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If Trade Economists Were More Honest the NYT Would Not Print Articles About the U.S. Stealing Doctors from Poor Countries Print
Sunday, 11 March 2012 10:11

The United States buys food from many developing countries. How many major NYT pieces have there been complaining about how we steal food from Honduras, Ghana or other poor countries?

Of course that would make no sense. In principle the trade should be mutually beneficial, with poor countries using the money they get from exporting food to buy necessary imports. (Not everyone necessarily gains in this story. For example, the landowners may be positioned to get the bulk of the benefits, but the poor country as a whole generally gains from trade.)

This fact makes it very strange that the NYT would run a major Sunday Magazine piece titled, "America is stealing the world's doctors." The same models that economists use all the time to tout the benefits of trade and show the stupidity of trade barriers can also be used to show how poor countries can benefit from having their doctors come to the United States.

Doctors are not in fixed supply, we can have more of them. And in fact, it is much cheaper to train doctors in the developing world than in the United States. Rather than having fewer doctors come from the developing world, the economics would dictate that we should have more.

Doctors earn on average more than $250,000 a year in the United States. The piece describes an American trained doctor in Zambia earning just $24,000 a year. This suggests enormous opportunities for potential gains.

If many more doctors went from Zambia and other poor countries to work in the United States, it could substantially reduce the pay of doctors in the United States. If enough doctors came to the United States to reduce average pay by $100,000 a year, the savings to patients would be more than $80 billion a year.

If just 20 percent of these gains were taxed back to pay for extending medical training in the developing world ($16 billion a year), the doctors who left could be more than replaced with newly trained physicians. This would mean that developing countries would also be able to get better health care. And, the net savings to the United States would still be well over $60 billion a year, far more than the amount of money at stake with extending the Bush tax cuts to the richest 2 percent.

This is how any honest trade economist would view this situation. Unfortunately, trade economists spend most of their time arguing against measures that could benefit manufacturing workers and other less-educated workers. They don't concern themselves with the far more costly barriers than ensure that doctors in the United States stay rich and that health care remains unaffordable to many both in the United States and the developing world.

Lessons on the Resource Curse: Educating Thomas Friedman, # 2754 Print
Sunday, 11 March 2012 07:52

It's Sunday, which means that Thomas Friedman will be proudly pushing some misguided thesis in his NYT column. Today's topic is the resource curse.

Friedman points to a graph that the OECD has constructed showing the relationship between the share of natural resource rents in national income and a country's student test scores. The graph shows a strong negative relationship, meaning that the more resources a country has, the worse the test scores.

Friedman's take away from this story is that if you don't have natural wealth then you have no choice but to work and study hard. He holds up Taiwan, which is one of the richest countries in the world, despite the lack of major resource deposits and being a regular victim of catastrophic storms.

While working and studying hard might be good advice in general, there is a small problem with Friedman's story. The basic measure of resource wealth in this story, resource rents as a percent of national income, is not an independent measure of resource wealth.

There are many countries that are very resource rich (e.g. the United States) where natural resources are not an especially large share of national income precisely because they have been successful. In other words, there is a serious bias to this measure.

If two countries have the same amount of resources, the one with a lower ratio of resource rents to national income will be the one that has been more successful developing other parts of its economy. This means that the analysis that Friedman is touting is essentially telling us that successful countries have been successful.

Research that has attempted to just examine resource wealth, without comparing it to national income, has found that there is actually a positive relationship between resource endowment and national income. In other words, when the extraction of natural resources is well-managed to the benefit of the country, it makes a positive contribution to growth. But studying hard is still good advice.  

NYT Shows the Increasing Role of Luck and Randomness on Its Oped Page Print
Saturday, 10 March 2012 21:35

The country is suffering as a result of continued high unemployment, growing inequality, and the loss of trillions of dollars of wealth that has left the huge baby boom cohorts unprepared for retirement. In this situation what does the NYT put on its oped page? A piece by Todd and Victoria Buchholz complaining that young people increasing think that luck is the main determinant of economic outcomes in the United States.

It is understandable that young people would see luck as the main determinant of outcomes, since it clearly is not qualifications. Anyone want to argue that the people who sent the economy into the toilet were the most talented folks available for the job?

But much of the rest of the piece also makes no sense. The Buchholzes complain that 18-year-olds are much less likely to have a drivers license today than 30 years ago. This is taken as a reduced impulse to mobility.

That could be the case, but the more likely explanation is the increased restrictions that states are placing on young drivers. Did the Buchholzes not know about these restrictions or did they just choose to ignore them because they didn't fit their story?

They also complain that people are less likely to move across state lines. Again, if they had done their homework they would know that interstate moves always drop in a downturn. It is not surprising that in a downturn as bad as the current one, there would be a big falloff in mobility.

After all, there is no point in moving if there is nowhere to go. In other downturns there were areas of solid growth even as the rest of the nation was slumping. For example, in the 1981-82 recession, many people could look to the oil boom in Texas as a source of employment.

Where would someone go for a job today? The Buchholzes suggest North Dakota with its 3.3 percent unemployment rate.

According to the Bureau of Labor Statistics, North Dakota currently has roughly 400,000 jobs. If the number of jobs increased by 10 percent (a huge rise), it could absorb less than 0.4 percent of the unemployed workers in the country.

Perhaps unemployed workers don't drop everything and rush to North Dakota because they have a better understanding of economics and arithmetic than the Buchholzes. Their likelihood of getting a good paying job in North Dakota is in fact very low. If the Buchholzes did their homework before writing a column for the NYT, they would know this. 

NYT Gets Carried Away With February Job Numbers (see correction) Print
Friday, 09 March 2012 22:03

The February jobs report was reasonably good. It wasn't great; we created an average of 250,000 jobs a month for four years at the end of the 90s. Coming off a severe downturn we should be seeing jobs growth of 400,000 a month, as we did following the 81-82 recession and the 74-75 recession, but 227,000 jobs is definitely an improvement over what we had been seeing.

But the NYT got a bit carried away. It told readers:

"Household survey respondents indicated that 879,000 more people were working in February than in January. Though it is not unusual for the two surveys to differ, it is unusual for the growth in the household survey to be so much greater."

No, that isn't quite right. The survey showed a rise in employment of 428,000 jobs. That's good, but not 879,000.



The NYT is in fact right on this. The article was referring to a series that BLS constructs that adjusts the household survey for differences in concept with the establishment survey. This measure excludes self-employed workers and adjusts for workers with multiple jobs. This series did in fact show a gain in employment of 879,000 in February.

The biggest reason for the difference between the two series was a sharp drop in the number of workers reported as self-employed. This reduced the gain in employment shown in the published data, however it would not affect the establishment series.

Thanks Zee for calling this to my attention.  

Japan or China as Number 2? It Isn't Close Print
Friday, 09 March 2012 06:14

Yet again the NYT tells us that China just passed Japan as the world's second largest economy. This is misleading because this is using an exchange rate measure of GDP. Most economists would use a purchasing power parity measure which values all goods and services at a common set of prices.

Using this measure, China's economy passed the size of Japan's in 2001. Its economy is now almost three times as large as Japan's.

Full Cost-Benefit Analysis of AIG Bailout Print
Friday, 09 March 2012 05:54

The Washington Post (a.k.a. Fox on 15th Street) did another one of its cheerleading pieces for the bank bailouts, telling readers that the country is likely to make money on its bailout of AIG in its lead editorial. This is of course silly since the Post's calculation assumes no opportunity cost for money.

Under the Post's definition of profit, if the government lent out $10 trillion for 30 year mortgages at 1.0 percent interest, and got this money paid back, then it would have made a profit. This is not the way that businesses ordinarily do their accounting.

The government made huge amounts of money available to AIG in the middle of a financial crisis. At that time, this money would have carried an enormous premium in the private sector. In other words, private firms would have paid very high interest for this money, especially since it came with an explicit guarantee that the government would not allow AIG to fail.

For this reason, it is absurd to argue that the government made a profit on AIG. It could have gotten a far higher return on almost any other use of this money.

The piece also concludes by implying that a full cost-benefit analysis of the bailout compared to a counter-factual where AIG was allowed to fail would almost certainly show that the bailout was a huge winner. This is far from clear.

It took Argentina 1.5 years to recover the ground lost during its financial crisis in 2001-2002. It then sustained solid growth until the world economic crisis brought its economy to a standstill in 2009.

While our economic leaders may not be as competent as those in Argentina, even if it took the U.S. twice as long to regain the lost ground, we would still have been back to 2008 levels of output by last fall and seeing strong growth now instead of the modest 2.5-3.0 percent growth rate projected by the Congressional Budget Office and other forecasters.

In addition, the country would now have a much smaller financial sector and would be seeing much less inequality as companies like AIG, Goldman Sachs, Morgan Stanley and other big financial firms would have all failed and be reorganized. This would almost certainly mean that the financial sector would not be the same drag on the economy in the future as it has been in the last three decade.

If the Washington Post really was interested in a full cost-benefit analysis of the bailout it would need to consider these aspects of the alternative world. It obviously does not want its readers to consider such issues.

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.

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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.