a time when other companies were dying for cash. We would have made an enormous profit if we had invested government cash almost anywhere. For example, if we lent $192 billion to Dean Baker's Excellent Hedge Fund, which used it to invest in the S&P 500 and then split the gains with the government, the country would have pocketed over $100 billion from the deal. So would Dean Baker's Excellent Hedge Fund.

Saying that the government made a profit on the bailout deals is irrelevant in any meaningful sense. The people who make this assertion are either showing their ignorance or being dishonest.

At some point when we are growing up most of us discover that people don't always tell the truth. Apparently, some folks at the NYT have not learned this lesson.

In an article reporting on Walmart's decision to stop providing health insurance for 30,000 part-time workers, the NYT told readers:

"In scaling back coverage for part-time employees, Walmart joins retailers including Home Depot, Target and Trader Joe’s, which have dropped benefits in response to the Affordable Care Act, the health care overhaul enacted by the Obama administration."

Actually, the NYT doesn't know that the Affordable Care Act (ACA) is the reason these retailers cut their health care coverage. Retailers have been cutting health care coverage, along with wages and other benefits, for more than a quarter century. While the ACA may have been a factor in these recent benefit cuts, it is entirely possible that these stores would have cut health coverage even if the ACA had never passed. That would be the case even if the companies may have told the NYT that the ACA was the reason they were ending coverage. 



I should mention that in standard economic theory, payments for health care are seen as coming out of wages. This means that if Walmart is cutting its health care because workers can now get access to insurance through Medicaid or the exchanges, we should expect to see a roughly equal increase in their wages. On the other hand, if Walmart is just cutting benefits with no increase in wages, this is in effect just a cut in pay. Since the piece makes no reference to any planned pay increases, it sounds like the latter.

That's the story that we may hear based on new data on job openings and hires. The data showed a rise in the number of job openings in August, coupled with a fall in the number of hires.

This might seem to fit the skills mismatch story that many folks are pushing. The idea is that the jobs are out there, but unemployed workers just don't have the necessary skills to fill them. If that's the case, then we apparently need more people with the skills to work as retail clerks and table servers.

The gap in retail between openings and hires increased by 123,000 last month, as hiring fell by 83,000, in spite of a 40,000 increase in job openings. Job openings in accommodation and food services increased by 73,000 while hiring fell by 5,000, adding 78,000 to the gap. (There was also a sharp fall in hiring in construction in August, but this just partially reversed an extraordinary rise reported in July.)

Anyhow, if you want to believe the skills mismatch story, you have to believe that the mismatch is most serious in sectors that we don't typically think require many skills. 

The Wall Street Journal ran a short piece headlined, "Dudley [N.Y. Federal Reserve Bank President William Dudley] elevates the strong dollar in the Fed's policy outlook." The point is supposed to be that the rise of the dollar in recent weeks will both put downward pressure on inflation and increase the U.S. trade deficit, as U.S. goods become less competitive. Unfortunately, the piece couldn't quite keep the story straight. The second paragraph told readers:

"First, Mr. Dudley has elevated the strength of the dollar and soft global growth as factors affecting the Fed’s policy thinking. He said the weak dollar puts downward pressure on U.S. inflation and dims U.S. near-term export prospects, factors that keep the Fed patient about raising rates even as the job market improves (emphasis added). It’s unusual for a senior Fed official to speak so directly about the impact of the currency on his thinking, in part because the currency is supposed to be the domain of the U.S. Treasury."

Yes, it is unusual for a Fed official to talk so openly about the impact of the value of the dollar on the economy, which is why it is important to get the story right. Obviously this was just a typo, but it is an extremely unfortunate one.


Note: I see that the WSJ has corrected the typo.

There's an old saying in economics that it doesn't matter if what you say is right, what matters is if the right person says it. I was reminded of this line when I read Matt O'Brien's Wonkblog post on the success of the Fed in allowing the unemployment rate to fall below the nearly universally accepted measure of the NAIRU, without having any notable acceleration of inflation. 

This is a great history that should be tattooed on the forehead of everyone involved in the current debate on how low the unemployment rate can go without kicking off a wage price spiral. Back in the mid-1990s all right thinking economists thought that the NAIRU was in the neighborhood of 6.0 percent. This meant that if the unemployment rate was below 6.0 percent the inflation rate would begin to increase. And, it would keep increasing as long as the unemployment rate stayed below 6.0 percent.

While there was some difference on the precise number (the usual range went from 5.6 percent to 6.4 percent), there was almost no dispute on the basic point. As O'Brien notes, even Janet Yellen adhered to this view, expressing concerns in 1996 that if the Fed didn't raise interest rates inflation would be a big problem. (Paul Krugman also expressed a similar view at the time.)

Thanks to the eccentricities of Alan Greenspan, the Fed did not raise interest rates. Instead it allowed the unemployment to continue to fall. It fell below 5.0 percent in 1997, it crossed 4.5 in 1998, and reached 4.0 percent as a year-round average. And inflation remained tame. The result was that millions of people had jobs who would not have otherwise. Tens of millions of workers at the middle and bottom of the wage distribution saw substantial real wage gains for the first time in a quarter century.

And, for the folks fixated on budget deficits, we saw a large surplus for the first time in decades. As much as the Clintonites like to boast of their great surpluses, the reality is that the budget would have remained in deficit if Clinton's Fed appointees (Janet Yellen and Lawrence Meyer) had gotten their way. It is only because the Fed allowed the unemployment rate to fall far lower than these folks thought wise that the budget shifted from deficit to surplus. (In 1996 the Congressional Budget Office projected a deficit of $240 billion [2.5 percent of GDP] for 2000. In fact, we ran a surplus of roughly the same amount. According to CBO, the legislative changes over this four year period went a small amount in the wrong direction.)

Anyhow, all of this should be a good reminder that the whole of the economics profession can be completely wrong on the most important issues affecting the economy. But that isn't why I brought you here today.

Neil Irwin has a piece today on the causes and consequences of the recent run-up in the dollar. He argues that the rise is largely due to the fact that the U.S. economy seems to be doing better in recent months than most other major economies, especially the euro zone and Japan. In those cases, the central banks are looking to ease up further in the foreseeable future, while the Fed is debating when to tighten.

This is certainly a plausible explanation for most of the rise (doesn't work well for the British pound), but the consequences are not as benign as Irwin's piece might lead readers to believe. The main consequence of a higher dollar is a larger trade deficit and therefore slower job growth and fewer jobs.

To get an idea of the magnitude of this effect, last month Goldman Sachs estimated that the 3.0 percent rise in the dollar we had seen by that point (it's a bit more now) will shave 0.1 to 0.15 percentage points off GDP growth in each of the next two years (sorry, no link). That translates into lost jobs. If the economy is 0.25 percent smaller in 2016 due to the higher dollar that would imply a loss of roughly 350,000 jobs.

In considering whether this job loss is a big deal, remember that the country has less than 80,000 people employed in coal mining. There have been frequent news stories warning of the dire job impact of measures to reduce greenhouse gas emissions, which would lead to substantial job loss in the coal industry. Just as a matter of arithmetic, if the coal industry were completely wiped out by environmental measures, the job loss in the coal industry would be less than one fourth as much as the job loss implied by Goldman's estimate of the impact of the rise in the dollar.

In fairness to Irwin, he does note there will be winners and losers:

"If you frequently fill up your car with imported oil or drink French wine, it’s good news. If you are Boeing competing against Airbus, or General Electric competing against Siemens, or Cadillac competing with Mercedes-Benz, it is terrible news."

We might add to his list of winners people who frequently take vacations in Europe or other foreign countries. A high percentage of the people involved in crafting economic policy (e.g. congressional and administration staffers, reporters, economists) fit into this category. It is probably also worth mentioning that the financial industry generally likes a stronger dollar since it means less risk of inflation and their money goes farther overseas. And, companies like Walmart that bet big on low cost imports are also happy with a higher dollar.

For these reasons, the high dollar may not be portrayed as a matter of concern in the media, even if the impact on jobs is far larger than other issues to which they have devoted considerable attention.

Apparently the Washington Post editorial board is partying over the fact that bankruptcy judges are imposing cuts in the pensions of retired public sector employees in Detroit, Michigan and Vallejo, California. An editorial in today's paper noted these cuts and told readers:

"Yet in many jurisdictions the balance has tipped too far in favor of ­public-employee benefits, largely because neither public-sector unions nor the politicians whose campaigns the unions support have any incentive to budget more realistically. Unsustainable pensions helped cause the recent wave of municipal bankruptcies that has touched cities as different as Detroit and Vallejo, Calif."

Okay, so the balance has tipped too far in favor of public-employee benefits and is "unsustainable."

So those retired public sector workers must be living really well. In Detroit the average non-uniformed public sector employee gets a pension of $18,500 a year. This goes along with an average annual wage for active workers of $42,000 a year. At the Washington Post this is apparently an imbalance where things have gotten too tilted for public sector workers. 

Yes folks, they pay people to ask such questions. Steven Mufson uses a Wonkblog piece to speculate on why it is that even though we have been in a recovery for more than five years people are still not happy about the economy. He tells us that President Obama has the same problem as President Bush (I), who got trashed on the economy even though revised data show it had been growing rapidly at the start of 1992.

While Mufson seeks out expert analysis to try to resolve this paradox, he might try looking at the data for a moment. No one sees the economy. They don't what the rate of growth is unless they read about it in the newspaper. What they do know is whether they have a job, whether their job is secure, and their pay is rising.

If you ask about these questions the only mystery is why Mufson is wasting our time. In 1992 the employment to population ratio was still 1.5 percentage points below its pre-recession level. That would translate into roughly 3.2 million fewer people having jobs in today's labor market. The current employment to population ratio is down by close to 4.0 percentage points from pre-recession levels, translating into more than 9.0 million fewer people with jobs. (Some of this is due to retirement of baby boomers.) Wages for most workers have been stagnant or declining in the last five years as was the case in 1992.

So the real question here is why any serious people would have any question about why the public is sour on the economy. People care about their living standards and security, they don't care about GDP numbers produced by the Bureau of Economic Analysis.


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