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Manufacturing Jobs Still Matter, as Does the Dollar Print
Wednesday, 04 April 2012 03:56

Eduardo Porter had an interesting column in the NYT discussing the future of manufacturing jobs in the U.S. economy and the role of trade. While the piece makes several valid points, it seriously underplays the importance of manufacturing jobs. Remarkably, it also does not discuss the trade deficit and the dollar.

The piece is correct in saying that there is nothing intrinsically good about manufacturing jobs and that it makes little difference to manufacturing workers whether they lose their jobs to trade or productivity growth. Nonetheless, it is still true that manufacturing remains a source of relatively high-paying jobs for workers without college degrees. This may be the result of a historical legacy and higher than average unionization rates, but it is still the reality.

The issue of trade is also important, because the loss of jobs as a result of the trade deficit creates a situation that is in the long-run unsustainable. If the economy returns to full employment we would have a trade deficit of close to 5 percent of GDP (@$750 billion a year). A trade deficit of this size logically implies negative national savings of the same magnitude. That means that we must have either negative private savings (i.e. households and firms have negative savings) and/or a government budget deficit that is equal to $750 billion a year.

Of course the main factor in determining the size of the trade deficit is the value of the dollar. If the dollar is over-valued by 15 percent, it means that our exports will cost roughly 15 percent more for people in other countries while imports will cost roughly 15 percent less for people living in the United States. There is no policy or set of policies that can have anywhere near as much impact on trade as the value of the dollar.

This is why a discussion of the value of the dollar should be front and center in any discussion of trade. If the dollar were to fall by 10-15 percent, and bring trade back into balance, it would generate close to 5 million new manufacturing jobs in the United States. This would have an enormous impact on the labor market for less-educated workers.

The article also includes a comparison of jobs that are subject to international competition and jobs that are not. This is highly misleading.

Whether or not a job is subject to international competition is a matter of policy, not an intrinsic feature of the job. The fact that manufactured goods are widely traded is the result of long set of trade agreements over the last three decades that were deliberately designed to make it as easy as possible for U.S. firms to hire low-cost labor in the developing world and ship their production back to the United States.

Our trade negotiators could have instead devoted their energies to make it as easier as possible for foreign students to train to U.S. standards as doctors, dentists, lawyers, economists or other professionals. There are tens of millions of very bright people in China, India, Mexico and elsewhere in the developing world who would be very happy to train to U.S. standards in these professions, including becoming proficient in English, and work in the United States for less than $100,000 a year.

We do actually bring large numbers of foreign workers into the country in some occupations, but they tend to be low-paying ones. Immigrant workers are enormously important in farm work, restaurant and hotel work and residential construction. They would be equally dominant among physicians, dentists and lawyers if they faced as few barriers as they do to working in these low-paying occupations.

The savings to U.S. consumers from this sort of expanded trade in professional services would be hundreds of billions of dollars annually in the form of lower health care costs, reduced university tuition and savings on all other products in which the cost of highly paid professionals is a major input. The reason that trade agreements did not take this route is that U.S. professionals have much more political power than manufacturing workers. As a result, they have been able to maintain barriers that largely protect them from competition with their counterparts in the developing and developed world. (U.S. professionals also make more than their counterparts in Europe.)

As the old story goes in explaining the difference between autoworkers and economists; autoworkers are smart enough to know that they need protection, but lack the power to get it. Economists are too dumb to know that they need protection, abut are powerful enough to get it. This explains much of the story of wage differentials in the U.S. labor market. 

It's Not Just Democrats Who Say That Eliminating Small Tax Breaks Will Not Make Up for Rate Reductions Print
Wednesday, 04 April 2012 03:45

The NYT did some serious head said/she said reporting when it concluded an article reporting on President Obama's criticism of the tax cuts for the rich in the Republican budget:

"In theory, tax writers could focus on tax breaks that primarily help the rich, like the deduction for charitable giving, or end the biggest tax breaks only for upper income earners. But Democrats say such selective changes to the tax code would never recoup such large cuts to income tax rates."

It is not just Democrats who say that taking back a selective group of tax breaks for the rich will not offset a big cut in tax rates. It happens to be true.

The one tax break that could be offsetting, the lower tax rate for dividends and capital gains, has been declared off-limits by the Republicans. The amount of taxes at issue for the remaining tax breaks would not come close to offsetting a reduction in the top marginal tax rate of more than 15 percentage points for the top 1 percent of the income distribution. The NYT should have made that clear to readers. 

Adventures in Bank Regulation: How Slow Are the Employees at Monadnock Community Bank? Print
Tuesday, 03 April 2012 04:17

That's undoubtedly what NYT readers were asking after reading a piece saying that banks are fleeing federal regulators in order to avoid the excessive burden. The piece begins by telling us about Monadnock Community Bank, a small community bank in New Hampshire.

According to the piece, William Pierce, the president of Monadnock, is planning to sell the bank to credit union so that it can avoid the burdensome regulation of the Office of the Comptroller of the Currency (OCC). As an example, the piece tells us that the OCC required the bank to review its procedures for dealing with delinquent mortgages, even though it has only had two foreclosures in the last four years. This review is supposed to require the time of 3 of the banks 18 employees.

Okay, let's see what our friend, Mr. Arithmetic, says about this. According to the piece, Monadnock has $82 million in assets. Let's say that half of this, or $41 million, is in residential mortgages. The average home price nationwide is a bit over $200,000 (considerably higher in the Northeast). If the average mortgage has a loan-to-value ratio of 75 percent, that implies a value of $150,000. That means that the bank should have about 270 mortgages on its books.

Apparently the bank is careful with its loans, since it only had two foreclosures in the last four years, but let's say that nonetheless an incredibly high percentage of the loans are still delinquent. If 10 percent of the mortgages were delinquent, then this would mean that Monadnock has 27 delinquent loans.

How long will it take 3 employees to review how these 27 delinquencies? If it took 2 hours for each mortgage (which seems extreme, unless the record-keeping is a mess), we get a total of 54 hours, or roughly two days work for each employee. In short, if Mr. Pierce's claim about the burden of this regulation is true, it speaks more to the quality of his staff and his supervision than the burden of the regulation.

As a practical matter, presumably the bank has some list of procedures on handling delinquent mortgages. This would probably have to be reviewed and updated. This process should probably not require a great deal of time for one worker, although the bank would likely have other workers read and edit the revised version.

The piece should have made an effort to evaluate the claim that new regulations are imposing an excessive burden on Monadnock and similar banks, rather than just presenting them to readers as though they are true. Readers are likely to be very sympathetic to a small community bank. Putting the unexamined claims of Mr. Pierce at the beginning of the piece gives considerable credence to the claims of an excessive regulatory burden.


Good NYT Piece on Public Sector Pension Funds Being Ripped Off Print
Monday, 02 April 2012 06:43

The NYT had a good piece reporting on the fact that public sector pension funds that have invested heavily in alternative investments (e.g. hedge funds, real estate funds and private equity funds) have done much worse than those that just held traditional investments (e.g. stocks and bonds). While the managers of these alternative investments did quite well collecting fees, the governments did not.

There is a simple way to avoid this problem. If the funds made compensation for the managers of these investments almost entirely contingent on their beating a conventional market basket, then the risk would be shared. If managers are not willing to accept such contracts it implies that they don't believe they will be able to beat the returns on conventional instruments. If the managers don't believe that they can beat conventional returns, then governments should not either.

The Cost of Health Care in Europe: The Debut of Professional Wrestling on NPR Print
Sunday, 01 April 2012 16:52

National Public Radio told listeners that, "Like the U.S., Europe Wrestles With Health Care." If the wrestling in Europe is anything like the U.S., then we must be talking about professional wrestling. ("Hit him over the head with a chair!")

The per person cost of health care across Europe is far less than in the United States. According to the OECD, in 2009 (the most recent year for which it has comparable data), per capita health care expenditures in the United States were $7,960. In France, Germany, and the UK, the three countries featured in the piece, the costs were $3,978, $4,218, and $3,487 respectively.

In other words, costs in the U.S. were more than twice as high as in France and the U.K. and more than 80 percent higher than in Germany. While the rise in health care costs poses a problem in these countries, as it does in the United States, the impact is very different than what it is in the United States. NPR should have pointed out the huge difference in current costs instead of trying to imply that all countries face the same problem.

There is one other point in this piece that badly needs correcting. The piece quotes Arthur Daemmrich, a professor at Harvard Business School:

"In Britain, for example, a new bio-tech drug that extends a person's life on average one or two months, but costs $25,000, would not be reimbursed."

Actually, the drug does not "cost" $25,000. The British government gives a drug company a patent monopoly that allows it charge $25,000 because the government will arrest any competitors that try to sell the drug. The actual cost is more likely in the range of $5-$10.

This speaks to the incredible inefficiency associated with the patent system as a mechanism for financing drug research. However it is wrong to imply that it would be expensive to society to give patients these drugs. It would actually be very cheap.

E.J. Dionne Inadvertently Gives Evidence on the "Right's Stealthy Coup" Print
Monday, 02 April 2012 04:05

In his column today, titled "the right's stealthy coup," E.J. Dionne discussed the takeover of the Republican Party by its extreme right-wing. For example, he noted that the Republican Supreme Court justices appear to be taking positions that even President Reagan's solicitor general considers absurd.

Dionne then shows how effective the right has been in their stealthy coup effort when he refers to "a vote on the deficit-reduction proposals offered by the commission headed by former Sen. Alan Simpson and Erskine Bowles, former chief of staff to Bill Clinton."

Of course there were no deficit-reduction proposals offered by the commission. The commission never issued any proposals. The by-laws of the commission clearly state:

"The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission."

There was no vote taken by December 1 on any plan. There was an informal poll of members on December 3, 2010. This poll found that 11 of the 18 commission members supported the proposal put forward by the commission co-chairs, Morgan Stanley Director Erskine Bowles and former Senator Alan Simpson.

This means that the proposals that Dionne refers to as coming from the commission are in fact just proposals from the co-chairs. They cannot accurately be called proposals from the commission.

Remarkably, the right is using public money to advance this deception. The commission's website inaccurately posted the report of the co-chairs as a report of the commission. Showing an extraordinary sense of irony, they titled the report, "the moment of truth."

Esquire Magazine: Writer wanted to help convert class war into generational war. No skills required; pays top dollar. Print
Friday, 30 March 2012 22:06

This could well have been the want ad Esquire used to attract a writer for its story titled, “War Against Youth.” This lengthy piece is the best compendium of warped logic and misplaced facts on this topic since the Peter Peterson financed film, IOUSA.

The whole story is given away in the first paragraph:

“In 1984, American breadwinners who were sixty-five and over made ten times as much as those under thirty-five. The year Obama took office, older Americans made almost forty-seven times as much as the younger generation.”

That sounds really awful. Thankfully it is not true, as readers could find by looking at the chart that accompanies the article. This is a ratio of wealth, not income.

This is a huge difference. Wealth adds up a household’s total assets. This means the value of their home, their 401(k) and other savings, their checking account and car. The calculation then subtracts liabilities: mortgage debt, car loans, credit card debt, and student loans. This is very different from income, which for most people means their wages and for older people their Social Security.

If the writer, the editor, the fact checker or anyone at Esquire had a clue, they would have caught this mistaken first paragraph and killed the piece. As their chart shows, the median net worth for households over age 65 was $170,494. That merits repeating a couple more times. The median net worth for households over age 65 was $170,494. The median net worth for households over age 65 was $170,494.

Again, net worth refers to total assets minus liabilities. This means that if we add up the home equity of the typical household over age 65, their 401(k) and all other savings, the value of their car and any other possessions they might have, it comes to just over $170,000. This is a bit more than the price of the median home.

In other words, if the typical household over age 65 took all of their wealth, they would have enough money to pay off their mortgage. After that they would be entirely dependent for their living expenses on their Social Security benefit, which averages a bit more than $1,200 a month.

To take another comparison, the lifetime accumulation of wealth of the typical household over age 65 would be approximately equal to what the CEO of Goldman Sachs earns in two days. A top hedge fund manager, who makes $3-4 billion a year, can pocket this much money in ten minutes. Yet, Esquire tells us that it is the high living retirees getting by on their $1,200 a month Social Security checks who are responsible for the questionable future facing the young.



Discrepancies Between National Income and GDP Print
Friday, 30 March 2012 05:42

Binyamin Appelbaum has a NYT blogpost suggesting that the economy may be growing more rapidly than the GDP imply based on the fact that national income has grown more rapidly in recent quarters. In principle, GDP, which measures the goods and services the economy produce, should be equal to national income, which measures the income generated in the production process. (Every cost to a buyer is income to someone.)

However, they never come out to be exactly equal. They measures of GDP and national income are done independently. The difference, the extent to which GDP exceeds output, is called the "statistical discrepancy."

Appelbaum's post points to a new paper that suggests that we should be taking an average of GDP growth and income growth as our actual measure of economic growth. If we go this route, then it implies that the recovery has been somewhat stronger (and the recession steeper) than the standard measure of GDP growth.

There is an alternative story. David Rosnick and I analyzed the movement of the statistical discrepancy and found a strong inverse correlation between the size of the statistical discrepancy and capital gains in the stock market and housing. This meant, for example, there was a large negative statistical discrepancy in 1999 and 2000 at the peak of the stock bubble (i.e. income exceeded output) which disappeared after the bubble burst.

The same thing happened in the peak years of the housing bubble, 2004-2007. In that case also, the large gap between the income side measure and the output side measure disappeared after the bubble burst.

The logic is simple. Some amount of capital gains will get misclassified in the national accounts as ordinary income. (Capital gains should not count as income for GDP purposes.) While this may always be true, when we have more capital gains, the amount of capital gains misclassified in this way will be greater.

This story fits the data pretty well. If our analysis is correct, then we are better off sticking with our old friend GDP as the best measure of economic growth.

The Lowest Number of Unemployment Claims Since April of 2008? Print
Friday, 30 March 2012 05:26

Yes, that it is the way that the media reported the Labor Department's release of new unemployment claims yesterday. Strictly speaking, this is true. The 359,000 claims reported for last week is the lowest number in almost four years.

However, it is worth pointing out that last week's number was originally reported as 348,000. It was revised up this week to 364,000. There has been a very consistent trend with claims numbers be revised upward over the last couple of years. (I don't think this is a deliberately rigging; it just suggests a bias in the methodology.) This upward revision makes the "lowest in four years" line somewhat less meaningful.

Michael Gerson Has Not Heard About the ACA Print
Friday, 30 March 2012 05:14

That's what readers of today's Washington Post column by Michael Gerson must conclude. After all, he tells readers that President Obama has done nothing to reduce the cost of government health care programs. If he had heard of the Affordable Care Act, then he would know President Obama had actually done a great deal to control the costs of these programs, as shown in the Congressional Budget Office's (CBO) baseline budget projections which show spending if the cost control mechanisms in the ACA are left in place. These had the effect of reducing the projected 75-year shortfall in Medicare by more than 75 percent. 

It would also be worth reminding readers that Representative Ryan's Medicare plan is projected to hugely increase the cost of providing health care to seniors. CBO's projections imply that Representative Ryan's plan would increase the cost of providing Medicare equivalent policies to people over age 65 by $34 trillion over Medicare's 75-year planning period. 

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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.