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David Leonhardt Is Badly Confused: The People Running the Economy Had Far More than 13 Years of Education Print
Saturday, 10 January 2015 08:31

David Leonhardt has a good discussion of many of the issues surrounding President Obama's proposal to make community college free. He concludes the piece by noting that we likely need a more educated work force now than in the last century, then adds:

"If nine years of free education was the sensible norm for the masses in the 19th century and 13 years was the sensible norm in the early 20th century, what is the right number in the 21st century?

"Our current system suggests that the answer is still 13. The performance of our economy suggests otherwise."

Actually almost all of the people who are involved in designing and implementing economic policy have had far more than 13 years of education. The economists who were unable to recognize the $8 trillion housing bubble that wrecked the economy all had well over 20 years of education. Even members of Congress who don't understand basic economics (e.g. spending creates demand) almost all have had 17 years of education and many have law degrees or other post-college degrees.

The problems of our economy seem to stem from inept economic policy. We don't have any source of demand to replace the demand generated by the housing bubble. If Leonhardt is claiming the economy's problems stem from a poorly educated workforce he does not support this with any evidence. 

David Leonhardt Goes Off the Deep End in Creating False Equivalence Print
Friday, 09 January 2015 14:55

As Paul Krugman likes to point out, conservative leaders have a bad habit of just making things up: global warming isn't happening, tax cuts pay for themselves, quantitative easing will lead to hyper-inflation etc.. David Leonhardt tells readers that at the Upshot section of the NYT, which he edits, they are committed to calling both sides out when the facts don't support their claims.

And he is taking the occasion to beat up on liberals on the relationship between marriage and happiness. He proudly calls attention to a new study that purports to show that married couples are happier on average than people who are not married, and this is even after controlling for states of happiness before they were married.

It's not clear exactly what liberal view Leonhardt thinks he is challenging. There is an obvious survivor bias in a long marriage. We expect that people in unhappy marriages are less likely to stay married, so this study has effectively found that people in happy stable relationships are happier on average than people not in happy stable relationships. Are there liberals who feel it is important to argue that this is not true?

There is a problem that liberals, like any believer in logic, may have with policy prescriptions that could be mistakenly based on this finding. For example, it certainly does not follow, based on this research, that the government should make it more difficult for couples to divorce. The point is that happy couples are happier, if we forced unhappy couples to remain married, it does not follow that they would be happier than if they were separated.

We may also think that the government should foster happy couples by having subsidies for marriage. But this effectively amounts to penalizing the people who are already unhappy because they are single. After all, someone has to pay for these subsidies, which means that on average we would have money flowing from already unhappy single people to our happy couples. Is this good policy?

It's also not clear that there is importance to marriage as opposed to a stable relationship. In the U.K. (where the subjects for the study lived), like the U.S., most people in stable relationships tend to get married. However in other countries this is not a cultural norm. Are we supposed to believe the sheet of paper makes people happy? Did the Wizard of Oz make the straw man smart when he handed him a diploma?



Economists Should Not Have Been Surprised by the December Drop In Wages Print
Friday, 09 January 2015 14:28

The Washington Post article on the December jobs numbers told readers:

"Though there were nascent signs of wage growth in November, the data from December showed average hourly earnings slid backward by five cents, to $24.57.

"That wage decrease over the past month, a surprise to economists, indicates that the nation has not yet reached 'full employment' — a condition in which demand from employers is broad enough that workers have a degree of leverage and a chance to see pay raises."

This comment earns a really big OY!

No, the drop in average hourly earnings should not have been a surprise to economists. As some of us were screaming following the November jump in hourly wages, the monthly data are erratic. As I pointed out at the time, the jump reported in November followed two months of very weak wage growth. It simply is not plausible to think that millions of employers who were being tightfisted September and October suddenly got really generous with their workers in November. The world doesn't work that way.

The more obvious explanation is that the monthly changes are driven largely by measurement error. A weak number in one month is likely to lead to a strong number the next (and vice versa) because a weak number likely understated the true rate of wage growth. If the next month's number then accurately measures the true wage, then it will appear like a large jump. This is a regular pattern that anyone who follows the data (e.g. economists) would know.

The point about full employment is also seriously off. The employment to population ratio is still close to four percentage points below its pre-recession level. And, contrary to the protestations about this being due to the retirement of the baby boomers, the decline is largely due to prime age workers (age 25-54) leaving the labor force. And it's a bit hard to believe that all these people in their 30s and 40s just decided they no longer feel like working. In addition, the number of people involuntarily working part-time is still up by more than 2 million from its pre-recession level.

In other words, we are still very far from what would have been considered full employment back in the good old days of the Bush presidency. Folks should be very upset if the Fed starts raising interest rates to slow the economy and keep people from getting jobs.

This piece also misleads readers in saying:

"Another strong sector was professional and business services — accountants, architects, consultants — which added 52,000 positions. The pick-up in better-paying industries is in noted contrast to periods earlier in the recovery, when growth was concentrated in part-time positions and the retail and health sectors."

Actually, most of the growth in the professional and business services sector (67.7 percent) was in the relatively low-paying administrative and waste services categories.


Obama Tries to Fix a Housing Market That Is Not Broken Print
Thursday, 08 January 2015 11:36

The NYT badly misinformed readers by telling them that Obama was easing up on Federal Housing Authority lending rules to fix a "lagging" housing market. Actually home sales are slightly above their population adjusted pre-bubble level. In fact, if we took account of demographics (the increasing portion of elderly that is constantly used as a justification of low employment rates) then house sales are above pre-bubble levels. Also, inflation-adjusted house prices are 15-20 percent above trend levels.

It is true that builders are not building as many homes as would be expected, but this is explained by vacancy rates that are still relatively high. The lower homeownership rate is likely the function of the weak labor market and also that the "flexible" labor market touted by most economists means that people have to change jobs frequently, which often means moving. People who have to sell their home shortly after buying it end up building wealth for the real estate and financial industry, not their family, which is an important reason why fewer people are becoming homebuyers.

This piece also wrongly asserts that, "rents are soaring." This is not true by the usual definition of "soaring." The Bureau of Labor Statistics owners' equivalent rent measure rose 2.7 percent over the last year. This measure excludes utility fees that are often included in apartment rents, which is appropriate since homeowners also have to pay for utilities.


Owners' Equivalent Rent: Percent Change Over Prior 12 Months


                                    Source: Bureau of Labor Statistics.


Japan's Declining Population: More Which Way Is Up Problems at the Post Print
Thursday, 08 January 2015 09:39

Yes, Japan looks like it is becoming less crowded and the folks at the Post are terrified. A Wonkblog piece warned readers that, "Japan's birth rate problem is way worse than anyone imagined."

The basic story is it seems that Japan has consistently over-projected its birthrate. As a result, its population is now declining and the rate of decline may be even faster than is now projected.

The question is why is this a problem? First, just to take an issue off the table, it is important that Japan, like the United States, create a situation where families and especially women, feel they can have children and still have a fulfilling career. But the question here is whether it is a problem for society if people choose to have fewer children and we have a declining population.

The piece tells readers:

"Japan’s declining population has a powerful impact on its economic situation, and not for the better. An aging population leaves the country with fewer workers and more dependents. And conventional wisdom says aging leads to slower economic growth and more deflationary forces, both of which make it more difficult for Japan to chip away at the substantial debt burden from its economic crisis at the beginning of the 1990s."

Actually, since Japan is a densely populated country with expensive real estate, a declining population could be associated with substantial improvements in living standards as the property values and rents would drop due to less demand. It's not clear why fewer workers and more dependents should be a big problem. This has been the reality for the last 60 years, a period in which countries have generally enjoyed rising living standards. The key of course is productivity growth which means that we need fewer workers to produce the same amount of output. (Remember the robots who are supposed to take all of our jobs? That is productivity growth.)



E.J. Dionne and Dynamic Scoring: Getting the Story Backward Print
Thursday, 08 January 2015 09:03

E.J. Dionne is upset about Republican plans to have the Congressional Budget Office (CBO) use dynamic scoring in assessing the effects of tax cuts. He tells readers that dynamic scoring:

"will make it easier for the Republicans to shower money on their favored constituencies while pretending to be fiscally responsible. Dynamic scoring, the Center on Budget and Policy Priorities noted, 'could facilitate congressional passage of large rate cuts in tax reform by making the rate cuts appear — on paper — less expensive than under a traditional cost estimate.'

"To understand the dynamic-scoring game, imagine a formula based on the idea that because infrastructure spending boosts the economy — which it most certainly does — we should pretend that an expenditure of $100 billion is actually, say, only $80 billion."

Dynamic scoring means taking account of the growth effects of tax cuts and incorporating them into budget estimates. This is actually a very reasonable thing to do. When Douglas Holtz-Eakin, a conservative Republican economist, was head of CBO, he put out an analysis of the impact of dynamic scoring on budget estimates. The analysis found that the impact of a simple estimate of the impact of a tax cut on growth was small and in fact negative.

The analysis did find larger positive impacts if the tax cut assumption was coupled with other assumptions, such as a later tax increase, which would give people more incentive to work in the period of low taxes. However these modeling exercises showing growth were not in fact analyzing the policy being considered, which was simply a tax cut.

The issue created in this context has nothing to do with dynamic scoring, it is a question of honest scoring. That should be the real concern. If the Republicans want to follow Holtz-Eakin's analysis and incorporate the negative impact that tax cuts have on growth then there is no reason for anyone to object. However if they just want CBO to make up numbers, their plan is objectionable. But the issue is not dynamic scoring.

This brings up the other side of the equation raised by Dionne. Government investment in infrastructure, education, and research and development does in fact have an impact on growth and CBO should be taking it into account in its projections. Under CBO's current methodology, if the government stopped spending any money on improving and maintaining the infrastructure or on educating our children it would show up as a boost to the economy.

In CBO's models, the reduced government spending would free up resources, some of which would end up as private investment. That would lead to higher productivity and more growth. There is something seriously wrong with modeling that implies we could grow the economy better if we stop maintaining our roads and educating our kids.

Finally it is worth taking issue with the use of "fiscally responsible." The absurd conceptions of fiscal responsibility in place in Washington today are costing the jobs of millions of kids' parents. This policy, which is ruining the lives of mutiple generations, should not be characterized as "responsible." Washington politics may make it impossible to beat back deficit fetishism, but there is no reason that serious people should treat it as reasonable policy.

The It's Hard to Get Good Help Crowd Bemoans the Fact Europe is Becoming Less Crowded Print
Wednesday, 07 January 2015 04:35

The horror, the horror! Europe has a declining ratio of workers to retirees, just as has been the case for the last fifty years.

That is the message Arthur Brooks gave us in his NYT column this morning, although he left out the part about the last fifty years.

"Start with age. According to the United States Census Bureau’s International Database, nearly one in five Western Europeans was 65 years old or older in 2014. This is hard enough to endure, given the countries’ early retirement ages and pay-as-you-go pension systems. But by 2030, this will have risen to one in four. If history is any guide, aging electorates will direct larger and larger portions of gross domestic product to retirement benefits — and invest less in opportunity for future generations."

Brooks' source shows the share of the over 65 age group in the population rising from 18.8 percent in 2015 to 23.7 percent in 2030. If that sounds really scary consider that it has risen from 15.7 percent in 2000 to the current 18.8 percent over the last 15 years. In other words, this is a trend that has been taking place for a long time: people are living longer. This is usually viewed as good news.

Even as the ratio of older people to working age population has risen in Europe and elsewhere, people have seen rising living standards due to productivity growth. This is why we can all have enough to eat even though only less than 2.0 percent of the workforce is employed in agriculture. (Remember the robots who are taking our jobs? That is a story of rising productivity. It's a story where we have too many people who want to work.)



Pay by the Mile Auto Insurance: A Testament to the Lack of Creativity of Environmentalists Print
Tuesday, 06 January 2015 08:57

It is often said that the environmental movement has less creativity than a dead clam. Nothing demonstrates this point better than the lack of interest in promoting pay by the mile auto insurance.

I am reminded of this issue by a piece on Morning Edition that discussed how the recent drop in gas prices will be associated with thousands of more deaths in traffic accidents. The point is simple: people will be driving more and faster, therefore there will be more accidents and more deaths.

This brings up pay by the mile insurance since the point of the piece is that high gas prices gave people an incentive to drive less and more slowly. If insurance were on a pay by the mile basis it would also give people an incentive to drive less and ideally more safely.

The arithmetic is straightforward and striking. The average insurance policy is around $1,000 a year. The average driver puts in roughly 10,000 miles a year on their car. (These are rough numbers, but last time I checked they were in the ballpark.) This comes to 10 cents if insurance were paid on a per mile basis.

If a typical car gets 20 miles a gallon, then having insurance paid on a per mile basis is the equivalent of a $2.00 a gallon gas tax in discouraging driving. That should be a big deal and the sort of thing that environmentalists should be pushing for, since it is likely far more politically feasible than a $2.00 a gallon gas tax.

Just to be clear, this is not on average increasing insurance costs. It will redistribute them from people who drive relatively little to people who drive a lot. (Insurers already have some differences based on miles driven, but they don't come close to reflecting the actual difference in risks -- as they will tell you.)

Also, charging per mile doesn't prevent insurance companies from factoring in driving records or distinguishing between rural and urban miles. The insurers know where people live and they know their driving records. These could be easily factored in when setting the per mile rates.

Anyhow, a modest subsidy for people to buy pay by the mile policies could go a long way in changing incentives and reducing driving and greenhouse gas emissions. (Note the adverse selection goes in the right direction here. Low mileage drivers would opt for pay by the mile policies leaving high mileage high risk drivers in the conventional insurance pool.)

This should have been an obvious policy to push for those who want to stop global warming, but it might require a bit of new thinking.

Which Way Is Up Problems on the Euro Print
Tuesday, 06 January 2015 08:29

A NYT article on the recent drop in the value of the euro against the dollar carried the bizarre headline, "falling euro fans fears of a recession." The headline is strange, because the drop in the euro will not cause a recession. In fact, it will help the economy by boosting net exports from the euro zone, as the article itself states.

Several other points in the article are also seriously confused. It asserts:

"There is also the fact that eurozone countries tend to be net importers of oil and natural gas — which is usually priced in dollars — meaning that their weak currency may not buy as much fuel in the future."

The fact that oil is typically priced in dollars really has nothing to do with the time of day. The price of oil has fallen by roughly 50 percent over the last year measured in dollars. The euro has fallen by a bit more than 10 percent, which means that oil has fallen by roughly 45 percent measured in euros.

The fact that the euro zone produces relatively little oil is a huge benefit in this story relative to the United States. While consumers in both the U.S. and the euro zone will be benefited by the plunge in oil prices, the United States has areas of the country like Texas, North Dakota, and Alaska, that are heavily dependent on oil production. These regions will be badly hurt by the drop in oil prices.

The article also notes that Europe may be hurt by a slowdown in growth elsewhere in the world, referring to the "region’s dependence on trade." Actually the euro zone as a whole doesn't depend much more on trade with the rest of the world than the United States. The vast majority of trade of euro zone countries is with other euro zone countries, therefore a slowdown in growth elsewhere in the world will not do more harm to the euro zone than the United States.

The Growth Projections for the Trans-Atlantic Trade and Investment Pact Are a Joke Print
Monday, 05 January 2015 08:08

Bob Kuttner has a column in the Huffington Post warning of the dangers of the Trans-Atlantic Trade and Investment Pact (TTIP). Kuttner correctly points out that the deal is not really about reducing trade barriers, which are already minimal, but rather about locking in place a business-friendly structure of regulation (wrongly described as "deregulation").

At one point Kuttner refers to projections that the TTIP will increase GDP in the EU and U.S. by 0.5 percent. It is important to note that this projection is for the period after the deal is fully implemented, more than a decade after it is signed. That means the projection implies an increase in the growth rate of less than 0.05 percentage points annually, an amount far too small to be measured accurately.

It is also worth noting that this projection does not incorporate any negative impact from the protectionist parts of the TTIP. The deal is likely to strengthen patent and copyright protections, leading to higher prices for drugs, software, and other products, all of which will be a drain on consumers and a drag on growth.

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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.