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Frank Bruni Wants Lower Quality Public School Teachers Print
Tuesday, 19 August 2014 07:17

That's what can be inferred from his column calling for an end to tenure for public school teachers. Job security is part of the pay package for public school teachers. If they can expect less job security, it effectively amounts to a cut in pay. This would be expected to make teaching a less attractive career path compared with the alternative choices.

As a practical matter, there are few (if any) school districts that do not have provisions that allow even tenured teachers to be fired if they are not competent. This may not happen in many cases because their principals are too lazy to document the incompetence, or the higher ups in the school district don't provide them the resources they would need to ensure that classes are being well-taught. These latter problems will not be addressed by the ending of tenure.

How Should Social Security Benefits Respond to an Economic Collapse? Print
Tuesday, 19 August 2014 04:27

This is the issue that Andrew Biggs implicitly raises in his Wall Street Journal column highlighting the jump in the size of the projections of the Social Security shortfall since 2008. Biggs complains that progressives have responded to the economic collapse by proposing an increase in benefits that would make the shortfall even larger rather than supporting plans for eliminating the projected shortfall. While Biggs' focus is explicitly the solvency of the program, the actions of progressives can only be understood against the larger economic context.

The calls for expansion of benefits are at least in part a response to the economic collapse.It's worth noting that this collapse was 100 percent preventable and that it was one of the worst blunders in the history of economic policy-making in the history of the world. Unfortunately the top economic advisers in both political parties whose errors were responsible did not have their standing affected by this mistake.

As a result of the collapse, many people nearing retirement saw much of their savings disappear as the stock market collapsed, house prices plummeted and they lost their jobs during their peak savings years. This meant that millions of workers had to draw down their savings to support their families at a point where they had planned to be accumulating wealth for retirement. In addition, due to the weakness of the labor market created by high unemployment, tens of millions of workers have seen stagnant wages over the last six years when they could have expected to see real wage growth in the neighborhood of 1.0 percent annually had the economy continued on the path projected in 2008.

In short, the collapse hugely increased the need for Social Security, which is the basis for the response of progressives. Biggs is correct that the cost of additional benefits will have to be covered at some point, but there is no obvious reason that it is necessary to come up with the full plan today. Part of the cost can be recovered by increasing the payroll cap as has been proposed by people across the political spectrum.

It is likely that we will need some increase in the payroll tax at some point, but there is little reason that the exact timing needs to be pinned down today. In the decade from 1980 to 1990 the payroll tax increased by over 2.0 percentage points. In spite of this hike, many conservatives tout the eighties as an economic golden age. It is difficult to see why it would be such a disaster if there were a comparable increase somewhere over the next three decades.

Workers care about their after-tax wages which are primarily determined by what they earn before taxes. Due to economic mismanagement and trade and regulatory policies that were designed to redistribute income upward, most workers have seen very little growth in before-tax wages over the last three decades. If they get an even share of the projected growth in compensation over the next three decades, then before tax compensation will be almost 60 percent higher in 2044 than it is today. It is understandable that progressives would be more focused on ensuring that workers get their fair share of economic growth than the risk 3-4 percent of these gains might be taken back in tax increases to support their retirement.

Stock Returns: Between Shiller and DeLong Print
Monday, 18 August 2014 06:51

Robert Shiller had a piece in the Sunday NYT noting that the S&P 500 was unusually high relative to his measure of trailing earnings. He calculated a ratio above 25, far above the historic average of 15. Shiller said that in the past, each time this ratio crossed 25 the market took a plunge shortly thereafter. He concludes his piece by seeing it as a mystery that the market remains as high as it does.

Brad DeLong picks up on Shiller's analysis and points out that in most cases in the past where Shiller's ratio had exceeded 25, people who held onto their stock over the next decade would still have seen a positive real return. He notes the examples in the 1960s when investors would have seen a negative ten-year return, even though Shiller's ratio was below the critical 25 level. He therefore concludes there is no issue.

I would argue there is an issue, although not quite as much as Shiller suggests. To get at the problem, we have to recognize that stock returns, at least over a long period, are not just random numbers. Both Shiller and DeLong treat this as a question of guessing whether an egg will turn into a lizard or chicken based on the distribution of past hatchings that we have witnessed.

That would be a reasonable strategy if that is the only information we have. But if we saw that one of the eggs was laid by a hen, then we may want to up our probability estimate that it will hatch into a chicken.

In the case of stock returns we can generate projections based on projections of GDP growth, profit growth, and future price to earnings ratios. For example, we may note that the ratio of stock prices to after-tax corporate profits for the economy as a whole was 22.3 at the end of 2013. (This takes the value of stock from the Financial Accounts of the United States, Table L.213, lines 2 plus 4 for market valuation. After-tax corporate profits are from the National Income and Product Accounts, Table 1.10, Line 17).

This means that earnings are roughly 4.5 percent of the share price. If companies pay out 70 percent of their earnings as dividends or share buybacks (roughly the average), this translates into a 3.1 percent real return in the current year.



Job Polarization Was a Story of the 1990s, Not the 2000s Print
Monday, 18 August 2014 04:18

The Washington Post had an article reporting on the more rapid job growth in higher paying sectors of the economy in the last six years. At one point the piece tells readers:

"Even before the recession began, the economy was experiencing what academics call job polarization: growth at the high and low ends of the pay scale, but not much movement in the middle. Two major factors drove this shift: new technologies that replaced some skilled workers and increased competition from the international labor market."

Actually this is not true. Since 2000 both high and middle wage occupations were declining as a share of total employment. Only low-paying occupations saw an increase in their share of total employment.

Washington Post Reports Medicare Spent 0.14 Percent of Its Budget of Motorized Wheel Chairs, Much of Which Was Fraudulent Print
Sunday, 17 August 2014 07:46

The Washington Post had a major front page story reporting on scammers pushing unneeded motorized wheelchairs to seniors. Medicare pays roughly $5,000 for each chair, which allows for a large profit to suppliers as well as payments to intermediaries who would push the chairs to people who did not need or want a motorized wheelchair.

The piece is a useful exposure of a major scam operation, however it never puts the cost of the scam in a perspective that would be meaningful to most readers. At one point it tells readers that Medicare spent a Really Big Number ($8.2 billion) on these motorized wheelchairs since 1999. It would have been helpful to inform readers that this amounted to 0.14 percent of the $5.8 trillion that Medicare paid out over this period. 

Of course not all of the payments were made for unnecessary wheel chairs. If 60-70 percent of the wheel chairs were not needed, then fraudulent sales would come to roughly 0.1 percent of Medicare spending over this period.

This is hardly a trivial sum, but by failing put the numbers in context readers may wrongly be lead to believe that the Medicare program is grossly inefficient because of such scams. In fact, because the program has much lower administrative costs than the private sector (@ 2 percent for Medicare compared to 15-20 percent for private insurers), the country is still saving an enormous amount of money because the government is providing Medicare rather than private insurers.

If administrative costs were at the level of the insurance industry, Medicare would have cost between $600 billion and $900 billion more since 1999. It is also worth noting that private insurers are also often victims of scams.


Note: The figure for administrative costs for Medicare refers to the traditional fee for service Medicare program. Parts C and D, which are administered by private insurers, have considerably higher costs.

The Skills Gap is Most Evident in Retail Trade and Restaurants Print
Saturday, 16 August 2014 08:19

Floyd Norris has an interesting column comparing the numbers of job openings, hirings, and quits from 2007 with the most recent three months in 2014. The most striking part of the story is that reported openings are up by 2.1 percent from 2007, while hirings are still down by 7.5 percent. 

While Norris doesn't make this point, some readers may see this disparity as evidence of a skills gap, where workers simply don't have the skills for the jobs that are available. If this is really a skills gap story then it seems that it is showing up most sharply in the retail and restaurant sectors. (Data are available here.) Job openings in the retail sector are up by 14.6 percent from their 2007 level, but hires are down by 0.7 percent. Job opening in the leisure and hospitality sector are up by 17.0 percent, while hiring is down by 7.4 percent.

If the disparity between patterns in job openings and hires is really evidence that workers lack the skills for available jobs then perhaps we need to train more people to be clerks at convenience stores and to wait tables. 

Martin Feldstein and Robert Rubin Discover Bubbles Print
Friday, 15 August 2014 04:26

In one of the more remarkable shows of chutzpah in modern economic policy, Martin Feldstein and Robert Rubin penned a joint oped in the Wall Street Journal warning that the Fed needs to take seriously the risk of asset bubbles. The basis for the chutzpah is that this column is appearing in the summer of 2014 instead of the summer of 2004, when it could have saved the United States and the world from an enormous amount of suffering.

Had these men written a similar column in 2004 warning about the housing bubble (as some of us were desperately trying to do at the time) it undoubtedly would have received enormous attention in both the policy and financial community. Both men were considered the pillars of economic wisdom for their respective parties. Feldstein served as head of the Council of Economic Advisers under President Reagan and had trained most of the other leading lights of conservative economics. Rubin has served as Treasury Secretary under President Clinton and had advanced the careers of figures like Larry Summers and Timothy Geithner.

Unfortunately, instead of warning of the bubble, they were profiting from it. Rubin was a top executive at Citigroup, which was one of the biggest actors in the securitization of subprime mortgages. Feldstein was on the board of AIG, which was issuing credit default swaps on mortgage backed securities with a nominal value well into the hundreds of billions. 

For what its worth, their current warnings are misplaced. The Fed has to concentrate on trying to promote growth and getting people back to work. The risk from inflated asset prices that they identify are primarily a risk that some hedge funds and other investors may take a bath when asset prices (like junk bonds) move to levels that are more consistent with the fundamentals.

Unlike the housing bubble, these inflated asset prices are not driving the economy. This means that the economic repercussions of a decline in the price of assets like junk bonds will be largely limited to the losses of the people who invested in them. That is the way a market economy works. People make bets and some lose, so what?

It is also worth noting that Federal Reserve Chair Janet Yellen is far ahead of Feldstein and Rubin on the problem of bubbles. Last month she warned of the over-valuation of some assets in her congressional testimony. Since then the price of these assets, notably junk bonds, has fallen, reducing the potential risk they pose to the financial sector. It makes far more sense to deal with out of line asset  prices by trying to use targeted actions to bring them back into line than to throw millions of people out of work, and reduce the bargaining power of tens of millions more, by raising interest rates.

A Rapidly Aging Population Is Not a Depression Problem Print
Friday, 15 August 2014 04:09

Matt O'Brien had a good piece in Wonkblog pointing out that the current downturn in the euro zone has been worse for these countries than the Great Depression. However it does get part of the story wrong.

At one point it outlines the troubles of the region:

"The combination of zombie banks, a rapidly aging population and, most importantly, too-tight money have pushed it into a "lowflationary" trap that makes it hard to grow, and is even harder to escape from. That's what happened to Japan in the 1990s, and now, 20 years later, its nominal GDP is actually smaller than it was then."

The aging of the population, and therefore a slow-growing or declining labor force, does not belong on the list of problems here. What matters for well-being is per capita growth. (That is not the only thing that matters, but insofar as GDP matters it is GDP per capita.) If the population is growing very slowly or even shrinking slowly, it will likely be associated with lower overall growth, but not necessarily with lower per capita GDP growth.

Germany has managed to get its unemployment rate down to 5.1 percent, compared to 7.8 percent before the downturn, in spite of having considerably lower growth than the United States over this period. Its employment rate for prime age workers (ages 25-54) has risen by 3.0 percentage points, compared to a drop of 3.5 percentage points in the United States. 

As a result of its slow population growth, few in Germany would see its slow economic growth as being a problem. In fact, most view the economy as being relatively prosperous right now. This is one of the reasons that the country is reluctant to support measures that would help its neighbors, since Germany is not really sharing in their pain at the moment. Similiarly, Japan's slow population growth meant that most people in the country were not suffering in the way that its weak GDP growth may have suggested.

Consumers Aren't Being Cautious, They Are Spending As Much as We Can Reasonably Expect Them to Spend Print
Thursday, 14 August 2014 07:20

In its report on retail sales in July, the Washington Post told readers that consumers are being "cautious," since there was little increase from June's levels. Actually, with the saving rate hovering between 4-5 percent of disposable income, consumers are spending about as much as we can reasonably expect them to spend.

The current saving rate is well below the level of the pre-bubble years, which averaged close to 8.0 percent. The ephemeral wealth of the stock and housing bubbles drove the saving rate to lower levels. But if we pull out these unusual periods, the current saving rate is unusually low, not high as the Post article would imply.

Stocks, Flows, and Abenomics Print
Thursday, 14 August 2014 07:05

Matt O'Brien had an interesting post in Wonkblog on the market reactions to Abenomics. O'Brien points out that the rise in Japan's stock market and the fall in the value of the yen since Abe took office are the result of market movements when Japan's markets were closed. This means that the movements in the stock market were driven by traders in Europe, the United States and elsewhere. O'Brien shows that Japan's stock market has actually declined slightly in the period when the Japanese market was open and the yen has risen in value, implying that Japanese investors don't share the views of foreign investors.

This takeaway is not quite right. It is important to remember that the outstanding amount of equity or currency vastly exceeds the amount that is bought and sold in a day or month. Japanese investors obviously noticed the dramatic rise in the stock market and the fall in the yen over the last year and a half. If they did not believe that these movements were based on solid economic foundations, presumably they would have sold their stock and bought yen in a way that offset these movements.

To see this point, imagine you had shares of stock in a company that were trading at $100 per share. Imagine you went away on vacation for two weeks, out of reach of the Internet. When you came back you discovered that the shares were selling at $150 each. If you did not believe that the higher price accurately reflected the outlook for the company's future profit potential, then presumably you would dump your shares and pocket the profit. 

This is clearly not going on in Japan. While the actions of Japanese traders may very slightly be offsetting the enthusiasm of foreign investors, for the most part they obviously share this enthusiasm or they would not be willing to hold the stock of Japanese companies at current prices.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.