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The Data Show the Case for College Is More Ambiguous than What the New York Times Tells You Print
Tuesday, 27 May 2014 04:09

David Leonhardt touts (but doesn't link to) new research from the Economic Policy Institute which shows the wage premium for recent college grads hit a record high in 2013. He then goes on to declare that it would be irrational for people not to go to college given this large pay premium. 

Leonhardt's analysis ignores the dispersion in pay among college grads, especially among men. Research by my colleague John Schmitt and Heather Boushey shows that near one in five recent male college grads earned less than the average high school grad. This implies that going to college implies substantial risks, especially since attending college is likely to lead to substantial debt. There is also a risk that a student will not complete college, which is especially likely for the marginal college student (a person at the edge of deciding whether to try college or not). It is also likely that the marginal college student faces a much higher risk of being in this bottom fifth than the typical college student. In short, a little deeper analysis indicates that the decision of many people, especially young men, not to attend college could seem very rational. 

Leonhardt also tells readers that the unemployment rate for people with just college degrees (i.e. without advanced degrees) between the ages of 25-34 was just 3.0 percent in April. That seems unlikely. The Bureau of Labor Statistics reported that the unemployment rate for all people over age 25 with college degrees, including those with advanced degrees, was 3.3 percent in April. Since younger grads and those without advanced degrees have higher unemployment rates it is difficult to see how Leonhardt's assertion can be true. 

 
Syriza Is Opposed to the European Union's Anti-Growth Policy, Not the European Union Print
Monday, 26 May 2014 06:59

The Washington Post told readers that in several countries parties hostile to the European Union won in the elections to the European Parliament over the weekend. One of the countries on its list was Greece, where Syriza, the main opposition party received the most votes.

It is inaccurate to describe Syriza as being opposed to the European Union. The party has not called for Greece to leave the European Union. The party is opposed to austerity policies imposed on Greece by the European Union which have pushed the unemployment rate above 25 percent. By the I.M.F. measures, the lost output in Greece from being below potential GDP since 2010 is now approaching 30 percent of GDP, which would be more than $5.7 trillion in the United States. (This estimate is likely very conservative since the I.M.F. hugely reduced its estimate of Greece's potential GDP in the last few years.)

Syriza is opposed to these anti-growth policies. It is not opposed to the European Union.

 

 
Small Businesses Account for 60 Percent of Job Losses Print
Sunday, 25 May 2014 05:31

There is a popular and ungodly silly line about new businesses being responsible for some very high share of new jobs in the U.S. economy. A version appears in this NYT article on the economic ripple effects of student loan debt. It cites a study showing that recent graduates with large amounts of student debt are less likely to start a business, then adds:

"Considering that 60 percent of jobs are created by small business, 'if you shut down the ability to create new businesses, you’re going to harm the economy,' Professor Ambrose [one of the authors of the study] said."

The problem with Professor Ambrose's comment is that small businesses also account for close to 60 percent of the job loss in the economy. On a gross basis small businesses do create many more jobs than larger firms, but they also are far more likely to go out of business and therefore lose jobs than large firms. On net, firms of all sizes add jobs at approximately the same rate.

This doesn't mean that we shouldn't be concerned about student debt restricting young people's ability to start businesses and in other ways limit their career choices. It does mean that the consequences for the economy may not be as large as implied by this comment. 

 

Note: link fixed.

 
Contrary to What You Read in the Washington Post, House Sales Have Recovered Print
Friday, 23 May 2014 05:27

The continuing weakness of the housing market is a regular theme of the business media. They seem as eager to display their ignorance now as they were during the housing bubble years. 

The Post gave us another item in this series in an AP article on existing home sales in April, which ran at 4.65 million annual rate, according to data from the National Association of Realtors. The fourth paragraph told readers:

"Nearly five years into the recovery from the Great Recession, real estate sales have yet to return to their historic averages."

If we go back to the pre-bubble years of the mid-1990s, we find that existing home sales averaged just over 3.4 million in the years from 1993-1995. Adjusting this figure upward by 20 percent for population growth would still get is to less than 4.2 million, well below the sales rate reported for April.

New home sales are still running below historic averages, so that would bring the total sales close to their pre-bubble levels but there is not much of a case that they are lower than what should be expected. Furthermore, if we consider the aging of the population, the excuse given by many economists for the drop in labor force participation, we should expect a drop in the ratio of home sales to population.

Older people less frequently buy homes than younger people. It is perhaps an inconvenient truth for economists, but the population that comprises the potential labor force is the same population that comprises the group of potential home buyers.  

 

 
Washington Post Reports That David Autor Needs to Read His Research on Inequality More Carefully Print
Friday, 23 May 2014 04:44

The Post ran a piece highlighting research by M.I.T. economist David Autor that purportedly shows the wage premium earned by college grads is the main source of inequality in the economy today.This is presented as a counter to much analysis showing that the income gains of the richest 1 percent has been the major source of inequality. The data presented in the piece do not support Autor's claim.

In the case of full-time male workers, Autor's data show that full-time male workers with a college degree have seen an increase in real wages of just 3.0 percent from their peak in 1973 to 2012. This was a period in which productivity almost doubled. Women college grads did considerably better over this period, but even women with college degrees saw essentially no wage gain from 2001 to 2012, a period in which productivity increased by more than 25 percent.

Autor's data indicate that most college grads have not shared evenly in the economy's growth over the last four decades. The much smaller segment of the workforce with advanced degrees have done considerably better, but this puts the cutoff between winners and losers at advanced degrees and everyone else, not between college grads at everyone else.   

 
Imitation Is the Highest Form of Flattery Print
Thursday, 22 May 2014 05:05

Some folks have pointed out to me that the housing cost calculator that David Leonhardt has in the Upshot section of the NYT looks a lot like the one that CEPR developed years ago to try to warn people about the housing bubble. Yes, it does, and if memory serves me correctly David had asked me about it when he originally designed another version a few years back. Anyhow, glad to see the idea has caught on.

 
Robert Samuelson Wants Us to Default on the National Debt Print
Thursday, 22 May 2014 04:36

Actually, he probably doesn't, but that would be the logic of his complaint (taken from Gene Steuerle) that "dead men" have established priorities for federal spending. After all, dead men made the decision to borrow the money that constitutes the debt, which thereby obligates the country to pay back the interest and principal.

But Samuelson's complaint is not about the interest and principal being paid back to rich people like Peter Peterson, Samuelson is upset about the money being paid out to ordinary workers (mostly retirees) for Social Security, Medicare, and Medicaid.

"In 1990, Social Security, Medicare and Medicaid (health insurance for the poor) totaled 6.7 percent of national income, or gross domestic product. By 2010, they were 10 percent of GDP. Using plausible assumptions, the Congressional Budget Office estimates this spending (including the Affordable Care Act) at 15.2 percent of GDP by 2038."

There are several immediate problems with Samuelson's complaint.

First, if we are counting the spending on the Affordable Care Act, it is hardly a story of "dead men." The folks who made this into law are almost all still alive, and the person who pushed it through Congress, Nancy Pelosi, is not a man. In other words, this spending reflects priorities of people who very recently represented public opinion.

The second problem is that including Social Security in the arithmetic simply confuses the issue. Almost all of the rise in spending over this period is due to rising payments for health care programs, not Social Security. In 1990, the government was spending 4.3 percent of GDP on Social Security (it had spent as much as 4.9 percent in the early 1980s). It is projected to spend 6.2 percentage points of GDP on Social Security in 2038.

Furthermore, taxes were raised explicitly to pay for this increase. While Samuelson may think it's reasonable to tax people for Social Security and then use the money to pay for the military or other purposes, most of the public does not share his perspective. According to Steuerle, people will be paying slightly more money in Social Security taxes than they receive in benefits, so there doesn't seem much basis for his complaint about "giveaway politics."

The real story here is health care and there is a real giveaway, but not to the folks in Samuelson's rifle scope. The United States pays more than twice as much per person for its health care than people in other wealthy countries. It has nothing to show for this additional spending in outcomes. If we spent the same amount per person as Germany, Canada, the U.K., or any other wealthy country, the government would be looking at large budget surpluses for the rest of the century.

The additional costs are due to fact that our doctors get paid twice as much as doctors elsewhere, we pay twice as much for drugs and medical equipment, and we have an insurance system that drains away almost 20 percent of spending on needless administrative costs. Unfortunately these groups are so powerful that the excessive costs they impose on the government and the country rarely even come up in public debate. (Increasing trade in physician services is not even on the agenda in current trade agreements and a main goal is increasing the cost of prescription drugs.)

In short, there is a very simple story here that Samuelson is grossly misrepresenting by including Social Security in the discussion. We are being badly ripped off by our health care system. And, the beneficiaries are so powerful they mostly prevent the ripoff from even being discussed. Instead, we get people like Samuelson who want us to beat up seniors.

 
The Seventies Were Not Like the Great Recession Print
Wednesday, 21 May 2014 20:54

I'm back (thanks for all the kind comments) and I see I have to correct some seriously misleading commentary from Robert Samuelson earlier in the week. Samuelson concluded a discussion of Timothy Geithner's new book:

"This is the central lesson of the crisis. Success at stabilizing and stimulating the economy in the short run can destabilize it in the long run. This also happened in the 1960s, when the belief that economists could control the business cycle led to inflation and instability in the 1970s and early 1980s. But the lesson is not acknowledged because its implications are unpopular (an obsession with short-term stability may backfire), and it’s ignored — or even denied — by the post-crisis narratives, including Geithner’s."

Sorry, this one is not quite right. The pain suffered by people in the 1970s is not in the same ballpark as with the Great Recession. In the 1970s the stock market tanked, but since most people own little or no stock, who gives a damn? The economy generated 19.7 million jobs in the decade, an increase of 27.6 percent. By contrast in the 14 years from January of 2000 to January of 2014 the economy created just 6.5 million jobs, an increase of just 5.0 percent.

Most of this difference is explained by demographics (the baby boomers were entering the labor force in the 1970s, they are starting to leave now), but it was still an impressive feat to accommodate such a large expansion of the labor force in a relatively short period of time. In addition, the economy was hit by two large oil shocks that made the process considerably more difficult.

There was no prolonged period in which the economy was below its potential level of output in the 1970s. In fact, the Congressional Budget Office (CBO) puts the economy as operating above potential output for part of the decade. By contrast, CBO calculates that the economy has been roughly 6 percent below potential GDP for most of the last 5 years (@ $1 trillion a year). This represents a massive amount of lost output.

And, in direct contradiction of Samuelson's assertion, the failure to deal with the short-term can lead to serious long-term consequences. A recent paper by the Fed calculates that that potential GDP has fallen sharply as a result of the prolonged downturn. This implies that the failure to carry through short-term stabilization can lead to serious long-term consequences.

In short, Samuelson's central lesson lacks any evidence or logic to support it.

 
Vacation Time Print
Friday, 09 May 2014 19:09

I am out of here. I'll be back on Thursday, May 22. Remember, until then don't believe anything you read in the newspaper.

 
More Nonsense on Deflation Print
Friday, 09 May 2014 07:07

In a mostly useful article on the problems facing the euro zone economy, Neil Irwin again raises the prospect that a shock could turn the inflation rate negative.

"The lowflation, as people have taken to calling it, is particularly dangerous in that it could easily turn into outright deflation, or falling prices, should one nasty shock come along. For example, if tension between Ukraine and Russia boils over into a full-scale war, it could easily tip the European economy back into recession and send prices tumbling."

It's not clear what he is talking about here. If a war between Russia and Ukraine threw the European economy into a recession it would be just as bad news for the countries of the region if the inflation rate were now 2.0 percent instead of 0.5 percent. The problem would be a new recession in an area that is already suffering from very high unemployment. The decline in the inflation rate from a low positive to a low negative is a non-issue.

The inflation rate is already lower than would be desired, any further fall makes matters worse, but crossing zero means nothing except for numerologists. Accelerating deflation could be a problem, but we have seen exactly zero instances of this phenomenon in the last 70 years in wealthy countries.

It is worth noting that many economists if they are honest in their beliefs (I know, absurd proposition) must already think that the euro zone inflation rate is negative. The Boskin Commission, which was warmly received by the leading lights in the economics profession, claimed that the consumer price index in the United States overstated inflation by 1.1 percentage points annually. Most of the problems they identified are still present and likely to be worse with European price measurements than in the United States.

 
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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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