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Genuine Counterfeits Print
Friday, 09 March 2012 05:12

The NYT discovers a real case of counterfeiting in an article about a wine dealer who was arrested for selling millions of dollars of fake wine. This one is worth noting because it is in fact actual counterfeiting, as opposed to the cases of selling unauthorized copies that are often wrongly identified as "counterfeits" in the media.

The difference is that in a case of actual counterfeiting the buyer is defrauded. They think that they are getting something that they actually are not getting. The most obvious case is with fake currency, but counterfeits can also be works of art that are sold as being produced by famous artists or a case like this one, where wines are falsely labeled to lead buyers into thinking they are getting rare and expensive vintages.

By contrast, when a buyer gets an Apple-like product or a designer-type handbag at a fraction of the standard price, they generally know that they are not getting the brand product. In these cases, the buyer is making a decision that they would rather pay less and get an imitation rather than the brand product.

In the case of unauthorized copies, the owner of the brand may have a legal case against the seller for violations of intellectual property, however the buyer has benefited from the transaction. Therefore, the buyer has no reason to cooperate with law enforcement in cracking down on the sellers. By contrast, in a case of actual counterfeiting, the buyer is the victim of fraud and has every reason to cooperate with law enforcement.

 
Unit Labor Costs: Can We Force WSJ Reporters to Read the Graphs They Use? Print
Thursday, 08 March 2012 13:29

It would be a big step forward if we could. Kathleen Madigan tells readers that the Fed is going to have to start worrying about inflation since unit labor costs have exceeded the core inflation rate in the last two quarters. This is shown very nicely in the graph accompanying the blog note.

Of course this graph also shows unit labor costs running way below core inflation all through 2009 and 2010. This means that companies had huge increases in profit margins over this period. It might be painful for folks at the WSJ to hear this, but there is nothing natural about the huge increases in profit margins in 2009 and 2010 and there is no reason to expect such high margins to persist forever.

If the Fed were working exclusively for the owners of corporations, then they might try to clamp down on any reduction in unemployment that could allow workers to have enough bargaining power to make up some of the ground lost in 2009 and 2010. However, if the Fed has an eye to the broader economy, the fact that corporations may not be able to sustain record profit margins indefinitely would not be a major concern.

[Thanks to Joe Seydl for calling this one to my attention.]

 
Oil Prices ARE Determined in the World Market #3456: It is Not Just Something that President Obama Says Print
Thursday, 08 March 2012 05:40

A NYT article on President Obama's proposals for increasing the tax credits for buying cars powered by alternative fuels concluded by quoting President Obama's statements that gas prices are determined by the world market and will be little affected by increased U.S. production of oil. This is also something that happens to be true.

U.S. oil production is around 9 percent of world production. Even very large increases in U.S. production would have only a minimal effect on world oil prices, and therefore a minimal effect on the price of gas in the United States. The NYT should tell readers this and not leave it as a he said/she said proposition on which reasonable people can differ. It isn't.

It would also be helpful if the NYT put the numbers in this piece in some context. For example, the $1 billion that President Obama proposed to spend to help cities build infrastructure for vehicles powered by alternative fuels would be equal to approximately 0.03 percent of federal spending if it were done in a single year, which seems unlikely. (The article is not clear on the time-frame of the spending proposals it mentions.)

Such context is important since many readers may not realize that these proposals will have very little consequence for the budget or the deficit.

[Addendum: The Washington Post commits the same sins.]

 
The NYT Editorial Board Flunks Housing and the Economy 101 Print
Thursday, 08 March 2012 04:53

The NYT's editorial on housing policy makes it sound like it expects the Nasdaq to return to its 2000 peak of 5000. The NYT wants more action on housing in order to get prices to rise and boost the economy. There is so much that is wrong about this view that is difficult to know where to begin.

At the most basic level, why on earth would we expect house prices to rise? Has the NYT still not noticed the housing bubble? There was no logic to the run-up in house prices over the years 1996-2006.

This run-up was a break from a 100 year history in which nationwide house prices had just tracked the overall rate of inflation. There was nothing in the fundamentals to support this run-up as was demonstrated by the fact that rents only slightly outpaced inflation in the first half of this period and not at all in the second half.

At this point, the bubble has now largely deflated so that prices nationwide are within a range that can be viewed as consistent with their long-term trend. In some areas (e.g. Las Angeles, New York, San Francisco) the bubble still has some air that is likely to continue to dribble out. In other areas (e.g. Los Vegas and Phoenix), prices have probably over-corrected on the downside leading to some eventual rebound, but there is no reason to expect a nationwide increase in house prices. Furthermore, with nationwide vacancy rates still near record highs, how can the NYT seriously expect any substantial increase in house prices any time soon?

This brings up the next question, what exactly does the NYT expect higher house prices to do for the economy? In the bubble years, high house prices led to a near record building boom. Does the NYT think we will see a huge uptick in construction at a point where we still have vacancy rates near record highs?

The other part of the story was the consumption spurred by what proved to be illusory housing wealth. If we did get house prices up again then there is no doubt that it would lead to some additional consumption (the usual estimates are 5-7 cents on the dollar), but this seems a rather perverse way to try to generate demand in the economy.

Essentially higher house prices transfer claims to wealth from non-homeowners to homeowners. The higher house prices go, the more wealth homeowners can command and the harder it is for non-homeowners to become homeowners. (This is known as the "unaffordable housing" policy.) If we just want someone to spend money, wouldn't a refundable tax credit do the trick better? Or, as more long-term policy, how about getting the dollar down and thereby boosting net exports?

While it is difficult to understand how the NYT thinks that housing policy will affect the economy, its agenda does make sense as housing policy. There should be pressure on banks to do more to modify loans to keep people in their homes. Of course having some sort of national right to rent policy would make the most sense, but hey, that would require some new thinking.

We should also be moving ahead with investigations with the purpose of prosecuting fraud. There were a lot of mortgages made in the bubble years that the issuers knew to be based on inaccurate information. This had to have been a matter of policy at the major subprime issuers. These mortgages were packaged into securities by Goldman Sachs, Merril Lynch, Citigroup and the other investment banks and then resold around the world. Knowingly packaging and reselling fraudulent loans is also fraud.

The people at the top responsible for these actions badly need to be prosecuted and jailed. Our financial markets will not be safe until this happens. On this score, the NYT editorial is right on the mark.

 
Erskine Bowles on Predictable Economic Crises Print
Wednesday, 07 March 2012 06:16

Tennessee Senator Bob Corker had an oped in the Washington Post complaining about the budget deficit. He concluded the piece by quoting Morgan Stanley director Erskine Bowles comment that the deficit is leading to "the most predictable economic crisis in history."

This is not true. There are many countries that have sustained debt to GDP levels of more than twice projected for the United States ten years from now. Japan currently has a debt to GDP ratio of more than 200 percent and can still borrow long-term in financial markets at interest rates close to 1 percent. Financial markets show no concern whatsoever about the financial situation of the United States, with the yield on the 30-year Treasury bond just over 3 percent.

In fact, the most predictable economic crisis in history was the crisis that would result from the collapse of the $8 trillion housing bubble. This led to both the current downturn and the large deficits that Senator Corker and Mr. Bowles find so upsetting. Of course both of them failed to see that crisis coming.

 
The Washington Post Gets Out Extra Whitewash for Piece on the IMF and Greece Print
Tuesday, 06 March 2012 05:07

The Washington Post had a front page fluff piece on the IMF of the sort that would be expected in a paid advertisement. The 5th paragraph tells readers:

"Over the decades since its creation after World War II, the IMF has taken responsibility for ensuring the health of the global economy. The agency has repeatedly rescued teetering governments and restored confidence to panicked markets by coupling its unrivaled expertise with money provided by member countries, most prominently the United States."

The evidence does not fit this picture well. The IMF had enormous sway in determining economic policy in developing countries in the decades of the 80s and the 90s, especially in Latin America where many countries were following the Washington Consensus neo-liberal model. This led to two decades of dismal economic growth and weak progress on social indicators like health care and education measures.

The "rescue" of East Asia following its financial crisis was especially onerous. As a result of the harsh conditions imposed on the countries of the region, developing countries began accumulating massive amounts of reserves in order to ensure that they would never be forced to deal with the IMF.

This meant running huge trade surpluses, especially wiith the United States. That created the fundamental imbalance of the last decade that was associated with the housing bubble. Instead of rich countries lending money to poor countries, poor countries were lending massive amounts of money to the United States in order to keep up the value of the dollar and sustain their trade surpluses. Lacking productive investment outlets, this money was used to fuel the housing bubble.

Rather than being seen as an agency that looks after the health of the world economy, the IMF is better understood as the agent of a creditors' cartel, getting as much money as possible back for private creditors. This is the only plausible way to understand its dealings with Argentina during its crisis in 1998-2002.

The IMF imposed ever more onerous conditions on the country, pushing it into a depression. When the government finally broke with the IMF because it could no longer meet these conditions, the IMF did everything it could to sabotage its recovery. This included issuing tremendously pessimistic growth projections that could discourage private investment. Nonetheless, Argentina's economy grew rapidly, as it quickly regained the ground lost in the recession.

The article also concealed the IMF's repeated errors in dealing with the current crisis in Greece and the Eurozone telling readers at one point:

"But the prognosis for the bailout was getting grimmer. At the IMF, assumptions about Greece’s prospects were tumbling. Spending cuts by the Athens government were weakening economic activity, pushing the country into a deeper recession than expected. The wider European economy was slowing, denying Greece the lift anticipated from trading with its neighbors." [emphasis added]

The poor performance of Greece was entirely expected by many analysts. It was a predictable result of large cutbacks in government spending coupled by similar moves to austerity in its major trading partners.

Greece's fundamental problem is that its economy has become uncompetitive with northern Europe leading to a huge current account deficit. This can only be corrected by having prices in Greece fall relative to prices in Northern European countries.

This can be accomplished either by having prices in Greece fall, or prices in Northern Europe rise more rapidly. The former is very difficult to accomplish, while the latter could be done relatively easily if the European Central Bank would just allow a somewhat rate of inflation (e.g. 3-4 percent for the Eurozone as a whole). The IMF has refused to ever state this obvious truth, even though its chief economist, Olivier Blanchard has made exactly this sort of argument in an IMF paper. In short, the IMF is pursuing a policy in Greece that almost certainly cannot succeed because it is continuing to defer to the powerful economic and political interests in Europe, rather than applying sound economic reasoning.

It is also worth mentioning that IMF economists can retire in their early 50s with 6-figure pensions. This likely undermines their authority when insisting that countries cut back pensions that average less than 1000 dollars a month.

 
David Brooks Argues That If We Were More Moral, We Would Throw Millions More Out of Work Print
Tuesday, 06 March 2012 04:46

Yes, he did. His paean to the late James Q. Wilson is titled, "the rediscovery of character." It is a discussion of how Wilson touted the importance of values to a country that Brooks believes lacks them.

In the middle of the piece he tells readers:

"Every generation has an incentive to spend on itself, but none ran up huge deficits until the current one. Some sort of moral norms prevented them."

Of course the reason that the country is running up huge deficits at the moment is that private sector spending has collapsed. Prior to the collapse of the economy in 2008, deficits were relatively small with the debt to GDP ratio actually declining.

The large government filled the demand gap created by the lack of private sector spending. If we did not have this spending, then millions of additional workers would be unemployed. They would be unable to properly care for their children.

It is hard to see the moral norms that tells us this situation would be good. There are certainly people who think it is more important to have a balanced budget than workers have jobs and that their kids have a decent education, health care, nutrition, and housing.

This balanced budget view seems more obviously attributable to a misunderstanding of the economy. However, if Brooks wants to claim that the worship over balanced budgets over a decent society and a healthy economy is a moral norm, then we should be happy that this norm does not carry quite as much weight as it used to.

 
There Is Little Disagreement That Drilling Off the U.S. Coast Will Have Almost Zero Impact on the Price of Gas Print
Sunday, 04 March 2012 19:51

In an article on the debate over offshore drilling, the NYT told readers:

"while candidates have sparred over the reasons for rising prices, there is little disagreement over the call for more drilling, onshore and offshore."

The NYT should have also told readers that there is almost no disagreement among economists that drilling everywhere all the time offshore will have almost no impact on the price of gas in the United States. The reason is that we have a world market for oil. The additional oil that might come from offshore drilling is a drop in the bucket in a world oil market of almost 90 million barrels a day.

It is unlikely that drivers would even notice the difference between a policy where we told the oil industry that it could drill wherever it wants and pay no attention to the number of people it kills in the process or the resulting damage to the environment and local economies and a policy where we banned all new offshore drilling. Over the next 2 years the difference would be virtually non-existent and even after 10 years it is unlikely to change the price of gas by more than 2-3 percent.

The media should point out this fact to readers and that politicians who claim otherwise either do not understand the oil market or are being dishonest. It also would have been worth reminding readers that politicians of both parties receive large campaign contributions from the oil industry.

 
Will the French Have to Work Fewer Hours to Compete With Germany? Print
Sunday, 04 March 2012 10:54

The NYT had an article comparing the relative success of Germany's economy compared with France. It notes that Germany has a considerably lower unemployment rate and stronger growth.

The article highlights France's stronger labor market protections as a factor explaining the different outcomes. In this vein, the article includes a quote from a German official that, "the French work to live and the Germans live to work.”

The data suggest otherwise. In 2009, the most recent year for which data is available, the average German worker put in 10 percent fewer hours than the average French worker, according to the OECD.

It seems more likely that the difference in economic outcomes is attributable to the better training received by German workers as well as the greater labor-management cooperation in the workplace in Germany. These factors are mentioned in the article, but are given considerably less attention that the differences in labor market protections.

 

[Addendum: I chose 2009 because it was the last year for which data is available from the OECD, it is not cherry-picking. I am the hugest fan of anywhere of Kurzarbeit, German's short-work program, but that is not the explanation for why the average work year is shorter in Germany than in France. In 2008, the OECD reports that the average French worker put in 1560 hours compared to 1426 in Germany. In 2007, it was 1556 hours in France compared to 1430 hours in Germany. In short, the gap between the length of the average work year in France and the average work year in Germany predates the recession. The story that the French work less is an invention of the NYT, it does not correspond to the world.]

 
An Arithmetic Lesson for Steven Pearlstein Print
Sunday, 04 March 2012 09:00

Washington Post business columnist Steven Pearlstein often has thoughtful things to say about the economy; not today. He has one of those charming "pox on both your houses" pieces in which he even-handedly denounces the left and the right.

The denunciation of the right is fine. Complaints about economic harm from high taxes and over-regulation are utter nonsense as we all know. (We have low taxes and business-friendly regulation already.) It's the attacks on the left that defy arithmetic and logic.

He begins the piece by touting the economy's 3 percent growth rate in the fourth quarter and recent job creating pace of 200,000 a month. Then he tells readers:

"There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more."

Okay, let's assume that the growth rate remains ate 3.0 percent, which is somewhat higher than most forecasts. Currently the economy is operating at about 6 percent below its potential. Potential growth is around 2.5 percent annually according to the Congressional Budget Office. This means that we will make up our shortfall at the rate of 0.5 percentage points annually. That puts 2024 as the year when we again reach potential GDP.

Taking the jobs side of the picture, the economy is currently down by around 10 million jobs from where it would be had we continued on our pre-recession job growth trend. We have to create roughly 100,000 jobs a month to keep pace with the growth of the labor force. This means that if we create 200,000 jobs a month, then we are cutting into this shortfall at the rate of 100,000 jobs a month. That gets back to full employment in 100 months or 8 and a half years.

Hey, who can call this a depression?

The substance is perhaps even more irksome than Pearlstein's arithmetic problems. He complains:

"It is true, for example, that with additional borrowing and spending, we could rehire laid-off teachers and police officers. That would certainly boost employment in the short term, reduce class sizes and make us all feel safer. But the reality is that, even if the economy were to improve as a result, it would be many years before tax revenues return to where they were at the height of the bubble. At some point, spending by state and local governments will have to be brought down to match the level of taxes that their voters are willing to pay. The notion that once unemployment falls below 6 percent everyone will join hands and finally put the fiscal house in order — well, that’s nothing more than political fantasy."

If Pearlstein ever paid any attention to the people who is criticizing, he would know that they advocate federal support for these services at the state and local level. The federal government can of course borrow very cheaply and cover the cost of this aid when the economy is in a downturn. When the unemployment rate returns to more normal levels, contrary to what Pearlstein seems to imply here, state and local governments will have the necessary tax revenue to pay for these services. (That is not true everywhere, but there are always growing and declining regions of the country.)

Pearlstein then goes on to trumpet spending on improving infrastructure, education, and research and development, all investments that will have long-term payoffs. Maybe there is someone on the left who does not support aggressive spending in these areas, but I challenge Pearlstein to find this person.

Finally, it is incredible that in a piece focused on the need to restructure the economy, Pearlstein does not once mention the value of the dollar. The fundamental imbalance in the U.S. economy is its large trade deficit. This will only be corrected by a sharp decline in the value of the dollar against the currencies of our trading partners, something that Pearlstein has written about frequently in other columns.

It certainly would have been worth mentioning this point here. When the dollar does fall to more competitive levels, the United States stands to gain 4-5 million manufacturing jobs. This will have an enormous impact on re-balancing the U.S. economy.

 
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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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