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Economics Lesson for Senator Leahy Print
Wednesday, 18 January 2012 05:31

Senator Patrick Leahy, the sponsor of the Protect Intellectual Property bill, claimed that if Congress rejected his bill it would "cost American jobs." This is almost certainly not true.

Insofar as individuals are able to able to gain access to copyrighted material for which they would otherwise have to pay, they are able to save money. This if effectively the same thing as a tax cut, putting more money in their pocket, the vast majority of which will be spent on goods and services in their community, thereby creating jobs.

If they are denied access to this material, most would not be paying the copyright-protected price. Insofar as some of these people would pay the copyright protected price, it would mean some additional revenue to companies like Disney and Time-Warner. Most immediately this would mean higher profits for these companies. It may have some marginal impact on their employment, but the jobs lost from the money taken away from consumers would almost certainly be larger than the jobs gained by allowing these entertainment companies to gain more revenue. This is similar to imposing quotas on imported clothes. This will lead to more jobs in the textile industry, but fewer jobs everywhere else.

Senator Leahy's bill will also impose additional cost on search engines like Google and intermediaries like Facebook. These costs are like a tax on the Internet. They pull money out of the economy and make these providers less efficient.

The NYT should have included this sort of economic analysis along with Senator Leahy's comments.

 
Numbers in Space on Taxes and Spending Print
Wednesday, 18 January 2012 05:12

The NYT went overboard in an effort to present numbers in no context whatsoever when it discussed efforts to pay for the extension of the payroll tax cut for the rest of 2012. The article discusses the cost of various spending cut proposals without putting them in any context whatsoever, including even the number of years involved.

For example, it told readers that requiring a Social Security number to claim the child tax cut would save $9.4 billion according to the Congressional Budget Office. The article never gives a time period over which these savings would be realized.

Presumably, this is a 10-year estimate. Over this period, the federal government is projected to spend more than $43 trillion, so these savings would amount to a bit more than 0.02 percent of projected spending over this period. It would be helpful to include some context when presenting these numbers, otherwise they have little meaning to readers.

 
The Non-Mystery of Slow Job Growth Print
Tuesday, 17 January 2012 20:31

The Wall Street Journal had a bizarre article about capital investment and robotics to explain the slow job growth in this recovery. There actually is a much simpler explanation, it's called "slow growth."

Productivity growth has averaged close to 2.5 percent since 1995. That means the economy must grow at a 2.5 percent rate just to keep labor demand constant. If it grows slower than this, we expect the demand for labor to fall and the number of jobs to decrease or the average number of hours worked to fall.

Since the recovery began in the summer of 2009 GDP growth has averaged just under 2.5 percent. These means that we should not have expected the economy to create any jobs over this period. In fact, it has added almost 1,500,000. Insofar as there is a mystery, given the weak growth of the economy over the last two and a half years, it is why the economy added so many jobs.

 
Why Should People in the United States be Concerned About Getting Lower Cost Engineering Services? Print
Tuesday, 17 January 2012 20:15

The Wall Street Journal wants us to be worried that we will be paying less for our shoes, clothes, and engineering services. Actually, they only want us to be concerned about the last of these three, although it never tells us why.

It had an article the point of which is to warn readers that engineering is increasingly being outsourced to Asia. This may be bad news to people who hope to work in engineering, but for the rest of us, it means cheaper products, just as buying clothes and shoes manufactured abroad meant cheaper products.

The outsourcing of manufactured jobs is of course bad news for manufacturing workers and there are many more people who either work in manufacturing or could potentially if the jobs were there. In other words, the WSJ would have a much more compelling case if it warned us about the risk of losing jobs in clothing and shoe making to Asia than it does with engineering. For the overwhelming majority of people in the United States, this should mean an improvement in living standards.

 
Is an Identity Crisis Worth 10 Percentage Points of Unemployment? Print
Tuesday, 17 January 2012 06:05

That's the question that the Washington Post is implicitly raising for readers in its discussion of Iceland's recovery from the recession. The piece notes that Iceland's unemployment rate is 7.0 percent. It doesn't make the comparison to other crisis-afflicted countries which have unemployment rates well in the double-digits, with Spain leading the pack at 22 percent.

In general the piece does paint a reasonably positive picture of Iceland's economy, but it warns readers that:

"It’s tempting to conclude that this country of 318,000 people simply handled the crisis more adeptly than others, like a pick-your-own-ending book in which Icelanders chose correctly. There is a sliver of truth in that, but the full story is more complicated. That’s partly because the circumstances in Iceland are far different than in the United States and Europe, but also because such a simple explanation ignores the anger, the angst and the struggles that remain here, hidden barely beneath the surface.

"Iceland has weathered the worst of the financial crisis, but its society has yet to solve the identity crisis that followed in its wake."

If Post readers were informed of the situation in the other crisis-afflicted countries, they would be able to put Iceland's identity crisis in context.

 
Inefficiency and Corruption: The Predictable Result of Patent Monopolies Print
Tuesday, 17 January 2012 05:53

The NYT reported on a new government regulation that will require drug companies to disclose payments they make to doctors. The reason is to expose potential conflicts of interest that could influence their research, public statements, and prescription writing.

It would be helpful to include some comment from economists on this new regulation. The sort of corruption associated with patent protection for prescription drugs is exactly what economics predicts would result from a system of government-granted monopolies that allow drug companies to sell their product at several thousand percent above the free market price. 

 
And Where Did the Complexity Come From? Nocera on Financial Reform Print
Tuesday, 17 January 2012 05:34

Joe Nocera's column today argues that the financial industry may have a legitimate complaint when it says that the Dodd-Frank financial reform bill is too complicated. While the law is complicated in many areas, it is important to recognize that in many cases the industry was the source of the complication.

For example, there was a widely held view following the experience of AIG, which had issued hundreds of billions of dollars worth of credit default swaps outside of the purview of any regulator, that derivatives should be traded either on exchanges or through clearinghouses in order to increase transparency. Rules to this effect were included in Dodd-Frank.

However, the financial industry wanted to preserve the option to trade some derivatives over-the-counter. Therefore they included a series of exemptions in the legislation.

These exemptions are quite complicated. In contrast, a blanket requirement that derivatives had to be traded through a third party would be relatively simple. However it was the industry that added the complexity.

There are many other areas where a similar story could be told. That is why it is hypocritical for someone like J.P. Morgan CEO to complain about the complexity of the legislation. 

 
NYT Strikes Out in Making the Economic Case Against Hungary Print
Monday, 16 January 2012 19:10

Hungary is being led by a right-wing populist government that seems to have a questionable commitment to democracy. The steps it has taken to end the independence of the judiciary and undermine the fairness of future of elections are ominous. However, the NYT's efforts to construct an economic case against the government fall badly short of the mark.

The NYT tells us that:

 

"Hungary serves as a cautionary tale for those who argue that Greece could regain competitiveness by reintroducing its currency. The drachma would plunge against the euro, the theory goes, and allow Greek products to compete on price with countries like Turkey.

'Whatever you win today, it shoots you back tomorrow,' said Radovan Jelasity, chief of the Hungarian unit of Erste Bank, an Austrian institution.

....

In theory, the plunge of the currency should help the economy by making Hungarian products less expensive abroad and cutting the cost of labor relative to neighboring countries.

But economists and business people say the advantages of a weak currency are more than canceled out by negative factors, like soaring prices for imported fuel or imported components for Hungarian factories, not to mention higher payments on foreign currency loans.

....

But the economic climate is grim, with 10.7 percent unemployment and inflation of 4.3 percent even as the economy heads into recession."

 

Okay, so the word is that things are really bad in Hungary with its 10.7 percent unemployment rate. Let's see how that looks compared to the competition.

Book2_1990_image002

                                 Source: OECD.

If we compare Hungary to the debt crisis countries that remain within the euro it is looking pretty good. The closest among this group is Portugal, with an unemployment rate of 13.2 percent. The others are considerably worse. (The unemployment rates given are all the most recent available, which differs somewhat across countries.)

The 4.3 percent inflation rate might be somewhat higher than is desired, but hardly a crisis. The United States had higher inflation rates many times in the last 50 years without serious economic disruptions. Furthermore, in the context of a heavily indebted population, inflation performs the valuable function of reducing the real value of debt. It is also a necessary part of the adjustment process for a country looking to regain competitiveness by reducing the value of its currency.

The moral of this story is that Hungary's government may actually be led by bad guys, but it doesn't seem that their policies have had terribly negative economic consequences thus far. That could change down the road, but it still appears that Hungary's economy is doing relatively well.  

 
Powell's Books is a Union Store Print
Monday, 16 January 2012 15:06
That might have been worth mentioning in an NYT piece that reported on people turning to smaller alternatives to Amazon as a matter of principle. Some of these people object to Amazon's labor practices. Such people would likely appreciate the opportunity to buy from a unionized bookseller like Powell's.
 
The Invisible European Central Bank: A Missing Part of the Euro Zone Crisis Print
Monday, 16 January 2012 08:35

The NYT had a mostly good piece discussing the gap in competitiveness between the northern and southern European countries that lays at the heart of the debt crisis in the euro zone. One item that would have been worth adding is the fact that European Central Bank is making any potential adjustment process far more difficult by not having more expansionary policies and by refusing to act as a lender of last resort.

Forcing heavily indebted countries to meet tough deficit targets, at the same time that their interest burdens are soaring, is creating an impossible situation. This is leading to a downward spiral in which austerity measures slow growth and raise deficits, which undermines confidence in the debt. This pushes up interest rates, which makes the deficits even larger.

 
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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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