The NYT told readers that the budget deficit in the first nine months of the 2015 fiscal year was $365.2 billion and is projected to be $486 billion for the whole year. Feel informed?
Odds are that most readers don't have much basis for determining whether this deficit is big or small (yes, it is lots of money). In times past the NYT had committed itself to putting numbers like this in some context that would make it understandable to readers. For fans of such context, the deficit is a bit less than 2.7 percent of GDP. It is somewhat smaller by this measure than last year's deficit and is causing the debt to GDP ratio to edge downward.
That might have been useful information for readers. As it is, the NYT told readers that the deficit is a really big number.
There have been numerous articles and columns about how China is going to suffer because of its one child policy. The story is that there will be very few workers to support the growing population of retirees.
Well, just when you thought it couldn't get any worse, it turns out that robots are coming to take the jobs of the few workers China still has. How are they ever going to be able to support their retirees now?
Yes, these are completely opposite stories. It's too hot and too cold. It's too wet and too dry.
Look, there can be some truth to either of these stories. The first story is one where there is a problem of too little supply. Everyone is retired and there are not enough workers left to care for the elderly.
The second story is one of too little demand. The robots are doing all the work so no one has a paycheck to pay for the things they need. In this story, the robots are caring for the retirees, we don't need any workers to do it.
The fact that both of these stories can be told by people with claims to being serious speaks volumes about the state of economic debate in policy circles. Why do people put up with economists?
No one expects much consistency from Washington politicians or the Washington Post, but the latest episode in the Trans-Pacific Partnership (TPP) should be over the top even for this crew. Wikileaks published the text of a leaked health care annex. The annex spells out a set of rules that public health care programs must follow in deciding which drugs and procedures to cover. This will be subject to review and in principle can be contested through the investor state dispute settlement (ISDS) tribunals.
This means that if Pfizer comes up with a drug, for which it charges $150,000 per treatment, that is no more effective than the generic that costs $100 per treatment, it can contest the decision of Medicare or another country's health service not to pay for it. And, if it loses in the review process, it can take the complaint to an ISDS panel where it will get to appoint one of the three members.
Needless to say, this process is likely to raise the costs of Medicare and other public health systems considerably. That will undoubtedly lead to more calls for austerity from folks like the WaPo and other supporters of TPP, since we all know we can't afford the exploding cost of Medicare.
There is a widely circulated story in policy circles that public sector unions are to blame for underfunded public pensions. The story is that the unions effectively make deals with politicians they support to get generous pensions and leave the funding for people to deal with in the future.
In fact, there is little evidence to support this story, as many states with weak or no public sector unions rank near the bottom in pension funding, while some states with strong unions, like New York and Wisconsin, have pensions that are near full funding. Nonetheless, the story is still widely believed.
A ruling by New Jersey's Supreme Court yesterday should help to kill this story once and for all. The basic issue was whether the unions could hold the governor to an agreement where he had agreed to make payments into the pension funds in exchange for concessions from the workers. The court said no, the governor and the legislature could not be bound by any deal.
In other words, whether or not required payments are made to pensions, at least in New Jersey, is entirely up to the legislature and the governor. The unions have no voice in the matter.
It should be pretty hard to blame the unions in this situation, but that doesn't mean folks will stop doing it.
Several news articles have reported on the potential costs of the Obama administration's plans to forgive some of the student debt associated with Corinthian Colleges. Corinthian is a for-profit college that recently went bankrupt. It has been accused of using fraudulent tactics to get students to take out large loans to pay for its tuition.
In projecting the costs to the government, these pieces neglect to take account of the positive effect on incentives that eliminating this debt would have. As it stands, heavily indebted students could expect to have a large portion of any money they earn taken away from them to repay their debts. This acts as a strong disincentive to work (or possibly an incentive to work off the books) in the same way that a high tax rate would provide a disincentive to work.
It is reasonable to believe that these former students will work more and pay more taxes if their debt is forgiven. This would offset some of the money that the government would lose by forgiving the debt. While this offset is not likely to be close to the face value of the debt, it is very plausible that in many cases the additional tax revenue would be comparable to what the government would eventually collect on the debt if it were not forgiven. (Much of the debt will never be repaid regardless of whether the government forgives it.) In other words, forgiving the debt of former Corinthian students may be much less than indicated in these pieces.
The Wall Street Journal promised "trade deficit myths" in its editorial on the Trans-Pacific Partnership (TPP), and it certainly delivered. It begins by telling readers:
"The first problem with Ms. DeLauro’s charge is that running a trade deficit—that is, having more imports than exports—isn’t necessarily bad. In the U.S. it can signal economic health: that American consumers and businesses are saving money by buying cheaper foreign goods, and that the U.S. economy is attracting overseas investment, which drives productivity and demand for domestic and imported goods."
That's right, when the economy is near full employment a trade deficit allows the United States to have more consumption, investment, and/or government spending than would be possible if it had balanced trade. The key phrase here is, "when the economy is near full employment."
The U.S. economy is very far from full employment these days. The employment-to-population ratio (the percent of people who are employed) for prime-age workers (ages 25–54) is still down by 3.0 percentage points from its pre-recession level and 4.0 percentage points from its 2000 level. The number of workers who involuntarily are working part-time is still roughly 2 million above its pre-recession level.
These data, along with many other labor market indicators, show the economy is still far from full employment. In this context, the trade deficit translates into demand that is being drained away from the United States. Most folks would consider the resulting unemployment and underemployment to be bad, even if that apparently is not the view at the WSJ.
That would appear to be the implication of his comment in a WSJ column that:
"Further, a recent study has shown that Germans and Americans spend the same amount of time working, but the proportion of taxable market time vs. nontaxable home work time is different. In other words, Germans work just as much, but more of their work is not captured in the taxable market."
According to the OECD, the average work year for a German worker is just 77.6 percent as long as for a U.S. worker (1388 hours per year compared with 1788 hours per year). However their per capita income is more than 83 percent as high as in the United States.
If Germans are doing nontaxable home work then this would not be picked up in its official GDP data. If this nontaxable homework is on average at least 75 percent as productive as the taxable work that German's perform, then a measure of GDP that included this work would show that Germany has a higher per capita income than the United States.
Paul Krugman questions whether there is an existence of positive relationship between equality and growth. He rightly cautions those on the left against being too quick to accept the existence of such a relationship.
He uses a simple graph showing the relationship between inequality and growth per working age person in the years 1985 to 2007. His takeaway is that there is not much of a positive relationship, but there clearly is no negative relationship between equality and growth. In other words, the people who argue that we need to have more inequality to support stronger growth have a hard case to make using this simple comparison.
I would suggest taking the analysis one step further. One big difference between countries over this period is the extent to which they opted to take the benefits from growth in more leisure time. There are large differences in the decline in the length of the average work year across countries.
Using the OECD data (which is not perfect for international comparisons) we find that relatively equal France saw a decline in average work hours of 10.2 percent over this period. Denmark had a decline of 5.3 percent, and West Germany had a drop of 15.9 percent. These would translate into annual increases in GDP per potential work hour of 0.5, 0.2, and 0.8 percentage points, respectively.
By contrast, in the relatively unequal U.K. the drop in average hours was 4.7 percent, in Canada 3.1 percent, and in the U.S. 2.2 percent. These translates in gains in annual GDP per potential hour worked of 0.2, 0.1, and 0.1 percentage points, respectively.
Would looking at GDP per potential hour worked strengthen the positive correlation between equality and growth? I don't have time to check that one just now, but a quick eyeballing of the data suggests that it is possible. This still would not be conclusive evidence that equality is good for growth, but it would be interesting. And, it is an important reminder that there is nothing wrong with taking the benefits of higher productivity in the form of leisure rather than income. The planet will thank you for it.
The Washington Post ran a column by Steven Woloshin and Lisa Schwartz complaining about drug companies inventing diseases to market their products for unapproved uses. The immediate target is the marketing campaign for testosterone supplements to treat "Low-T." Low-T comes down to a set of symptoms that are essentially those associated with aging. Aging cannot be treated effectively with testosterone supplements.
While the column calls for more effective regulation from the Food and Drug Administration, the underlying problem are patent monopolies that allow companies to make enormous profits by pushing their drugs for unapproved uses. When a patent monopoly provides such incredible incentives (patent protected drugs can sell for prices that are several thousand percent above the free market price), it is unrealistic to think that government regulation will be effective in changing behavior.
This is like the Soviet Union trying to prevent people from selling blue jeans on the black market. It didn't work. In the case of patent protected drugs, the incentives are much larger. And, the health costs can be enormous, since the drugs being pushed may actually be harmful.
Just kidding, in a piece noting high levels of youth disengagement from the labor market (neither employed, nor looking for work) Samuelson complains:
"Those with jobs subsidize their usually better-off elders through Social Security and Medicare payroll taxes."
Of course workers pay for these benefits. On average workers pay slightly more for their Social Security than the benefits they can expect to get back in retirement. They pay less than the cost of Medicare benefits, but this is because protectionists dominate policy in the United States and keep trade barriers in place that keep health care costs close to twice as high in other wealthy countries. Therefore it would be more accurate to say that their payroll taxes subsidize the income of doctors and drug companies.
It is true that in the current year Social Security and Medicare beneficiaries are not paying for their benefits, but if we ignore past payments, as Samuelson appears to be doing, then we should also ignore the fact that Peter Peterson and other wealthy people paid for the government bonds they own. From this perspective, we can then say that the interest paid on government bonds is simply a subsidy to the people who collect it.
Samuelson is right to note the high rates of non-employment among young people. The obvious solution would be to have government have big stimulus programs that could employ millions of young people. Unfortunately, deficit hawks (like Robert Samuelson) have forced government to go in the opposite direction and pursue policies of austerity.
In light of Samuelson's complain about subsidies for the old, it is worth noting his comment:
"To be sure, there are correctives. ... Older workers will retire or die, opening up permanent slots for the young."
The rate at which older workers retire will depend in large part on whether they can survive on their Social Security benefits. If these are made less generous, then we would expect fewer older workers to retire, leaving fewer jobs for young people.
In his Upshot piece discussing the May jobs report, Neil Irwin noted both the healthy job growth and the implication for productivity growth. I was troubled by the same issue when I wrote up the jobs report yesterday.
The point here is quite simple, we are seeing relatively rapid job growth, just under 2.0 percent over the last year, when the rate of economic growth is quite weak. The drop in first quarter GDP was clearly an anomaly. (One of the great pointless economic debates of all time is whether the bad number is due to unusually bad weather or an inadequate seasonal adjustment.) But even pulling this out, we are looking at an economy that at best is only growing at a bit more than 2.0 percent annually.
The implication, as arithmetic fans everywhere are quick to point out, is that productivity growth is far under 1.0 percent and possibly close to zero. This seems really hard to believe. You don't have to ascribe to the robots will take all our jobs view to believe that the trend rate of productivity has to be at least 1.5 percent and quite possibly over 2.0 percent.
Productivity had grown at almost a 3.0 percent annual rate from 1995 to 2005. While that may have been a one-time spurt, even in the years of the slowdown, from 1973 to 1995, productivity still grew at a 1.5 percent annual rate.
There is always a substantial cyclical element to productivity growth. Firms are less concerned about maximizing output per worker when workers are cheap and plentiful. There also is some skewing as desperate workers take jobs in low pay and low productivity sectors like restaurants. By my calculation, this skewing knocked about 0.2 percentage points off of annual productivity growth since 2007. That is some of the story, but clearly there is much else going on.
Anyhow, it is good to see people getting jobs, but we should want to see a better pace of productivity growth. It is also important to remember that we still have a long way to go on the jobs front. While a 5.5 percent unemployment rate may not sound too bad, the employment rate for prime age workers (ages 25-54) is still down by 3.0 percentage points from its pre-recession level and 4.0 percentage points from its 2000 level. It is not plausible that all of these people just decided that they don't feel like working.
This means that we still have far to go before we have fully recovered from the downturn. The Fed should keep this in mind when it considers putting its foot on the brakes by raising interest rates.
No, Krauthammer didn't actually come out in support of free trade. Instead he wants us to be concerned that doctors in the United States are quitting (to become shoe salespeople?) because they don't like Obamacare.
Since our doctors get paid on average roughly twice as much as those in other wealthy countries and even more relative to doctors in less developed countries, there should be little problem attracting large numbers of people willing to train to U.S. standards and work as doctors in the United States, even if it means filling out annoying forms.
However, since protectionists dominate trade policy, we are not likely to see an opening of physicians to foreign competition. While our trade negotiators are happy to craft deals that put manufacturing workers in competition with low paid workers in the developing world, they do not want to do the same with doctors. Instead, we are supposed to be worried that doctors are unhappy even though many are in the richest one percent of the country and the vast majority are in the richest two percent.
An AP article in the Washington Post on the release of Commerce Department data showing a sharp drop in the trade deficit in April concluded with a discussion of the Trans-Pacific Partnership (TPP). The piece told readers:
"Obama and backers of the trade deal argue that it would open huge markets to U.S. goods by lowering tariffs and other trade barriers. But critics, including labor and environmental groups, say that the trade agreement would subject American workers to unfair competition from countries with lower standards for both labor rights and environmental protections."
Actually critics also dispute the assertion that the TPP "would open huge markets." Most of the countries included in the TPP already have trade deals with the United States, so there is likely to be little increase in access to their markets. Of the remaining countries, Japan is by far the most important, but Japan's tariffs on U.S. exports are already low, so the gains from lowering these barriers further is likely to be limited. The remaining countries all have relatively small economies. Their size coupled with their distance from the United States makes it implausible that the United States will have any substantial increase in exports as a result of the TPP.
The Washington Post is apparently pulling out all the stops in pushing its agenda on trade. It ran a front page news story that included several heroic acts of mind reading and flagrant misrepresentations to help push the deal to its readers.
In the later category, the second paragraph told readers:
"members of the New Democrat Coalition [a group of centrist Democrats in Congress] heard from frustrated tech executives who pleaded with them to help boost global growth and demanded to know why the president’s party was not lining up behind his trade push."
In fact the tech executives were not pleading with them to help "boost global growth," or if they were they were not being honest. There are no models that show the TPP having more than a trivial impact on global growth. In fact, the United States Department of Agriculture projected that the impact on growth in the United States would be too small to measure.
If the tech executives were pleading with the New Democratic Coalition to "boost global growth" it was an argument of the form, "give me money, it will be good for the economy." The reality is that they of course want a deal that they helped craft to make themselves richer.
Contrary to the assertions in this article, the TPP is absolutely not about expanding trade. In fact, it increases protectionism in important areas in the form of stronger and longer patent and copyright protections. No models have sought to estimate the costs to the economy of these government granted monopolies. It is likely these costs are substantial since they can raise the price of the protected items by a hundredfold or more. (The patent protected price of the Hepatitis C drug Sovaldi is $84,000 per treatment in the United States. A high quality generic is available in India for less than $1000.) This increase in prices is equivalent to a 10,000 percent tariff. It leads to exactly the sort of distortions and corruption that economists predict from high tariffs.
The NYT ran a column on helping low income homeowners by Elysse Cherry, the chief executive of Boston Community Capital. The piece includes various proposals designed to help low income homeowners who were hit by the collapse of the housing bubble, but it also includes the bizarre complaint:
"In many areas, housing prices are stuck below their inflated pre-bubble levels. Until we deal with this fact, entire communities will continue to struggle with high foreclosure rates and a lack of economic mobility. ....
"However, the poorest fifth of Americans already spend more than 40 percent of their income on housing, compared with less than 31 percent for the upper fifth, according to government data. Meanwhile, real wages for most Americans have been flat or falling for decades. Absent an extraordinary increase in income for low-income families, home prices in low-income areas aren’t going anywhere.
"This disparity between high- and low-income neighborhoods is evident in the numbers. The Standard & Poor’s/Case-Shiller National Home Price Index for March was over the March 2004 index, and national median home prices, according to the real estate website Zillow, are just over what they were 10 years ago."
There are two problems with this complaint. First, it is factually wrong, or at least misleading. The weak price performance of lower cost homes depends very much on the time window being considered. If homeowners bought near the peak of the bubble, which disproportionately affected lower income neighborhoods, then their prices would still be depressed, however if they bought before the bubble they would be doing quite well.
American Enterprise economist Andrew Biggs again warned about public pension funding in a Wall Street Journal piece. He’s not altogether wrong. Biggs points out that many states continue to badly underfund their pensions. He also cautions against pension funds taking too much risk with their investments. These points are well taken, but I would raise a few issues about Bigg’s argument.
First, it’s good to see that Kansas is Bigg’s poster child as one of the states with a poorly funded pension plan looking for higher market returns rather than making its required contributions. This is worth noting because Kansas is one of the most Republican states in the country, with a very conservative governor. It certainly it is not a hotbed of public sector unionism. This point is important. It was not public sector unions that caused states to have problems with pension funding, it was bad management by elected officials, both Democrats and Republicans.
Second, Biggs somewhat misrepresents the issues on returns. He argues the return assumptions used by public pension plans are considerably higher than the recommendations of a group of investment consultants and asset managers. However the asset mix for which this group made their projections was a portfolio of 70 percent equities and 30 percent bonds. The mix of assets held by pensions tends to be oriented towards somewhat higher return assets, with holdings in private equity and venture capital. The returns assumed by the pension funds are much closer the returns recently recommended in a report by the Pension Consulting Alliance.
It is also worth noting one source of confusion in these comparisons. Many pension funds assume higher rates of inflation than we have been seeing recently or are expected in the future. For example, the Kansas plan cited by Biggs assumes a 3.0 percent average rate of inflation over its planning horizon. The Congressional Budget Office and most other forecasters assume a 2.0 percent inflation rate. The difference in inflation assumptions should translate one to one into differences in returns. In other words, a 6.0 percent return assumption with a 2.0 percent inflation rate translates into a 7.0 percent return assumption with a 3.0 percent inflation rate.
However Biggs is right to raise a flag about some of the risky investments being pursued by pension funds. Private equity and venture capital can both be very risky. In the past these investments have provided a better return than the overall market, but pension funds would be wise to exercise caution if they are relying on this continuing in the future.
It is amazing how economic reporters continue to repeat nonsense about deflation. As fans of arithmetic and logic everywhere know, deflation is bad for the same reason a lower rate of inflation is bad. It raises the real interest rate at a time when we want a lower real interest rate and it increases the real value of debt when we want to see the real value of debt reduced. (The real interest rate is the nominal interest minus the inflation rate.)
Crossing zero means nothing, which should be obvious to anyone who has given the issue a moment's thought. The inflation rate is a sum of millions of different price changes. When it is near zero, many prices are already falling. When it crosses zero and becomes negative, that means a somewhat larger share of prices are falling. So what? Since prices are quality adjusted, the prices people pay may still be rising.
Anyhow, the NYT added to the silliness yet again when it told readers that price declines in the euro zone due to falling energy prices are a potential problem. Let's think this one through for a moment. Suppose that prices are rising at a 1.0 percent annual rate. Given the weakness of the euro zone economy that is lower than would be desirable, but let's use that as a starting point.
Now let's have energy prices fall at a 40 percent annual rate so that prices are now falling at a 1.0 percent annual rate. Let's assume that the rate of inflation for non-energy prices has not changed.
Now how does this make things worse? People used to be pay more for gas and heat, with most of that money ending up outside of the euro zone. With the lower prices, this money stays in their pocket for them to spend on other things. In terms of debt burdens, if wages are rising in step with inflation, then the real value of debt to workers is being eroded at exactly the same rate as before. And since non-energy prices are still rising at the same pace, the real interest rate for investment outside the energy sector has not changed.
So what is the problem? It would be great if the NYT could get someone other than deflation cultists to do their economic reporting.
The NYT apparently thinks this is a common practice. An article discussing a Supreme Court ruling that a second mortgage could not be discharged in a chapter 7 bankruptcy filing even when the homeowner's first mortgage vastly exceeded the value of the house, told readers:
"a ruling in favor of the homeowners might have made banks and other lenders less willing to extend second mortgages in the future."
In a foreclosure, a first mortgage must be paid in full before a dollar can be paid on a second mortgage. In the case before the court, the first mortgage was for $183,000, while the home was valued at $98,000. The homeowner therefore argued that the second mortgage was effectively unsecured debt that should be discharged in bankruptcy.
A ruling in favor of the homeowner would only affect banks' lending behavior if they think there is a substantial probability that a home will fall below the value of a first mortgage. If they do believe this risk to be large enough to affect their lending, then it is probably best for the homeowner and the economy more generally that the second mortgage not be issued.
Robert Samuelson used his Monday column to tell readers that the problem with the economy is that we are suffering the psychological fallout of the Great Recession:
"My main explanation for this — as I’ve argued before — is the hangover from the 2008-2009 financial crisis and the Great Recession. These events changed economic psychology, precisely because they were unanticipated and horrific. They transcended the experience of most Americans (that is, anyone who hadn’t lived through the Great Depression). Corporate executives and consumers alike became more defensive; they saved and hoarded a bit more. If a novel calamity struck once, it could strike again. They’d better prepare."
The problem is that the data refuses to agree with his psychoanalysis. As I pointed out yesterday, consumption is actually higher as a share of GDP than it was before the downturn, indicating that fear is not keeping households from consuming in any obvious way.
Samuelson also points to the rise in temporary employment as evidence that firms are scared to commit themselves to permanent employees. The problem with this one is that temporary employment as a share of total employment is just rising back to the levels of the late 1990s, a time when the economy was booming.
If we look at the narrow category of temporary employment agencies, the Bureau of Labor Statistics (BLS) reports the number stood at 2,880,000 in April. That compares to 2,605,000 in December of 1999. Measured as a share of total employment, it stood at 2.03 percent in December of 1999, compared with 2.04 percent of total employment in April.
If we use the somewhat broader category of employment services, BLS reports the number at 3,547,000 in April. That compared to 3,776,000 in December of 1999. Measured as a share of total employment, jobs at employment service agencies fell from 3.77 percent in December of 1999 to 3.55 percent in April.
In short, if employment in temporary agencies is supposed to be a measure of insecurity, it doesn't appear to be going in the right direction to make Samuelson's point.
The most obvious explanation for the continuing weakness of the economy is that there is nothing to fill the gap in demand created by a $500 billion annual trade deficit (@ 3 percent of GDP). In the last decade, the demand generated by the housing bubble filled the gap, while in the 1990s the demand from a stock bubble filled the gap. In the absence of another bubble and a refusal to run large budget deficits, there is no obvious source of demand to fill this gap.
Unfortunately this explanation is far too simple to be used by economists or those writing on economy.
Undoubtedly millions of readers are wondering about the NYT's use of the term when it told readers that one of the goals of the Trans-Pacific Partnership (TPP) is to, "protect intellectual property from theft." Actually one of the goals of the TPP is to strengthen and lengthen patent and copyright protections.
After this is done, those who do not respect the new laws can be accused of "theft," however it makes no sense to accuse someone of theft for breaking laws that do not exist. The NYT may want strong and long protections, but a newspaper should not be calling people who do not adhere to its views of intellectual property "thieves."
As the world awaits the final word on the negotiations between Greece and its creditors, it's worth a quick flashback to 2010 and the report of Alan Simpson and Erskine Bowles, the co-chairs of President Obama's deficit commission. (This report is often referred to as a report of the commission. That is not true. The by-laws clearly state that to issue a report it was necessary to have the support of 12 of the 16 commission members. While no formal vote was ever taken, the co-chairs' report only had the support of 10 members.)
Anyhow, getting back to matters at hand, one of the Simpson-Bowles proposals was to raise the normal retirement age for Social Security to 69 from its current level of 66 (soon to be 67). The report recognized that many people work in physically demanding and/or dangerous jobs where it would be unreasonable to expect people to work this late in life. It therefore proposed having special lower retirement ages for certain occupations.
The reason this is relevant to Greece is that one of the sticking points at the moment is the reform of Greece's public pension system. One of the main issues is that the current system allows people in many occupations to start collecting benefits well before the normal retirement age. For example, hairdressers are apparently among this group because they are exposed to dangerous chemicals on the job.
While the Greek system was a universal target of ridicule among serious minded people everywhere, many of these same people embraced the Simpson-Bowles report as a gem of thoughtful, non-partisan, policy-making. The ability to ignore the fact that the supposedly thoughtful Bowles-Simpson gang were advocating the adoption of a pension system subject to universal ridicule is yet another example of the lack of seriousness of the serious people.