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The Strange Attack of Jeffrey Sachs on Paul Krugman Print
Sunday, 10 March 2013 13:18

In a Huffington Post column today, Jeffrey Sachs picks up where he left off in a co-authored column with Joe Scarborough that appeared in the Post last week. There are two main threads to Sachs' argument. The first is that we would have been much better off with an ambitious public investment agenda than the actual stimulus package that was passed by Congress. The second is that we would have been better doing nothing than getting a stimulus of the sort we got, or even worse, getting a larger stimulus of the same variety.

It is difficult to believe that Sachs thinks he is really quarreling with Krugman on the first point. Krugman has been a vocal advocate of exactly the sort of public investment that Sachs is advocating. (There may be an issue as to how such a stimulus should have been paid for. Sachs is advocating tax increases on the wealthy and a financial transactions tax, as has Krugman. It is not clear whether he thinks these tax increases should have been put in place in 2009 when the economy was collapsing.)

The real point of disagreement is the best route if you don't get a big public investment stimulus. Sachs' position seems to be that the sort of tax cuts and modest spending increases that were part of the Obama stimulus were worse than nothing. He argues that the tax cuts were largely used to pay down debt as was the case of much of the spending, which took the form of transfers like food stamps and unemployment insurance. The net effect then is to raise the debt without providing much boost to the economy.

Sachs' claim does stand at odds with much research on the topic. The standard Keynesian models, used by the Congressional Budget Office and others, showed the stimulus creating in the range of 2-3 million jobs. This view also has been borne out by empirical work on the effect of the stimulus. 



Washington Post Does Front Page Sales Pitch for Trade Agreements, Again Print
Saturday, 09 March 2013 09:05

The Washington Post just loves the trade agreements that recent administrations have been pursuing. It is willing to abandon all journalistic standards to help promote them. Post fans may remember back in 2007 when a lead editorial claimed that Mexico's GDP had quadrupled over the prior two decades in an editorial touting the benefits of NAFTA. (Mexico's actual growth over this period was 83 percent.)

Anyhow, it's back in the trade agreement promotion business with a front page article that touts the trade agreements being pursued by the Obama administration as a way to create jobs. The hard sell begins in the very first sentence where it tells readers that these are "free-trade" agreements.

This is of course not true. Formal trade barriers are already very low between the United States and most of the countries with whom we are negotiating trade pacts. These deals are in fact about imposing a set of standardized commercial rules, some of which, like increased patent and copyright protection, are the direct opposite of free trade. It undoubtedly sounds better to call a deal a "free-trade" pact, since most Serious People then think they have to support it, but it does not reflect reality.

It is also absurd to describe these deals as part of a job creation strategy in a period where the economy is operating way below full employment. Incredibly, the article holds up the prospect of opening up Vietnam's economy to trade -- in the same way that China's economy was opened up in the 90s -- as a goal of current negotiations. Needless to say, trade with China has not been a net creator of jobs in recent years.

However the whole idea of trade agreements as a way to create jobs is ridiculous on its face. There is an argument for reducing trade barriers to increase economic efficiency (increased patent and copyright protection go in the opposite direction), however this will have minimal impact on job creation.

This would be comparable to selling electricity deregulation as a job creation strategy. If it worked, electricity deregulation would lead to lower electricity prices which would provide clear economic benefits, but the impact on employment would be trivial. 

The same is true with trade agreements as every intro textbook shows. It is understandable that the Obama administration would want to mislead the public to better promote its trade agenda. But real newspapers are not supposed to assist in this effort.   

February Employment Right in Line with Prior Two Years Print
Saturday, 09 March 2013 08:51

I hate to spoil the party over the big February jobs numbers, but I guess I've always been more of a data geek than a party guy. Yes, 236,000 is better than expected and not a bad number in the scheme of things. But folks with a little bit of memory would be slower to bring out the champagne bottles. We created 271,000 jobs last February and 196,000 jobs in February of 2011. That makes the average for the prior two years 234,000, almost exactly the same as yesterday's job number.

Last year the story, as I said at the time, was that unusually good winter weather gave a boost to the February numbers. We didn't see snowstorms shutting down major cities across the Northeast and Midwest as we would in a typical winter. That story probably applies to some extent this year as well, even if Boston did take a hit over a mid-February weekend.

The 48,000 new jobs in construction would certainly be consistent with this story. You can believe that construction employment is growing at a 10 percent annual rate or that we saw a weather driven fluke in February. I vote for the latter, but we will have more information in another month.

Btw, if we take the 191,000 average rate of job growth over the last 3 months, we would not make up our 9 million jobs deficit until well into 2020. Things certainly could be worse, but that is not a terribly bright picture.  

Matt Yglesias' Important Point Print
Friday, 08 March 2013 17:00

Matt Yglesias is on the money when he points out that when progressives want workers to get more money, they must implicitly want someone else to get less. Now there is a real real big exception to this point, that being the current economic slump. In a context where the economy is producing at a rate that is around 6 percent (@ $1 trillion) below its potential, then we can literally talk about a situation in which we expand the pie and there is more for everyone.

This is why the concern about waste in the stimulus was so absurd. If the issue was whether we had spending that was partially wasteful or no spending, then the answer is spending that is partially wasteful. Otherwise the resources would just sit idle (meaning more workers are unemployed) and we get to celebrate that we didn't put people to work on partially wasteful projects. (Of course less wasteful is always better than more wasteful.)

But if we envision one day being back in a world where the economy is operating near its potential, the good guys getting more means the bad guys getting less. The right eats, breathes, and sleeps with this logic. They understand that when they push down autoworkers' or school teachers' wages, there is more for them. They understand that cutting Medicare or Social Security means more for them.

If progressives want to secure more income for ordinary working types and the poor then it will have to come at the expense of someone else. I have my list (CEOs and their friends, doctors and lawyers, Wall Street financial types, bringing corporate profits back to earth would also be a good idea). Others may have a different list. But if there is no one who is going to lose out in progressive policy post-full employment, then there is no one who is going to win either.

Of course at the speed we are getting to full employment many of us won't have to worry about this problem in our working lifetime. 



After reading the comments, let me make the point a bit more clearly. The right has found ways to use the market to kick our asses. Progressives should find ways to use the market to kick their asses. These ways are all over the place: opening up trade in health care, making it easier for foreign doctors and lawyers to practice in the country, make the financial sector pay the same sort of taxes as every other sector, ending too big to fail in the banking industry, etc. These are mechanisms that require the government to get out of the way (in the case of financial sector taxes -- not privileging one sector over others). If Occupy Wall Street was saying these things they were not very effective in getting their message out.

Joe Scarborough Carries His Deficit Rope-a-Dope to the Next Level (see addendum) Print
Friday, 08 March 2013 05:30

Joe Scarborough is apparently feeling emboldened by his exchange with Paul Krugman on the Charlie Rose show and is doubling down on his confused anti-deficit tirades. He is back with an oped in the Post, co-authored with Jeffrey Sachs, who should know better.

The piece is a cornucopia of confusion, beginning with the first sentence:

"Dick Cheney and Paul Krugman have declared from opposite sides of the ideological divide that deficits don’t matter, but they simply have it wrong."

I am not in the defense of Paul Krugman business, but surely Jeffrey Sachs knows that Paul Krugman does not argue that deficits do not matter as a general proposition. What Krugman has argued very vociferously is that deficits do not matter in an economy that is operating far below its potential, as is the case with the United States today. The Congressional Budget Office (CBO) projects that the economy's output will be more than 6 percent (@ $1 trillion) below potential this year. Projected 2013 output is almost 10 percent below the real level of output that CBO had projected in 2008 before it recognized the impact of the collapse of the housing bubble.

In a period of widespread unemployment and excess capacity, like the present, deficits cannot have the negative effect that they would if the economy were near full employment. In an economy near full employment, the argument would be that deficits push up interest rates. Higher interest rates will have the effect of reducing investment. They will also tend to put upward pressure on the dollar. A higher valued dollar will make imports cheaper, causing us to buy more from abroad. It will also make our exports more expensive, leading us to sell less to foreigners. The result is an increase in our trade deficit.



Washington Post Runs Front Page Piece Challenging Demographic Horror Story and Doesn't Even Know It Print
Thursday, 07 March 2013 09:09

The Washington Post had a front page piece today warning that the spread of robots in the workplace may displace large numbers of workers. Incredibly, the piece never once mentions the implication of the displacement story for the demographic nightmare stories that endlessly fill its news and opinion pages.

Remember, the demographic nightmare story is that because of lower birth rates and longer life expectancies we are going to see a fall in the ratio of workers to retirees, from 3 to 1 today, to just 2 to 1 in 20 years. So, this is a story where we are suffering from a severe labor shortage. All of us aging baby boomers will be laying in our own waste because there is no one to change our bedpans.

Okay, now we have the story of sophisticated robots that will be able to replace human laborers in a wide variety of activities. The Post tells us that we should be worried about unemployment. Not really, because anyone who has read an intro econ textbook in the last 70 years knows that creating demand in an economy is very simple. Governments can run deficits. And if we need lots of demand, then we can run large deficits.

These deficits will give us the money we need to buy the output generated by sophisticated robots. And, when it is necessary, we will have the sophisticated robots changing our bedpans.

Of course there is a political problem. Folks like Peter Peterson and Washington Post don't want us to run deficits. They would rather see workers be unemployed. But hey, this is not the fault of the robots.

Advanced robots are simply another form of the productivity growth that we should all know and love. It increases the potential wealth of society. It is certainly possible that the rich and powerful will use their control over the political process to deny the bulk of the population the benefits of productivity growth, as they have largely done for the last 30 years, but the blame should be focused on the rich and powerful, not the robots. You might as well lash out at the wheel.

Glenn Kessler Gets It Mostly Right on Budget History Print
Thursday, 07 March 2013 08:07

Glenn Kessler used his Factcheck column to take Senator Barbara Boxer to task for giving the Democrats credit for the budget surpluses at the end of the Clinton administration. Kessler rightly points out that the spending cuts and tax increases put in place by the Clinton administration would not have moved the budget to a surplus had it not been for the boom that was driven by the stock bubble. I have made the same point in other contexts.

There is one important part of the picture that Kessler leaves out. In the 1995 projections that he cites, it was assumed that the unemployment rate could not fall below 6.0 percent. The idea was that in order to prevent inflation, the Fed would slam on the breaks by raising interest rates. This would slow growth and prevent the unemployment rate from getting or staying below this target unemployment rate.

The budget projections might have been right if someone other than Alan Greenspan had been at the Fed at the time. Greenspan, who is not an orthodox economist, decided to let the unemployment rate fall below the 6.0 percent target because he saw no evidence of inflation. He had to argue with the Clinton appointees to the Fed who wanted to raise interest rates to head off inflation.

It was really due to Greenspan's policies that the unemployment rate was allowed to fall to 5.0 percent and eventually to 4.0 percent as a year-round average in 2000. This allowed millions of people to work who would not have otherwise had a job. The tight labor market also allowed for large gains in real wages for workers at the middle and bottom of the wage distribution for the first time in a quarter century. Oh, and for the DC policy wonks, it also gave us a budget surplus.

Anyhow, if we want to give credit to someone for the budget surpluses at the end of the Clinton administration it really should be Alan Greenspan (who I trash every other day of the week). It was only because he was willing to ignore the dogma in the economics profession that we were allowed to see what the world looks like when we have something resembling full employment.

Great Piece by Thomas Edsall on Social Security Print
Thursday, 07 March 2013 05:33

This one should be mandatory reading for reporters as well as anyone else who comments on the topic.

Rise in Vacancy Rates Due to Employers Being Choosy Print
Wednesday, 06 March 2013 21:11

The NYT has a good piece on new research that finds employers are being far more selective in their hiring. The research finds that employers are willing to interview more people and take longer in the process now than in the past.

This research is very useful because it helps to explain a seeming anomaly in the data. There had been a clear rightward shift in the Beveridge Curve in recent years, showing that there were more job vacancies at the same level of unemployment. This would often be taken as a problem of structural unemployment. However, we don't see any of the other signs of structural unemployment, most importantly, major sectors of the economy with rapidly rising wages.

This research provides an alternative explanation. Because they are many qualified job applicants, firms can have the luxury of being selective. It is also likely that waiting will pay off, which is not likely the case in a period with low unemployment, where qualified applicants are few and far between.

This one also gives me some satisfaction since I had previously speculated that this could be the case.

Correcting Brad DeLong on the Housing Bubble Print
Wednesday, 06 March 2013 15:24

I see that Brad has a post saying that the economy was adjusting nicely to the bursting of the housing bubble until the financial crisis set in. He notes that housing construction fell by 2.5 percentage points of GDP between 2005 and 2008. This was replaced by an increase in gross exports of 2.0 pp of GDP and increase in equipment investment of 0.5 pp. Everything was moving along nicely until the financial crisis in 2008.

I see things a bit differently. First, gross exports don't create jobs, net exports do. When we move an auto assembly plant from Ohio to Mexico, we are not creating additional jobs with the car parts exported to Mexico. That's intro textbook stuff. If we look at the net export picture, the gain is only about 1 pp of GDP. Furthermore, it is hard to see the improvement in the trade picture having gone very much further without a further decline in the dollar. (That was a possibility, but far from a certainty -- it depends on policy decisions elsewhere.)

The rest of the gap was made up by a surge in non-residential construction (can you say bubble?), which rose by more than 33 percent as a share of GDP, or more than 1 pp of GDP. This boom led to considerable overbuilding in retail, office space and most other categories of non-residential construction. Assuming the burst of spending in non-residential construction was another bubble, then the portion of the demand gap filled through this channel was destined to be temporary. It was inevitable that this bubble would also burst and we would need something else to make up the hole in demand.

The other factor in the mix is the drop off in consumption. Savings rates had been driven to nearly zero by the wealth created by the housing bubble. It seems to me inevitable that consumption would fall in response to the disappearance of this wealth. The financial crisis gave us a Wily E. Coyote moment where everyone stopped spending at the same time, but I would argue that this just brought the decline in spending forward in time.

The savings rate remains much higher today than at the peak of the bubble, although still low by historic standards. (It's currently around 4.0 percent, the pre-bubble average was over 8.0 percent.) We have two alternative hypotheses here. I gather Brad would say that people are spending at a lower rate because they are still freaked out by the financial crisis. I would argue that they are spending at a lower rate for the same reason that homeless people don't spend, they don't have the money.

Homeowners are down $8 trillion in housing equity as a result of the crash. I would expect that loss of wealth to have a substantial impact on their spending. I gather Brad does not.

[Correction: The earlier version said "net exports" in the first paragraph.]

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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.