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Is There Any Way That Weak Employment Numbers In Europe Might Bolster Concerns That Most Economists Are Right About Government Stimulus Print
Friday, 01 August 2014 05:28

A New York Times article on new economic data from the euro zone noted a 0.1 percentage point rise in the unemployment rate in France. It told readers that this rise (which is almost certainly not statistically significant):

"is likely to bolster concerns that France is stuck in an economic rut and politically incapable of making changes to labor rules or putting in place other overhauls needed to improve economic performance."

There is no one quoted making this claim, it is simply an assertion of the article. In this context, it is worth noting a piece in the NYT Upshot section by Justin Wolfers, which was also highlighted in Paul Krugman's column today. Wolfers noted the nearly unanimous view among the economists surveyed by the University of Chicago's Initiative in Global Markets that President Obama's stimulus created jobs and that it was more than worth its cost.

In the economics profession there is not much dispute that additional government spending in a depressed economy will lead to more jobs and growth. However, this view appears to have no place in the NYT's reporting on Europe's economy, instead we get unattributed assertions about bolstering concerns.

 
More Fun With Budget Numbers: Frat Boy Reporting at the New York Times Print
Friday, 01 August 2014 04:58

The NYT gave us a prime example of frat boy budget reporting today, presenting readers with really big numbers which mean almost nothing to any of them. The article referred to the Senate passage of bills providing funding for veterans health care and transportation. It told readers:

"Prompted by the long waiting lists at veterans’ health centers and the bureaucratic efforts to hide them, the $17 billion bill aims to clean up the scandal-scarred Department of Veterans Affairs by granting the agency’s secretary broad new authority to fire and demote senior executives.

"It would also authorize the leasing or construction of 27 new health facilities; and set aside $5 billion to hire doctors, nurses and other health care providers, and $10 billion to pay for veterans’ care at private and public facilities not run by the department."

Anyone know how large a share of the budget $17 billion is? Will it bankrupt our kids? Are the $5 billion for hiring doctors and $10 billion for care at private facilities in addition to or part of the $17 billion? Is this for one year or multiple years?

(The cost is approximately 0.45 percent of annual spending. The spending on doctors and private care is part of the $17 billion. It seems to cover multiple years [reducing its share of spending], but a quick look at the summary doesn't make the time period clear.)

The article also told readers:

"The Senate bowed to the House, which had approved an $11 billion measure financed largely by a sleight of budgetary hand that avoids any tax increases. Under the maneuver, known as “pension smoothing,” corporations will be allowed to set aside less money for pensions, which will increase profits and raise business tax receipts."

The $11 billion comes to 0.3 percent of annual spending. This spending also covers multiple years, although the time period is certainly not clear from this article.

Anyhow, this should be really good one for the fraternity of budget reporting. It provides virtually no information to readers but apparently meets the quality standards of the NYT. 

 
Larry Kotlikoff Tells Us Why We Should Not Use Infinite Horizon Budget Accounting Print
Thursday, 31 July 2014 21:23

In a New York Times column, Boston University economist Larry Kotlikoff told readers why we should not use infinite horizon budget accounting. Kotlikoff showed how this accounting could be used to scare people to promote a political agenda, while providing no information whatsoever.

For example, after telling us how much money his 94-year-old mother is drawing from Social Security and a widow's benefit from his father's job he ominously reports:

"you’ll find that the program’s unfunded obligation is $24.9 trillion 'through the infinite horizon' (or a mere $10.6 trillion, as calculated through 2088). That’s nearly twice the $12.6 trillion in public debt held by the United States government."

Are you scared? Hey $24.9 trillion a really big number. That's more than even Bill Gates will see in his lifetime. Does it mean our kids will be living in poverty?

Not exactly. Kotlikoff could have pulled a number from the same table in the Social Security trustees report to tell readers that the unfunded liability is equal to 1.4 percent of future income. If we just restrict our focus to the 75-year planning horizon (sorry folks, we don't get to make policy for people living 100 years from now), the shortfall is 1.0 percent of GDP.

That's not trivial, but it is considerably less than the combined cost of Iraq and Afghanistan wars at their peak. Furthermore, if we go out 40 years and assume that our children get their share of the economy's growth (as opposed to a situation in which it all goes to Bill Gates' kids), their before tax income will be more than 80 percent higher than it is today.

This means that even if they pay 2-3 percentage points more in Social Security taxes to cover the cost of their longer retirements (they will live longer than us), they will still have incomes that are more than 70 percent higher than we do today. Are you scared yet?

Read more...

 

 
How Do You Spell "Inflation Hawks on the Warpath?" ECI Print
Thursday, 31 July 2014 08:36

The release of new data from the Employment Cost Index (ECI) has the inflation hawks really excited. It showed that compensation rose by 0.7 percent in the months from March to June. This is a sharp uptick from the 0.3 percent rate in the months from December to March. This could be just what is needed to force the Fed to raise interest rates to slow the economy and keep people from getting jobs. That's pretty exciting stuff.

Before we start designating people to give up their jobs in the war against inflation, it's worth looking at the data a bit more closely. The 0.3 percent ECI growth reported for the winter months was actually unusually low. It had been rising at a 0.5 percent quarterly rate (2.0 percent annual rate) for the last four years. Fans of arithmetic can average together the 0.3 percent measure from the first quarter with the 0.7 percent measure from the second quarter and get (drum roll, please) ....... 0.5 percent. 

In other words, the 0.7 percent rise in the ECI kept exactly on the growth track we have been for the last four years. It is not evidence of an uptick in the rate of wage growth (which would be good news).

Employment Cost Index

ECI-2014-2

                                                  Source: Bureau of Labor Statistics.

 

Addendum:

Since there are people who see the rise in the second quarter ECI as a serious inflation threat, a few more data points may be helpful. The rise in the ECI for state and local employees was unchanged at 0.5 percent in both the first and second quarters. On the private side, the wage index went from a rise of 0.2 percent in the first quarter to 0.8 percent in the second quarter. The benefits index rose 0.3 percent in the first quarter, compared with 1.1 percent in the second quarter.

This leaves us with two possible explanations. The first is that the rate of increase in wages and benefits in the private sector slowed sharply in the first quarter and then accelerated even more sharply in the second quarter. Alternatively, the ECI under-reported wage and benefit growth in the first quarter. This means that if the trend growth was unchanged, we would find the sharp uptick in wage and benefit growth reported in the second quarter data.

When we look at a finer cut of the data it certainly seems consistent with the second story. For example, the increase in compensation for management, business, and financial occupations was 0.0 percent in the first quarter. It was 1.2 percent in the 2nd quarter. The increase in compensation for health care and social assistance industries was -0.3 percent in the first quarter. It was 0.6 percent in the second quarter. Does anyone believe that the world really looks like this?

 

 
Charles Lane Wants to Cut Social Security and Medicare Print
Thursday, 31 July 2014 07:18

Yes, what else is new? The immediate topic is Gene Steuerle's new book, Dead Men Ruling (reviewed here). The basic story, taken from the book, is that commitments made in the past, specifically Social Security, Medicare, Medicaid and interest on the debt, are taking up an ever larger share of the budget. This means that in the decades ahead people will have little say in how their tax dollars are spent, since they have already been committed by prior generations of "dead men."

There are several problems with this story. First, categories of spending are not the only way in which past generations obligate future generations. Military actions and tough on crime laws also impose large burdens on future taxpayers. For example, when the U.S. went to war in Iraq it not only committed itself to many decades of payments to veterans, included many who were wounded or disabled, but it also implied future commitments to the region. While the country may be able to back out of these commitments, politicians will often be reluctant to do so. 

In the same vein, tough on crime measures, such as three strikes laws, can mean that we will have to support a large prison population for decades into the future. (It can also mean that people spend their life in jail for petty offenses.) There is little obvious basis for highlighting the spending committed by social programs while ignoring spending committed by military actions and harsh criminal penalties.

A second problem with the logic here is it implicitly assumes that the revenue is available independent of the spending. This is almost certainly not true, especially in the case of Social Security. Under the law, Social Security taxes can only be used for Social Security spending. There is also reason to believe that people view Social Security taxes as different from other taxes. The National Academy for Social Insurance recently did a poll which found that a majority of people would be willing to pay higher taxes if it was necessary to avoid a benefit cut. The fact that taxes and spending are linked both in law and the public's mind means it is misleading to include Social Security revenue in the denominator of money available to spend. It isn't. (This would be explicit if we privatized Social Security.) This means that the amount of taxes that are actually up for grabs is much less than Lane-Steuerle say, and the portion committed by dead men for social insurance is considerably less.

This brings us to the other side of the ledger, Medicare and Medicaid. We spend more than twice as much per person for our health care as people in other wealthy countries. This should not be something we take for granted for all future time. After all, our political leaders are not that much more corrupt and incompetent than those in other countries.

If we paid the same amount for health care as people in other countries it would free up large amounts of revenue. However this would mean going after our doctors, the drug companies, and the medical equipment manufacturers, all of whom pocket close to twice as much as their counterparts in Europe and Canada. Of course this means going after powerful interest groups. That is not a popular position in Washington and certainly not at the Washington Post. (It should be noted that the Post gets large amounts of advertising revenue from drug companies.)

So the real question raised here is whether we look to cut benefits for seniors or whether we look to cut waste from the health care system. We know where Charles Lane and Post stand.

 

Addendum: I should also mention that patent monopolies also should be listed among the commitments made by dead men. In effect, a patent monopoly is a privately collected tax, where we allow patent holders to charge prices far above the free market price, but threatening competition with jail. Anyone looking at ways in which the government commits the resources of future generations should certainly count these obligations. For prescription drugs alone the excess price is around 2 percent of GDP (10 percent of the federal budget).

 

 
Curb Your Enthusiasm: One Percent GDP Growth Is Nothing to Get Excited Over Print
Thursday, 31 July 2014 05:36

The Washington Post went a bit overboard with its lead article reporting on the second quarter GDP data. The article begins:

"After suffering the sharpest contraction since the recession ended, the U.S. economy rebounded this spring, providing fresh evidence that the recovery is finally turning a corner.

"Government data released Wednesday shows the economy expanded at an annual rate of 4 percent during the second quarter. Consumers pulled out their wallets, businesses restocked their inventories and even the long-moribund housing market perked up.

"The strong report dovetails with recent improvements in the job market. The Labor Department is expected to announce Friday that more than 200,000 net new jobs were created in July, marking the sixth straight month it has hit that benchmark."

Actually the 4.0 growth figure reported for the second quarter implies the economy is on a very slow growth path when averaged in with the -2.1 growth in the first quarter. Taken together, the economy grew at less than a 1.0 percent annual rate in the first half of 2014. That is hardly cause for celebration. 

And it is important to understand that the strong growth in the second quarter was directly related to the weak growth in the first quarter. Inventory growth was very weak in the first quarter, subtracting 1.16 percentage points from the quarter's growth. This meant that the return to a more normal pace of inventory accumulation in the second quarter was a strong boost to growth, adding 1.66 percentage points. Final sales grew at just a 2.3 percent annual rate in the second quarter.

Even that rate was likely inflated to some extent by the weakness from the first quarter. In particular, a sharp jump in car sales added 0.42 percentage points to growth for the quarter. That will not be repeated in future quarters.

The report, taken together with the first quarter numbers, implies an underlying rate of growth close to 2.0 percent, the same as the rate for 2011-2013. This pace is at best keeping even with the economy's potential growth rate, meaning that it is making up none of the ground lost during the recession. According to the Congressional Budget Office's estimates, the economy is still operating at a level of output that is almost $800 billion (@4.5 percent) less than potential GDP. It will not close this gap unless it grows more rapidly than its potential.

The comment about job growth being in line with GDP growth seems misplaced given that the economy added 190,000 jobs a month in the first quarter when the data showed the economy shrinking by 2.1 percent. The pace of job growth has been quite extraordinary given the weakness of the economy.

 
The Nerd Hour: Why Gross Domestic Income Grew More Rapidly Than GDP Print
Thursday, 31 July 2014 03:48

In his write-up of the new data on GDP, Wonkblog's Matt O'Brien noted that Gross Domestic Income grew considerably more rapidly (or more accurately, shrank less rapidly) than GDP in the first quarter. O'Brien sees this as evidence that the economy grew more rapidly than the GDP data indicate.

That is possible, but it is also possible that the GDI data are simply in error. In principle GDP and GDI should be the same. GDP measures everything that was produced based on the sales of goods and services. GDI measures all the incomes generated in the production process. As a practical matter, they never add to be exactly the same. The Bureau of Economic Analysis generally considers the GDP measures to be more accurate since its ability to measure the sales of goods and services is better than its ability to measure income.

However there are patterns to the divergences. When there are large run-ups in asset prices (i.e. stocks and housing), the GDI measure tends to show stronger growth than the GDP measure. There is a simple explanation as to why this would be the case. If a portion of the capital gain income from a run-up in asset prices ends up being recorded as ordinary income, then the larger the capital gains, the more income will be wrongly reported. (Capital gains or losses should not be counted in GDI.)

It is likely that this would be the case. While people pay lower taxes on long-term capital gains than ordinary income, they pay the same tax rate on short-term capital gains. This means that they have no reason to be careful to distinguish these capital gains from ordinary income on their tax returns. Since tax returns provide the ultimate basis for GDI data, insofar as income is misrepresented on these returns it will lead to a misreporting of GDI.

In fact, we find a consistent pattern where GDI grew more than GDP in both the stock and housing bubble and again in the last few years with the sharp run-up in stock prices. If the capital gains explanation is correct, it means that income in the national accounts is overstated. This means that the saving rates are substantially lower than the official data show. (Saving is defined as income minus consumption, if income is overstated by 2 percent, then the saving rate is overstated by 2 percentage points, which would be close to half in recent years.)

It  also means that we can take no special solace in GDI numbers that are stronger than GDP numbers. It's just a mistake.

 
NYT Gets the Story of Argentina and the Vulture Funds Badly Wrong Print
Wednesday, 30 July 2014 04:19

A NYT article on the possibility of a default by Argentina seriously misrepresented the issues involved and the origins of the term "vulture" in reference to the funds involved in a lawsuit against Argentina. The article implies that the funds had been bondholders at the time of Argentina's default in 2001 who refused to accept the terms that were offered to bondholders following the default:

"Through two restructurings, the government eventually struck a deal with a majority of its bond investors, who are now called exchange bondholders because they exchanged their bonds for ones that were worth as little as a fourth of the value of the original securities. The hedge funds, known as the holdouts, declined to participate in the restructurings. Instead, they are seeking $1.5 billion in repayment, including interest."

In fact, these funds bought up Argentine debt years after the default, paying a small fraction of its face value. Their intention was to use their political connections to get a favorable ruling from the courts, with the hope of being able to extract something close to the face value of the defaulted bonds from Argentina's government. This is exactly what "vulture funds" do. The term did not originate with Argentina, it dates back decades.

 

 
Will Protection of Microsoft in China Cost the Jobs of Manufacturing Workers? Print
Tuesday, 29 July 2014 07:21

The NYT had an article reporting on the possibility that China will use anti-monopoly laws and other regulations to limit Microsoft's operations in the country. This raises an interesting issue. Presumably the Obama administration will step in to try to protect Microsoft's interests. Since the United States cannot just dictate policy to China, if it wins concessions on the treatment of Microsoft then it presumably will make less progress in other areas like getting China to raise the value of its currency against the dollar.

If negotiating over Microsoft leads to the dollar having a higher value than would otherwise be the case, it would mean that we have a larger trade deficit. This raises the question of how many steel workers and auto workers will lose their jobs to protect Bill Gates' profits?

 
More Fun and Games With Export-Import Bank Print
Tuesday, 29 July 2014 04:12

It is great fun watching the establishment get so upset over the possibility that Boeings' the Export-Import Bank may not be reauthorized to issue more loans. Just to remind everyone, the Export-Import Bank issues the overwhelming majority of its loans and guarantees to benefit a small number of huge corporations. It is a straightforward subsidy to these companies, giving them loans at below market interest rates. (Yes, they are almost all paid back. This means that our financial wizards have discovered arbitrage -- the government borrows at a lower rate than anyone else so it can show a profit any time it lends to anyone else by splitting the difference in borrowing costs.)

Anyhow, today's fun is a column in the NYT (major media outlets have an open door policy to anyone who wants to argue to preserve the subsidies) by William Brock, a former senator and trade representative under President Reagan. Brock tackles head on the argument made by folks like me that only a small portion of our exports are subsidized by the bank:

"Opponents of the bank say that it supports just 2 percent of all exports. Still, 2 percent amounts to $37.4 billion of American products made by American workers in American plants. That translates into tens of thousands of jobs from every state in the country."

Wow, that's pretty compelling. But wait, suppose we ended the subsidies to Boeing. Would it never sell another plane abroad?

Fans of economics everywhere know that the end of the Ex-IM subsidies simply means that it would stand to make less money on each plane. For the most part this would be a story of lower profits, but there would be some reduction in exports, probably in the range of 10 to 30 percent of the amount being subsidized. That translates into $3.7 to $11.2 billion in exports that we would lose without the Ex-Im Bank.

Is that a big deal? We can compare this to another export number that has been in the news recently. A new study showed that because of the sanctions against Iran, the United States has lost $175.4 billion in exports since 1995, with the estimated losses coming to $15 billion in 2012, the latest year covered by the study. So the jobs at stake with the Ex-Im Bank are about 75 percent of the number that could be gained if we ended the sanctions against Iran. In other words, if we think the ending of loans from the EX-Im Bank would be a hit to the economy, then we must think the sanctions to Iran are an even bigger hit.

Of course as a practical matter, if we really wanted to boost exports we would go the free market route and push down the value of the dollar against other currencies. That is how economies with a trade deficit, like the United States, are supposed to adjust towards balanced trade in a system of floating exchange rates. However we don't see this adjustment because other governments buy up large amounts of dollars in order to prop up its value and preserve their export markets in the United States.

We could negotiate for a lower valued dollar, but that would hurt the profits of companies like Walmart that have arranged low cost supply chains in the developing world. It would also hurt major manufacturers like Boeing and GE who now do much of their manufacturing overseas.

So, we don't read much in the papers about reducing the value of the dollar. Instead we get an endless drumbeat of news stories and columns about the urgency of preserving the Ex-Im Bank. The public may lack the political power to stop the re-authorization, but we can at least enjoy the show.

 

Note: It is of course net exports that add jobs, not just exports. (We don't create jobs if we import a car from Mexico and export it to Canada.) In both the case of the Ex-Im Bank and the Iran sanctions there also is a question of imports, which is going unaddressed.

 

 
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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.

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