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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.

Robert Samuelson, the NAIRU, and the Accuracy of Economic Predictions Print
Monday, 05 January 2015 07:43

Robert Samuelson gave his assessment of where the economy stands in his column this morning. At one point he tells readers that if the economy creates 230,000 jobs a month, by the end of the year it will be approaching full employment.

Even if the economy adds 230,000 jobs a month in 2015, by the end of the year it will still be more than 3 million jobs below what the Congressional Budget Office (CBO) and other forecasters projected before the downturn. That would imply that the economy would still be far below full employment.

Of course it is possible that CBO's projections about the labor force from 2008 were wrong, but this raises the obvious question of when CBO stopped being wrong. It is not obvious that it has learned more about the economy and the labor market in the last seven years, therefore it is not clear that its current assessment of the labor market should be treated as more accurate than its assessment from 2008.

Also, contrary to what is asserted in the article, Japan has been seeing rapid growth in employment under its new stimulus policies. In fact, its employment to population ratio has risen more than twice as much as the U.S. ratio since the end of 2012 when it adopted these policies. It is likely to again see healthy growth in 2015 now that it has put off a scheduled increase in the sales tax.

Confusion on the Internet Is Not the Answer Print
Sunday, 04 January 2015 08:54

The Washington Post once again displayed its contempt for economics when it published Michael Harris' book review of The Internet Is Not the Answer, a new book by Andrew Keen. Many of the central points in the review are seriously misleading or just outright wrong.

The best example of the latter is the claim in reference to the turning over of the backbone of the Internet from the government to the private sector in the 1990s:

"It was, in the words of venture capitalist John Doerr, 'the largest legal creation of wealth in the history of the planet.'"

Handing over the Internet to the private sector was not a creation of wealth, it was a transfer of wealth. The wealth already existed -- it was the backbone of the Internet. It simply went from being held by the public to being held by private individuals. This is comparable to creating wealth with patent monopolies. At the point where a patent is issued, the wealth already exists. However the patent allows it to be privately appropriated rather than shared by the public at large.

Harris compounds the confusion when he approvingly cites Keen's assessment of Amazon:

"But Keen argues that 'the reverse is actually true. Amazon, in spite of its undoubted convenience, reliability, and great value, is actually having a disturbingly negative impact on the broader economy.' He points to what he describes as Amazon’s brutally efficient business methodology, which has squeezed jobs out of every sector of retail, according to a 2013 Institute for Local Self-Reliance report that Keen cites. The report says brick-and-mortar retailers employ 47 people for every $10 million in sales, while Amazon employs only 14. Perhaps the question Keen is getting at is this: Are we consumers, or are we citizens? It’s a frustratingly complex inquiry."

There are two different issues here. The first is the extent to which Amazon has led to productivity growth. In general this is a good thing for the economy. Companies like General Motors and U.S. Steel have adopted labor saving technologies over the last century. This has reduced prices for consumers and allowed workers to enjoy higher standards of living. There is no obvious reason we should want people to have to waste time working in retail stores if we can adopt technologies that save us the trouble. Insofar as Amazon has helped to increase productivity, this is a good thing.



The NYT Apparently Welcomes Job Loss and Lower Wages Print
Saturday, 03 January 2015 08:32

That's what readers of a NYT article on the drop in the value of the euro would conclude. The piece told readers that the recent rise in the dollar is:

"A strong dollar is a welcome reflection of a United States economy that is growing and adding jobs at a faster clip than many of its peers."

Of course a strong dollar will make U.S. goods and services less competitive internationally, leading to a rise in the trade deficit. the drop in the trade deficit in the third quarter added 0.8 percentage points to the quarter's growth. It is likely that the rise in the deficit in the fourth quarter will subtract at least that much from the growth rate. In an economy that, according to the Congressional Budget Office, is still operating at a level of output that is almost 4 percentage points (@ $600 billion a year) below its potential level of output, and is down close to 6 million jobs from its trend path, it is bizarre to call a rise in the dollar that will slow growth as "welcome."

This article gets many other issues wrong as well. It tells readers;

"To jump-start growth and avoid deflation, many analysts say the most powerful policy arrow in Mr. Draghi’s quiver is to talk the euro sharply downward, which would bolster exports, increase the price of imports and ultimately, it is hoped, stimulate an increase in inflation."

There is no reason to believe that Mr. Drago is in particular trying to avoid deflation unless he is a member of some bizarre cult of zero worshippers. Having the inflation rate cross zero doesn't make any difference, the problem is that the inflation rate in the euro zone is too low. Draghi wants to raise the inflation rate, it's that simple.

The piece also notes a shift in bank reserves from euros to dollars and comments that it, "could signal a long-term preference on the part of central bankers for high-yielding dollars in favor of less lucrative euros."

Actually central banks usually are not especially interested in the returns on their reserve holdings and they certainly are not making long-term plans since they shift their holdings all the time. If there is a return issue at hand, some central banks may have made the bet that the euro would fall in the short-term against the dollar. Now that the euro has lost considerable ground, they may make a decision to start shifting back to euros from dollars.

Remarkably in the discussion of relative currency values the piece never refers to the trade deficit in the United States. This deficit is the primary cause of the secular stagnation, or lack of demand, that many economists have now determined to be the country's main economic problem. The trade deficit pulls more than $500 billion in demand out of the economy every year. From an economic standpoint it has the same impact as if people suddenly decided to cut back their annual consumption by $500 billion. There is no easy way to replace this demand domestically, which is why the United States economy remains severely depressed more than seven years after the recession began.


European Union Imposes a Tax on Digital Transactions Equal to 0.006 Percent of GDP Print
Friday, 02 January 2015 08:11

The NYT reported that the European Union (EU) will start collecting a tax on digital transactions in 2015 that is expected to raise $1 billion this year. For those who are not very familiar with the size of the EU economy, it is projected to be close to $19 trillion in 2015, which means that the revenue from this tax will be a bit less than 0.006 percent of GDP.

Is That $224 Billion Over One Year or Ten Years? Print
Friday, 02 January 2015 06:31

That's what millions of readers of Ron Haskins' column in the NYT on designing effective social programs will be asking. The column tells readers:

"When John M. Bridgeland led Mr. Bush’s Domestic Policy Council, he was amazed to find 339 federal programs for disadvantaged youth, administered by 12 departments and agencies, at a cost of $224 billion."

The piece doesn't indicate whether this spending is for one or ten years. (My guess is the latter, but I'm not really sure without looking at the research to see what is included.) Also, unless folks have a good memory, they are unlikely to know how important this spending was to the government and the economy. The budget was just under $1,800 billion in 2000, which would make the spending close to 12 percent of the budget for one-year. Projected spending for the ten-year budget horizon was over $20 trillion, which would have made the spending in question close to 1.0 percent of projected spending.

Ron Haskins is a serious researcher raising an important point, but it would be helpful if this number were expressed in a way that provided meaningful information to readers.

It Is Important That Women Can Combine Work and Family Obligations, We Don't Need More Kids: Japan Edition Print
Friday, 02 January 2015 06:09

The it's hard to get good help crowd keep trying to push the bizarre line that the world is running out of people. This theme appears in a NYT piece on Japan's efforts to end gender discrimination in the work place and to make it easier for women to hold on to jobs as they raise children. For example, it tells readers:

"The national birthrate is just 1.4 children per woman, among the lowest in the world and well below the level needed to ward off a sharp decline in population in the coming decades. And when Japanese women do have children, they quit their jobs more often than mothers in other industrialized countries, leaving a hole in an already dwindling work force."

There is no obvious problem with a declining work force. This means that there will be more demand for the workers Japan does have. They will shift from relatively low productivity jobs (e.g. the midnight shift at a convenience story or parking cars at restaurants) into higher productivity and higher paying jobs that otherwise might go vacant. From the standpoint of the well-being of the Japanese population, this is good news since it is likely to increase pay for most workers, even if it means less overall growth. It is per capita income that is relevant for well-being, not total GDP. People in Denmark are much wealthier than people in Bangladesh, in spite of the higher GDP in the latter.

Also, it is important to note that in even modest increase in productivity growth will swamp the impact of plausible differences in the dependency ratios that would result from more children. (Also, the relevant dependency ratio includes dependent children.) It is also necessary to remember that hours worked can various enormously. Since the collapse of its bubbles in 1990 the length of the average work year has declined by almost 15 percent in Japan, the equivalent of more than seven weeks of annual vacation. This is not a pattern we would expect to see in a country suffering from a shortage of workers.

Finally, a smaller population will make it easier for Japan to reduce its greenhouse emissions, helping to contain global warming. It will also make a densely populated island less crowded.

Frank Bruni Thinks The Rich Get Their Money from Social Security and Medicare Print
Thursday, 01 January 2015 17:42

That's what readers of his column on Rhode Island Governor Gina Raimondo would likely conclude. The column has the subhead, "Gina Raimondo's approach to income inequality."

There is not much in the piece that directly addresses income inequality as most of us would think about it. The piece highlights Raimondo's cuts to the pensions of public sector workers. This is not a group of people that ordinarily is considered to be among the rich. While the piece tells us that she "framed the cutbacks as progressive," it doesn't follow that they are in fact progressive. (The piece neglected to mention that under Raimondo's plan hedge funds may make large profits on handling the state's pension fund money at the expense of public sector workers and taxpayers.)

The piece then tells readers that the pension cuts:

"provided a template for how politicians in Washington could try to rein in Social Security and Medicare spending, if they wished."

The piece also indicates that Raimondo is either incredibly naive or dishonest. It reports:

"She said that she has told Wall Street titans point blank that they should be paying higher federal taxes and leveling the playing field, but with this message: 'I need you to double down on America. We need you. We need your brains, we need your money, we need your engagement — not because it’s Wall Street versus Main Street, but because you’re some of the smartest, richest people in the world, and you need to be a part of fixing America, because you want to live in an America that’s the best country in the world.'"

Wall Street titans make investment choices based on profits, not admonitions from politicians. If Raimondo doesn't understand this fact, she is dangerously naive. If she does, then her comment was meant to deceive the public.

The Dead Young Invincibles: Obamacare Needs Healthy People, the Older the Better Print
Tuesday, 30 December 2014 16:29

The NYT apparently still doesn't know that the young invincibles are dead. The idea that Obamacare needed young healthy people to enroll is one of the big myths that was killed in 2014. For the economics of the system to work, it needs healthy people to sign up. It is actually better for the system if they are older and healthy than younger and healthy because older people pay higher premiums.

Unfortunately the NYT is still confused on this basic point. In an article reporting on the situation with Obamacare in Kentucky, the NYT told readers:

"supporters say the private insurance exchanges will need robust business, including young and healthy customers that help balance the cost of sicker ones, to thrive."

The point here is that it really doesn't matter whether the people are young, it matters that some healthy people, who pay more in premiums than they get back in benefits, join the system.

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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.