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In Industrial Production Data, Focus on Manufacturing Print
Wednesday, 18 April 2012 05:17

The Federal Reserve Board's data on industrial production are often badly misinterpreted. The error occurs for two reasons. First, there are often large revisions to the monthly data and second, the aggregate index is often moved by large changes in mining or utility output.

The data for March released yesterday gave us examples of both. Therefore the NYT missed the story when it gave us the ominous news that: 

"A Federal Reserve report showed American industrial output was flat for a second consecutive month in March, held back by a 0.2 percent drop in manufacturing."

While the manufacturing index did show a 0.2 percent decline in March, its February reading was revised up by 0.5 percent. Therefore the March reading stood 0.3 percent from the advanced report for February and 0.6 percent above the February level. The reason that the industrial production index as a whole was flat over this period was a decline in mining output of approximately 3.8 percent. 

Is Thomas Friedman for Real? Print
Wednesday, 18 April 2012 04:34

I would make fun of the part of this Thomas Friedman column that calls for cutting entitlements to put the budget on a sustainable footing (the problem is not "entitlements," the problem is a broken health care system that raises the cost of public sector health care programs like Medicare and Medicaid), but I don't believe this piece is genuine. Yesterday, Atrios proclaimed Thomas Friedman the "Wanker of the Decade," referring to the first decade of his blog's existence.

I suspect some sort of side arrangement. Friedman is clearly trying to publicize this designation by writing exactly the sort of inane centrist, above-the-political-fray column that earned him this award. He can't fool me.

NAFTA and Free Trade Do Not Belong in the Same Sentence Print
Tuesday, 17 April 2012 16:17

[Note: Adam Ozimek wrote to tell me that the headline, "4 politically controversial issues where all economists agree," was not his. Without this headline, the blogpost is not especially objectionable.]

Megan MaCardle turned over her blog to Adam Ozimek to spread some misinformation about NAFTA and trade policy. Ozimek headlines the piece, "4 politically controversial issues where all economists agree." While I'm pretty comfortable with three of the four, the claim that all economists agree that, "the benefits of free trade and NAFTA far outweigh the costs" is highly misleading.

First, NAFTA was not about free trade. First and foremost, it was about reducing barriers that made U.S. companies reluctant to invest in Mexico. This meant prohibiting Mexico from expropriating factories and outlawing any restrictions on the repatriation of profits to the United States.

The agreement did little to loosen the obstacles facing highly-educated professionals in Mexico, like doctors and lawyers, from working in the United States. If the agreement had freed up trade in this area, it could have led to gains to consumers in the tens of billions of dollars a year.

In other areas, like patents and copyrights, NAFTA increased protection by extending the length and scope of these government granted monopolies. Mexico was forced to develop a U.S. type patent system for prescription drugs which led to considerably higher drug prices.

It is easy to see why someone who might in general support free trade would oppose NAFTA. The winners are the businesses that are in a position to take advantage of access to cheap labor in Mexico. The losers are the manufacturing workers in the United States who will now have to accept lower wages or lose their job.

It is entirely possible that an economist could agree that NAFTA did lead to net gains to the country as a whole, even if most people end up as losers (e.g. every worker loses $100 in wages, but Mitt Romney's clique pocketed an additional $50 billion in profit). In this case, she might say the policy was bad in spite of the net gains. (Several of the economists questioned raised exactly this concern.)

The higher costs imposed by higher prices for drugs and other products in Mexico could mean that a full assessment of costs would show Mexico to be a net loser from NAFTA. While tariffs are rarely more than 20-30 percent of a product's price, patents can raise the price of a drug by several hundred or even several thousand percent. The cost to Mexico's consumers in the form of higher drug prices can easily outstrip the small gains that showed up elsewhere. Of course this will lead to higher profits to U.S. drug companies.

Given the predicted distribution of gains, it is entirely possible that a fully informed economist could believe that the losses from NAFTA to the poor and middle class easily swamp the gains to the rich and for that reason oppose the policy. This is not bad economics as the discussion seems to imply.

Or, to put in terms that even an economist could understand, suppose there was a trade deal that completely opened up doctors, lawyers, and economists to international competition, but maintained the protection for everyone else, and hugely increased the protection for autoworkers. It is entirely possible that many economists would oppose this deal. They certainly would not call it a "free trade" agreement.

There is one final point worth making about this exercise. The line "all economists agree" carries much less weight these days because almost the entire economics profession somehow failed to see the $8 trillion housing bubble, the collapse of which wrecked the economy. Tens of millions of people continue to suffer with the loss of their jobs, their homes, and/or their savings as a result of this incredible incompetence.

In the wake of this momentous failure it is understandable that the public would be reluctant to take the advice of economists on economic policy. (Best question to ask an economist: when did you stop being wrong about the economy?) This is unfortunate, since economists really have learned some things from their studies that may not be apparent to everyone.

However, economists will have to earn back the public's trust. As long as economists pay no price in their careers for even the most disastrous failures, this may prove difficult. After all, if there are no consequences to getting things wrong, why would the public believe that economists will get things right? That is a point on which all economists should agree.

He Said/She Said on the Economy at NPR Print
Tuesday, 17 April 2012 06:54

Is today Tuesday? Some people say it is and others say it isn't. It's just so hard to decide.

That is pretty much what NPR told us about President Obama's record in turning around the economy this morning. It cited Alan Blinder, an economist who has served in past Democratic administrations, saying that President Obama's policies helped the economy. It then cited Douglas Holtz-Eakin, who served in the Bush administration and was the chief economic advisor to John McCain saying that his policies harmed the economy.

It would have been helpful to give us the assessment of neutral observers such as the Congressional Budget Office. It also would have been helpful to try to evaluate the claims of the Romney campaign that the stimulus harmed the economy.

NPR reported that the Romney campaign said:

"The president made the recession worse, the statement says, 'by pursuing a series of disastrous, partisan policies that created uncertainty, discouraged investment and stifled job creation.'"

There is a simple claim that can be evaluated here. The Romney campaign says that investment would have been higher had it not been for Obama's actions. This can be evaluated by comparing the path of investment with what might have been predicted absent the bad policies from President Obama.

Investment in equipment and software is currently close to 7.5 percent of GDP. It was 7.9 percent before the downturn in 2007. Given the huge amounts of excess capacity in large sectors of the economy, it is difficult to envision a scenario in which investment would have been much higher than it is today. If the Romney campaign is to be taken seriously in this claim then it should have to present some evidence that would establish its counter-factual as being credible. On it's face, it is not.

This piece also included a very misleading assertion from Holtz-Eakin. Referring to Holtz-Eakin the piece reported:

"He says any president would have acted to stop the economic free fall in 2009. The issue, he says, is the quality of the president's responses."

Actually, the free fall begin in September of 2008. President Bush did nothing to stop the free fall in the last four months of his presidency. Perhaps he would have eventually taken some action to boost the economy had he been in office longer, but given President Bush's track record it is far from clear that any president would have taken action to stop the free fall.

Educating David Brooks on the Budget Print
Tuesday, 17 April 2012 04:57

I enjoy teaching, I used to do it for a living. So I am happy to take on the job of teaching David Brooks about the budget so that he does not consistently embarrass himself in his NYT columns.

Today he is trying to give us a balanced assessment of President Obama's case for his budget. He just puts the facts on the table. Brooks tells us, "I’m not going to pass my own comprehensive judgment on this here."

The problem is that the facts are not quite as Brooks lays them out. To start with, Brooks seems more interested in scaring people than informing them. He tells readers:

"I’ve based that argument on certain facts. President Obama’s 2013 budget will add roughly $6 trillion to the nation’s debt over the next 10 years. By 2022, Americans will be spending $915 billion on interest payments on the debt alone, a number far larger than that year’s entire defense budget."

That sounds really really bad. After all, $915 billion is a really big number, can we afford that? The way that you look to answer that question is by comparing the spending to the projected size of the economy. GDP is projected to be $24.7 trillion in 2022. The projected interest spending in that year is then 3.7 percent of GDP. That is somewhat higher than 3.3 percent of GDP we hit in 1991, but not hugely so.

Furthermore, if the Federal Reserve Board continued to hold the $3 trillion in assets it has purchased to boost the economy, much of this interest would be refunded to the Treasury. Currently, the Fed is refunding about $80 billion a year to the Treasury, or a bit more than 0.5 percent of GDP. Its interest earnings would be projected to rise when interest rates go higher. (The Fed could raise reserve requirements to offset the potential inflationary impact of the additional reserves in the banking system.)

[ CORRECTION: Brooks is right here. He said "that" year, not "last" year.] Comparing projected interest payments in 2022 to last year's defense spending is a joke. Serious people do not compare nominal sums that are more than a decade apart. This is because serious people have heard of inflation. Hey, we're spending 8 times as much on the military today as we did at the height of World War II. This is true using nominal dollars, but obviously an absurd comparison.]



Japan Has Not Suffered from "Crushing" Deflation Print
Monday, 16 April 2012 05:12

A NYT article that reported on the declining importance of manufacturing to Japan's economy at one point referred to:

"the crushing deflation that has burdened Japan’s domestic economy for nearly two decades."

Actually, Japan has experienced modest inflation rather than deflation for most of the last two decades. Even when prices did fall, the rate of decline has been slow, exceeding 1.0 percent only in 2009, in the wake of the world financial crisis.

Japan, like other countries, suffers from having an inflation rate that is too low. This is a problem because nominal interest rates cannot fall below zero. It would be desirable to have a large negative real interest rate at present (the real interest rate is the interest rate minus the inflation rate), but this is not possible when inflation is a low positive number or a negative number.

The fact that the inflation rate is below zero has no special importance in this story. The decline in the inflation rate from a positive 0.5 percent to a negative 0.5 percent is no worse than a decline in the inflation rate from a positive 1.5 percent to a positive 0.5 percent.

This fact can be seen clearly if we remember that the rate of inflation is an aggregate of tens of thousands of price changes across the economy. When the inflation rate is near zero many of these price changes will be negative, meaning that the prices of some goods are falling. (Computer prices have been falling rapidly in the United States for decades.) When the rate of inflation goes from a small positive number to a small negative number it simply means that the percentage of items with falling prices has risen. It is difficult to see how that could amount to some sort of calamity.

This point is important because the obsession with deflation has been a serious distraction in policy debates. Many have implied that the Fed and other central banks have been successful in their anti-recession policy because they have managed to avoid deflation. This is not true. They have in fact failed because they have not been able to lower the real interest rate as much as would be desirable given the weakness of the economy.

Republicans Show Inability to Understand Arithmetic in Energy Policy Debate Print
Monday, 16 April 2012 04:45

That would have been a reasonable headline for a Washington Post article that told readers that Republicans hope to make the price of gas a major issue in the election. The article says that they hope to blame the rise in the price of gas on President Obama's restrictions on drilling and the construction of the Keystone pipeline.

The Republicans will only have a chance in succeeding in this effort if the media help them deceive voters. The price of oil, and therefore the price of gas, is determined in the world market. Even under the most extreme assumption (e.g. oil companies get to expropriate private property to drill everywhere, with no environmental regulations) it is unlikely that we could increase the world supply of oil by more than 1 percent. 

This could lower the price of oil by 2-3 percent. That means that, other things equal, a drill everywhere policy might reduce the price of gas by 7-8 cents a gallon. If voters knew this simple fact, it is unlikely that the Republican strategy to make gas prices a political issue would have much chance of success.

It is also worth noting that domestic production of oil and gas has increased substantially under President Obama. The main impact of the Keystone pipeline (which would not have yet been operational in any case) would be to equalize gas prices across the country. It would lead to lower gas prices on the East Coast, but higher prices in the Midwest. It is not clear that voters in the Midwest would be upset if they realized that delaying the pipeline has helped keep down the price they pay for gas.

Trade Agreements that Increase Protectionism are not "Free-Trade" Agreements Print
Monday, 16 April 2012 04:18

The Washington Post did the obligatory waste-a-word to increase inaccuracy routine when it referred to a "free-trade" agreement with Colombia in a front page news story. The agreement includes a number of provisions that increase the strength of patent and copyright protection in Colombia which will raise the price of drugs and other products above their free market level. This will have the effect of dampening growth, in addition to making health care more costly for people in Colombia.

There is no reason that the Post should call this pact a "free-trade" agreement. Its proponents like to embrace this term because it gives the pact a more favorable image, however it would be more accurate to simply call it a "trade" agreement.

In discussing this agreement, Morning Edition referred to the $1 billion in additional exports that the United States is projected to get as a result of the agreement. The number of jobs in the economy depends on net exports (exports minus imports). If jobs just depended only on exports, then we could increase employment by having car parts in the United States exported to Mexico to be assembled there, and then imported back as a finished car into the United States.

The history has been that the trade deficits have increased with countries with whom we have signed trade agreements. If that pattern holds with Colombia, the trade deal will be a net job loser, even if our exports increase. It would have been helpful if Morning Edition had clarified this arithmetic for listeners who might have been deceived by the way in which the Obama administration has sold the agreement.

It is also worth pointing out that an increase in exports of $1 billion would correspond to just 10,000 jobs, even if there is no increase in imports. If the economy is generating 200,000 jobs a month, this is equivalent to a day and half of job creation.

Greg Mankiw Hides the Role of Government in Redistributing Income Upward Print
Sunday, 15 April 2012 07:52

The fact that Greg Mankiw works for Governor Romney is very clear when he tells readers:

"Whether competition among governments is good or bad comes down to the philosophical questions of what you want government to do and how much you fear government power. If the government’s job is merely to provide services, like roads, schools and courts, competition among governmental producers may be as good a discipline as competition among private producers. But if government’s job is also to remedy many of life’s inequities, you may want a stronger centralized government, unchecked by competition.

"These are two fundamentally different visions. The next election, and to some degree every election, is about which one voters find more compelling."

This is no doubt how Mitt Romney and other wealthy people would like the public to see the debate. However the reality is that the government has implemented a wide range of policies that have led to a massive upward redistribution of before tax income over the last three decades. These policies have affected every corner of the market economy.

Just to take a few biggies, the fact that drugs are expensive is entirely due to government-granted patent monopolies. We spend about $300 billion a year on drugs that would cost less than$30 billion a year in a free market. The difference of $270 billion a year is close to 5 times what is at stake in extending the Bush tax cuts to the richest 2 percent of the taxpayers. (There are alternative mechanisms for financing drug research.)

Second, the reason why the wages of autoworkers have been depressed by having to compete with low-paid autoworkers in China, but the wages of doctors have not been similarly depressed is the result of deliberate government policy. We designed our trade policy to put our autoworkers in direct competition with workers who get paid less than $1 an hour in the developing world. The predicted and actual effect of this policy is to lower the wages of large segments of the U.S. workforce.

We could have designed trade policy to make it as easy as possible for smart kids from China, India and elsewhere to study to U.S. standards and then practice medicine, law, and economics in the United States. This would put the same downward pressure on the wages of these professions as we have seen for manufacturing workers and non-college educated workers in general. This would lead to huge gains to consumers and the economy in the form of lower costs for health care, college education and other services provided by highly paid professionals. 

However trade did not go this route because doctors have much more power than autoworkers. The negative impact of international competition on distribution is aggravated by the over-valuation of the dollar which leads to the large trade deficit we are currently experiencing. The over-valuation of the dollar is another deliberate policy that had its origins in Robert Rubin's high dollar policy, with the muscle provided by the IMF in its bailout of East Asian countries from their financial crisis in 1997.

For one more example, the decision to bail out the Wall Street banks, while leaving them largely intact, meant that the top executives and traders at these institutions could continue to enjoy huge paychecks with the taxpayer acting as their insurer. This is a massive subsidy from ordinary people to some of the richest people in the country.

There are many other examples of the government engaging in policies that lead to upward redistribution of income. This is the topic of my book, The End of Loser Liberalism: Making Markets Progressive (free download available -- death to copyright monopolies). It is very advantageous to the wealthy to act as though the current distribution of income is just the natural outcome of the market, but it happens not to be true. No one should buy this garbage unless you're being paid lots of money. 

Covering Up for Representative Ryan Print
Sunday, 15 April 2012 07:44

David Leonhardt wrongly told readers that:

"Mr. Ryan’s plan would cut the top rate to 25 percent, from 35 percent, and still leave overall tax collection roughly where it has been, by eliminating tax breaks."

Ryan claims that his plan would leave tax collections roughly where it has been, however he has never identified a set of tax breaks that he is prepared to eliminate to accomplish this result. In fact, Ryan has explicitly ruled out two touching of the biggest tax breaks, which largely affect the rich, the special treatment of capital gains and dividends.

To get anywhere close to revenue neutrality without touching these tax breaks would require eliminating almost all the tax breaks that benefit the middle class, like the mortgage interest deduction, the deduction for employer provided health care, and the deduction for charitable contributions. This would amount to a massive transfer from the middle class to the wealthy.

While Leonhardt cites a poll showing widespread support for tax reform, it is unlikely that many people would support a reform that meant that they paid thousands more in taxes each year so that Mitt Romney and Warren Buffet could pay less. This outcome is only plausible if the media do not accurately inform voters about what is at stake.

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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.