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Misplaced Celebrations On Third Quarter Growth Print
Friday, 31 October 2014 04:08

There was much celebration in the business press over the better than expected third quarter GDP growth. (See, for example, this WaPo piece touting the U.S. recovery as the "envy of the world.") Many were quick to say that the 3.5 percent growth for the quarter implies that the economy is now on a higher growth path, possibly in excess of 3.0 percent. Mr. Arithmetic begs to differ.

First, if we can look all the way back to the beginning of 2014 we see that the average growth for the first three quarters so far this year is just 2.0 percent, the same as the average for the prior three years. And, just to remind folks, we had a really bad recession back in 2008-2009. This has left us at a level of output way below the economy's potential. To make up the ground lost the economy has to be growing faster than its 2.2-2.4 percent potential growth rate. At the 2.0 percent growth rate we have seen so far in 2014, we are making up none of the lost ground.

The second point that should have featured prominently in all discussion of the GDP report is that the major drivers of growth in the quarter, net exports and military spending, will almost certainly not be adding to growth in the same way in future quarters and will most likely be in part reversed. In other words, the strong growth in these components is reason for believing future growth will be weaker, not stronger.

Net exports added 1.32 percentage points to growth in the quarter, while military spending added 0.66 percentage points. If the contribution of these sectors to growth had been zero, GDP growth would have been 1.5 percent rather than 3.5 percent.

If the folks who expound on the economy had access to data from the Commerce Department they would know that both of these sectors are very erratic, sharp movements in either direction tend to go in the other direction in the following quarter. (There is a logic to this. Imagine that the true path for both sectors is a constant growth path, but we have random error in either direction. If our error is on the high side one quarter, then if we get an accurate measure the next quarter, it would imply a decline from the erroneously measured number the previous quarter.)

The last time next exports added more than a percentage point to growth was the fourth quarter of 2013 when it added 1.08 percentage points. The following quarter it subtracted 1.66 percentage points from growth. Net exports added 1.12 percentage points to growth in fourth quarter of 2010. It subtracted 0.24 percentage points from growth in the following quarter.



In Case You Were Wondering What Folks Who Rate Subprime MBS as AAA Think of the Creditworthiness of the U.S. Government Print
Thursday, 30 October 2014 18:24

The Washington Post has the answer. It devotes an article to Moody's assessment of the financial situation of the U.S. government.

Most people probably know of Moody's as one of the credit rating agencies that were paid tens of millions of dollars to rate mortgage backed securities as investment grade during the housing bubble years. It's not clear when its assessment of creditworthiness supposedly became more credible.

Anyhow, the ostensible good news is that Moody's says we don't have anything to immediately worry about, the debt to GDP ratio is coming down for now.

"But -- and you knew this was coming -- there are dark clouds on the horizon. By 2018, the ratings agency expects annual deficits once again to surpass 3 percent of the size of the economy and to keep getting bigger. By 2030, debt held by outside investors is on track to rise from the current 75 percent of the size of the economy to 88 percent, an alarming increase that 'likely would bring negative pressure' on the nation's sterling AAA credit rating."

Moody's then gives us a number of suggestions that include cutting Social Security and Medicare benefits in order to avert this rise in the debt to GDP ratio to 88 percent. If you were wondering how bad it is to have a debt to GDP ratio of 88 percent, it is not a difficult question to answer. It turns out that there are many countries who already have debt to GDP ratios that are higher than the ratio that Moody's is warning we could hit in 2030 if we're not good.

There is Italy with a debt to GDP ratio of 136.7 percent and Spain with a debt to GDP ratio of 98.6 percent, according to the I.M.F. Even worse, we have Japan with a debt to GDP ratio of 245.1 percent. Even our good friends across the pond in the United Kingdom have a debt to GDP ratio of 92.0 percent.

Needless to say the markets are punishing these countries for their fiscal recklessness. As of October 30th, Spain had to pay an interest rate of 2.16 percent on its 10-year bonds, profligate Italy paid 2.46 percent. The United Kingdom had to pay 2.23 percent and Japan, hold your breath, had to pay 0.47 percent interest.

Look, we have real problems. Millions of people still can't find jobs and the weak labor market is redistributing income upward. And we should be worried about global warming. This stuff about long-term budgets is just brought to you by Jeff Bezos and his Wall Street friends because they want to cut Social Security and Medicare.

No one should be taking economic advice from folks who rate subprime mortgage backed securities AAA.

Washington Post Offers Lesson in Bad Public Opinion Polling Print
Thursday, 30 October 2014 04:21

The Washington Post has long used both its opinion and its news pages to push for cuts to Social Security. It has regularly exaggerated the problems with the program, for example once running a major front page story over the fact that 0.006 percent of Social Security benefits are paid out to dead people.

In keeping with this practice, the Post began a feature polling readers on how they would like to see the projected shortfall addressed with an article headlined, "Social Security Is a Mess. How to Fix It." Today the paper is reporting on some of the results. The piece begins:

"One thing was clear from the first month’s responses to our question about how to fix Social Security: Readers want something to get done.

"Only 2 percent of responses were in favor of 'doing nothing,' which would mean that after 2033 –when the Social Security trust fund is expected to be depleted– retirement benefits would be cut by 23 percent. And only 3 percent of responses said it would be a good idea to put off raising taxes until after the trust fund is depleted, at which point a steep tax hike would be needed to pay benefits [emphasis added]."

While the fact that only 2 percent of responses are in favor of "doing nothing" might sound compelling, there is an obvious problem with the sample. The overwhelming majority of Washington Post readers did not respond to the WaPo piece. The 2 percent in favor of doing nothing represent 2 percent of a tiny minority of Washington Post readers who are themselves far from representative of the population as a whole. Furthermore, the bias is compounded by the fact that if readers do not see an urgency to address the projected shortfall in Social Security they are almost certainly less likely to answer the paper's poll on the topic.

In effect, what the Post is telling us is that only 2 percent of their readers who took the time to answer its survey on Social Security felt that nothing should be done. Most of us might have guessed something like that without seeing the poll result.



Economists Who Saw the Housing Bubble Were Not Worried About a Depression Print
Wednesday, 29 October 2014 08:54

The Washington Post repeats the silly myth that we were in danger of a second Great Depression without heroic measures to save Wall Street. A piece on the path of quantitative easing (which was a good idea) told readers:

"But while economists generally agreed that effort [the Fed's purchase of $500 billion in mortgage backed securities in 2008-2009] helped the country avert another depression, the swift recovery that has historically accompanied downturns remained elusive."

It is quite fashionable among Washington elite types to insist that we would have had another depression if we didn't save the Wall Street banks, but do any of them have any idea what they mean by this?

The first Great Depression was the result of not having enough demand in the economy. We got out of it finally in 1941 by spending lots of money. The motivation for spending lots of money was fighting World War II, but the key point was spending the money. It might have been difficult politically to justify the spending necessary to restore the economy to full employment without the war, but that is a political problem not an economic problem. We do know how to spend money.

In effect, the pundits who say that we would have had a depression if we did not bail out the banks are saying that our economic policy is so dominated by flat-earth types that we would have to endure a decade or more of double-digit unemployment, with the incredible amount of suffering it would cause, because the flat-earthers would not allow the spending necessary to restore full employment. 

That characterization of our political process could be accurate, but it is important to be clear what is being said. The claim is not that anything about the financial crisis itself would have caused a depression. The claim is rather that Washington economic policy is totally controlled by people without a clue about economics. Apparently, the Post and others adhere to this view.

WaPo Touts the Expansion of Oil Supply, Apparently Unable to Get Projections from Energy Information Agency Print
Wednesday, 29 October 2014 04:42

As I've often noticed in the past, the WaPo apparently has difficulty getting access to government data at its location in downtown Washington, DC. If it did, it probably would not have run a Wonkblog piece by Steven Mufson touting the expansion of oil supply as the reason that oil prices have fallen sharply this year.

As I pointed out last week, the 2007 World Energy Outlook (the last projections from the Energy Information Agency before the economic collapse) projected output in 2015 of 98.5 million barrels per day (Table 1.3). The most recent projections put production at 92.7 million barrels per day, 5.8 million fewer barrels than had been projected before the slump. This means production has actually grown less rapidly than projected.

It may well be the case that potential production has grown due to large new investments, as Mufson claims, but the key story here is that demand is well below projected levels. This is due both to weaker than expected economic growth and to a lesser extent conservation measures. This drop in demand would be holding prices down even if there had not been any great breakthroughs on the supply side.

The Blame Teachers Game: Has Anyone Heard of the South? Print
Tuesday, 28 October 2014 21:50

Frank Bruni's column complaining about teachers and teachers unions undoubtedly has millions asking, "is our pundits learning?" The proximate cause is a soon to be published book by Joel Klein, the former New York City school chancellor.

It seems that the book repeats most of the old complaints of school "reformers." The big problem with our schools is that we have bad teachers and that unions won't let us get rid of them. Bruni tells readers:

"I was most struck, though, by what he observes about teachers and teaching.

"Because of union contracts and tenure protections in place when he began the job, it was 'virtually impossible to remove a teacher charged with incompetence,' he writes. Firing a teacher 'took an average of almost two and a half years and cost the city over $300,000.'

"And the city, like the rest of the country, wasn’t (and still isn’t) managing to lure enough of the best and brightest college graduates into classrooms. 'In the 1990s, college graduates who became elementary-school teachers in America averaged below 1,000 points, out of a total of 1,600, on the math and verbal Scholastic Aptitude Tests,” he writes. In New York, he notes, “the citywide average for all teachers was about 970.'"

So the problem with NYC's schools is that unions make it "virtually impossible" to fire bad teachers? If this is the big problem with our schools then we should expect places like Mississippi, Arkansas, and Texas to be the models of good education since teachers unions are relatively rare and certainly much less powerful than in New York City. Perhaps Klein has a chapter touting the success of public education in union-free areas, but I doubt he has much data to support such claims.

Of course if we look internationally, the best education outcomes on standardized tests are typically found in countries like Finland, where unionization of teachers is close to universal. One of the factors that might explain their success in education relative to the United States is that teachers are paid more relative to other professions. The ratio between the average pay of a  doctor and a teacher in these countries is something closer to 2 to 1 rather than the 5 to 1 in the United States. And, they don't have a bloated financial sector where good performers can easily make 10-20 times the pay of an average teacher.



Stop Pretending Population Doesn't Matter for the Environment Print
Tuesday, 28 October 2014 04:51

The Washington Post seems to have jumped the shark by running a Wonkblog piece that demands readers, "stop pretending we can fix the environment by curbing population growth." The gist of the argument is that plausible changes in population growth will not be sufficient to prevent environmental catastrophe without other changes.

If there were people who thought that slower population growth would be sufficient to prevent global warming, then this piece would be a useful corrective. However if the point of this piece is that slower population growth should not be an important part of a strategy to limit global warming, then it needs to read the research more closely.

The world population in 2100 in the high fertility scenario shown in the piece is more than twice as high as in the low fertility scenario. This implies that we would need to have less than half as much greenhouse gas emissions per person in the high fertility scenario to have the same impact on global warming as in the low fertility scenario. It would be quite expensive to reduce per person emissions by an additional 50 percent against the reductions that would be needed even in the low fertility scenario. For this reason, it would make a great deal of sense for population control (in the form of access to birth control and empowerment of women) to be an important part of an environmental agenda.

No Room for Unemployment In NYT Debate on Fed Policy and Inequality Print
Tuesday, 28 October 2014 04:21

The NYT had a Room for Debate segment on whether the Fed should be concerned about inequality. While many good points were raised in the exchange, none of the participants made the point that lower rates of unemployment are associated with faster real wage growth for those at the middle and bottom of the wage distribution.

This is the main point of the classic book, Getting Back to Full Employment: A Better Bargain for Working People, that Jared Bernstein and I wrote last year. We showed that workers at the middle and bottom of the wage distribution only saw wage growth when the unemployment rate was at low levels. This is an essential condition for these workers to share in the gains of economic growth.

The Fed may not always be able to boost growth and reduce unemployment by as much as it might like, but it certainly can keep the unemployment rate from falling. This is the point of raising interest rates. The idea is that higher rates will slow the economy and the rate of job creation, thereby keeping the unemployment rate higher than it otherwise would be.

If the Fed keeps the unemployment rate higher than necessary, then it is preventing most workers from sharing in the gains of growth, thereby worsening income inequality. This was very much an issue back in the 1990s when most economists thought the Fed should have kept the unemployment rate from falling much below 6.0 percent.

Fortunately, Federal Reserve Board Chair Alan Greenspan did not share this view. He allowed the unemployment rate to fall far below this level, reaching 4.0 percent as a year-round average in 2000. As a result, there was strong wage growth for workers at the middle and bottom of the wage distribution. These workers also had the opportunity to work more hours, further increasing their income gains. And, because unemployment disproportionately hits those at the bottom of the income ladder, these people disproportionately benefited from the jobs created in these years.

These fundamental points should have been included in the debate on the Fed and inequality.

Germany Leaves the Euro Zone, and the Problem Is? Print
Monday, 27 October 2014 07:42

Matt O'Brien gave readers a thoughtful discussion on how the euro zone's stagnation is likely to persist for the indefinite future, primarily because Germany is acting to obstruct any serious efforts at stimulus. However at one point the logic gets a bit weak. 

In laying out the various options for promoting stronger growth O'Brien suggests that Mario Draghi, the head of the European Central Bank could try to push ahead with quantitative easing even without the support of Germany. He says this could prompt Germany to take legal action and it "might even threaten to leave the euro zone over it."

If Germany left the euro zone, the problems of the other countries would be largely over. The euro would presumably fall in value against the new deutschemark, allowing the countries of southern Europe to quickly regain their competitiveness against Germany. The resulting reduction in their trade deficit would be a major boost to growth and employment. And this could be done without the financial disruptions that would be caused by the southern European countries leaving the euro.

So the question is, if Germany threatened to leave the euro zone, why wouldn't the other countries just say "please do?"

Robert Samuelson and the Family Deficit Print
Monday, 27 October 2014 04:43

We can finally declare the budget deficit crisis over; Robert Samuelson has moved on to the talking about the "family deficit." Actually, many of the points he makes are reasonable, the question is the policy implications.

People in committed relationships, generally involving marriage, do much better on average than do single adults on a variety of social and economic indicators. Perhaps more importantly, their children do much better as well. The data show that marriage is increasingly a middle class and upper class story, with those in the bottom half, and especially bottom quintile of the income distribution much less likely to be married and their children much less likely to be raised by a married couple. And in the United States, children raised by single parents generally don't do well in life.

It would be nice if the government could so something to ensure that all these single people, and especially single parents, were in happy committed relationships. But governments tend not to be good as matchmakers. Many relationships are seriously abusive. Someone married to a spouse who has serious problems with drugs or alcohol, or who can't control their temper, is not necessarily doing themselves or their children a favor by remaining in the marriage. And the government would not be doing anyone a service in this situation by preventing a divorce or separation.

Pro-marriage policy (e.g. tax incentives) may sound nice, but only until we give them a bit of thought. A marriage subsidy implicitly penalizes single adults. Recognizing the benefits that marriage offers, do we want to further penalize those not in a happy marriage and their children?

We can pursue policies that will make peoples' lives more secure and in that way likely increase the frequency of happy marriages. Legalizing marijuana and decriminalizing drug use in general would likely be a big step in the right direction. Men in jail generally are not good husbands and fathers.

Greater employment security and higher wages would also be a big step forward. Frequent job changes and moves are a disruption in anyone's lives. And the stress of constantly struggling to find the money for the rent or mortgage could make any relationship difficult. And safe and affordable child care would benefit both children and parents, whether they are single or married.

These items are all part of a general economic agenda for full-employment and greater economic security. It would be great if the advocates of marriage would join in for this effort.


Note: Typos corrected, thanks to Robert Salzberg.



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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.