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Simon Johnson Defends Populism Print
Thursday, 15 March 2012 07:19

Simon Johnson had a nice blogpost in the NYT arguing that populism has often been a source of good economic ideas in U.S. history with a focus on populist sentiment for breaking up too big to fail banks. At one point Johnson notes some of the constructive measures pushed by populists, noting that the direct election of senators and the income tax were both populist ideas.

One other item that should be on this list is ending the gold standard. This was a rallying cry for the populists throughout their history. It was also good policy, as going off the gold standard laid the basis for the recovery from the Great Depression. 

Economics 101 for George Will Print
Thursday, 15 March 2012 04:59

George Will has decided that it is unconstitutional for state and local governments to negotiate contracts with their workers that have the governments paying for some of the time of union staff. He found $900,000 of such payments in the Phoenix police contract and decided that is an unconstitutional gift.

It would be interesting to see how Will compares this to CEOs of companies that contract with the government paying themselves tens of millions of dollars a year. That might seem a much larger gift.

No doubt Will would say that companies negotiated a contract with the government and how the company choose to divide their money is their own business. However if he applied the logic consistently then he would end up with the exact same story with government workers.(Will also argues that the political power of public sector unions adds an element of corruption to this story. That doesn't help his case much. Government contractors have also been known to make campaign contributions.)

When unions negotiate a contract that provides for payment of union officers they understand that they are giving up something in terms of wages or other compensation. In other words, the government does not negotiate a contract with workers and then say "hey, here's another $900,000 to pay for union activities." The money to cover the cost of running the union is coming out of compensation that workers would have otherwise earned.

That is the econ 101 lesson and that is why it is unlikely that any court would waste taxpayers money reviewing a lawsuit that is so obviously ridiculous. George Will obviously does not like unions, but he will have to do a bit more homework if he wants to make his case in court, although he has obviously done enough homework to make the Washington Post oped page. 

The Wall Street Journal Tells Us That We Should Learn to Love Inequality Print
Wednesday, 14 March 2012 04:47

Last week Allan Meltzer had a column in the WSJ telling us that we should stop complaining about inequality and start loving it. His main point is that inequality is increasing everywhere, therefore there is nothing that we can do about it.

Neither part of this story is especially true. As Paul Krugman, Mark Thoma and others have already noted, inequality has not increased anywhere to the same extent as in the United States and in many countries there has been little or no change in most measures of inequality. So clearly different national policies can make a big difference in the extent of inequality.

However even if inequality was increasing everywhere, it does not mean that policy is not a factor. The WSJ may not have heard, but there are international forums like the G-8 and institutions like the WTO where countries coordinate policy.

This means, for example that if they agree on a policy of strong anti-inflation measures that raise unemployment everywhere (as they did), then they have collectively agreed to implement policies that redistribute income upwards. Similarly, if they agree to have stronger patent and copyright protection (as they have), then they have also agreed to policies that redistribute income upward. Unless we think that policies that are decided in international forums should not be subject to political debate, the fact that the same policies of upward redistribution have been imposed in many countries (not just the United States) is hardly an argument that we should not be concerned about them.

The other part of Meltzer's argument that is just wrong is that because Steve Jobs produced great products we should not be upset about inequality. Most economists are familiar with the concept of "economic rent." Economic rents occur when people get paid more than is necessary to get them to do their work.

For example, if a firetruck showed up at a burning home with children trapped inside, the parents would gladly pay whatever money they had to have the firefighters rescue them. In Alan Meltzer's world, if firefighters were making millions of dollars a year showing up at the burning homes of the wealthy we should not complain because saving children from burning buildings is a fantastic service and certainly we are all glad that the firefighters are there.

Of course, the reality is that firefighters are willing to do their work for much less money. They get a relatively good salary, but none of them are making millions of dollars a year.

Arguably the economy has been structured in a way that leads to large rents for those at the top. This is what those complaining about inequality are upset over. The fact that Steve Jobs might have actually made great contributions to society in exchange for his wealth has nothing to do with the time of day and Mr. Meltzer presumably knows this.



Post Both Oversells and Undersells Consumption in Recovery Print
Wednesday, 14 March 2012 04:19

A front page Washington Post article touted the 1.1 percent jump in retail sales reported for February. The piece said that the jump came in spite of the increase in the price of gas. This is only partly true, since more than a third of the increase in spending was due to increased spending on gas.

In the short term, higher gas prices are likely to be associated with increased spending, since people find it difficult to reduce their gas purchases. Over a longer period of time, they are likely to change their driving habits to save money.

More importantly, the February retail sales data follows three months in which the Commerce Department consumption expenditures data showed no real gain in spending. While the February retail sales detail indicate that the January data on consumption expenditures may be revised upward, when placed against the prior three months, the February gain does not look particularly impressive. 

As the piece notes, it is also important to remember that this was an unusually mild February. The fact that the weather was relatively warm and there were few major snowstorms across the Northeast/Midwest meant that people were more likely to go shopping, go out for dinner and do house repairs that would typically be the case in February. This clearly gave some boost to retail sales for the month.

This piece also seriously understates the role of consumption thus far in the recovery when it tells readers:

"Experts have been waiting for consumers to open their wallets because they are the backbone of the economy, accounting for roughly two-thirds of gross domestic product."

Actually experts know that consumption has been surprisingly strong thus far in the recovery. The savings rate has been under 5.0 percent for the last three quarters. Historically the savings rate had averaged more than 8.0 percent. It fell sharply in the last two decades as the wealth created by the stock and housing bubbles led people to spend a much larger share of their income.

With this wealth largely eliminated by the collapse of these bubbles it would be reasonable to expect the saving rate to return to its historic level or possibly even to rise above it, as the huge baby boom cohorts approach retirement with almost no assets. The fact that the savings rate has remained well below its historic average tells experts that consumers are spending at a surprisingly strong rate which may not be sustained indefinitely. 

Gas Prices are Determined in a World Market: The Post Does What a Paper Is Supposed to Do Print
Tuesday, 13 March 2012 10:56
The Washington Post had a good front page piece that explained that gas prices are determined in a world market and there is nothing that the United States can do to bring prices down to $2.50 a gallon.
Getting Carried Away With Oil Industry Numbers? Print
Tuesday, 13 March 2012 07:42

An NYT blognote touted a fossil-fuels job boom in the United States. A little skepticism might be in order here.

First the piece highlighted a report from the World Economic Forum that claimed that the oil and gas industry generated 150,000 new jobs last year, which it claimed was 9 percent of total employment growth. There is some question about the multipliers that the study uses to get to 150,000, but even with that number, the 9.0 percent figure is still off.

The Labor Department reports that the economy created 1,840,000 jobs last year. The 150,000 oil and gas related jobs would be 8.15 percent of total jobs growth, which would ordinarily be rounded to 8 percent.

The blogpost later refers to 9 million total jobs in the oil and gas industry. This seems more than a bit high, since adding jobs in gas stations, refining, drilling and pipelines only gets you a bit over 1 million. The source cited is a Pew study, but the only number I could find there was 1.27 million jobs (p 15).

Assuming that we eventually recover from this downturn, we will not need the energy industry to employ people. In fact, the fewer workers needed to provide us with our energy the better. (They can do other things.) However at the moment, we do desperately need more jobs. For this reason it is important to keep the numbers straight.

David Brooks is Worried That We Will Run Out of People Print
Tuesday, 13 March 2012 03:55

Yes, I am serious. He decries the fact that birth rates are now dropping in the Arab world as they had previously in Europe, Japan, and China.

It is utterly bizarre to see a piece like this. Does Brooks not know that wealth depends on income per person, not total income (i.e. Bangladesh is not richer than Denmark in any meaningful sense).

We can easily get by with a lower ratio of workers to retirees because of productivity growth. Furthermore, the smaller number of children will have an important role in reducing the number of non-workers that each worker must support. And, fewer people means less emission of greenhouse emissions and other pollution and less strain on the physical infrastructure.

If Brooks is troubled by lower or negative population growth it must reflect his religious beliefs, it is not a concern that has a basis in reality.

China's Trade Deficit Always Rises in February Print
Monday, 12 March 2012 05:11

The NYT reported that China's trade deficit hit a record in February. It would have been helpful to remind readers that China celebrated its new year in February. This celebration is associated with workers' vacations and reduced production at many factories. As a result, exports fall and the trade deficit rise.

This happens every year. The NYT should have pointed this fact out to readers.

Correcting Robert Samuelson on Japan and Deflation Print
Monday, 12 March 2012 04:21

Robert Samuelson rightly calls attention to the decision of Japan's central bank to target a 1.0 percent inflation rate, although he doesn't get a few of the key points right. First, this decision, if accurately described, will provide a huge test of an economic policy first proposed by Paul Krugman and later endorsed by Federal Reserve Board Chairman Ben Bernanke when he was still a professor at Princeton.

The question is whether by setting a higher inflation target, a central bank can bring about a set of self-fulfilling expectations that actually produce this higher rate of inflation. If Japan's central bank is actually committed to this policy, and it proves successful, it would have enormous implications for the conduct of monetary policy elsewhere.

For example, it would mean that if the United States wanted to run 3-4 percent inflation to reduce debt burdens and lower real interest rates, the Fed would have the power to bring this about [thanks JMiner]. That would make a huge difference for the pace of the recovery.

Samuelson gets some of the other aspects of this issue wrong. For example, he says that Japan's deflation is a problem in part because falling prices cause people to delay purchases since items will be cheaper in the future. This would be true for rapid rates of deflation, but Japan's deflation has almost always been less than 1.0 percent a year. In 2011 its inflation rate was -0.2 percent. This means that if someone was considering buying a $20,000 car, they could save $40 by waiting a year. It is unlikely that this rate of deflation affected the timing of many purchases to any significant extent.

The main problem with deflation is simply that the inflation rate is too low. In a weak economy it would be desirable to have a negative real interest rate, however nominal interest rates can't go below zero. (The real interest rate is equal to the nominal interest rate minus the inflation rate.) This means that the lower inflation rate, the higher the real interest rate. In this respect, a decline in the inflation rate from 0.5 percent to -0.5 percent is no worse than a decline in the inflation rate from 1.5 percent to 0.5 percent.

Samuelson also wrongly claims that a fall in the value of yen is one desired possible outcome from a higher rate of inflation since it would increase net exports. This does not follow. If prices in Japan rise by 1.0 percent and the value of the yen falls by 1.0 percent then the competitiveness of Japan's products will remain the same. Japan's competitiveness would only improve if the value of the currency fell by more than the rise in the inflation rate. (What actually matters is relative inflation rates, but this is the basic point.)

Finally, Samuelson includes some of his standard misplaced demographic warnings. He tells readers that Japan is suffering from a declining population. It is difficult to see this as a cause of suffering in Japan at the moment. Japan is a densely populated island where land is extremely expensive.

A decline in population will help to reduce this crowding, leading to higher living standards. Also, the problem of a declining population is supposed to be a shortage of workers. Japan does not have this problem as, by all accounts, it continues to suffer from an underemployed workforce.

Finally, Samuelson warns that Japan, like the United States, suffers from a severr debt problem. Samuelson notes that Japan's ratio of debt to GDP is well over 200 percent. This is more than twice as high as the projected debt to GDP ratio for the United States in a decade.

Japan can still borrow long-term in financial markets for around 1.0 percent. Its interest burden is around 1.5 percent of GDP. (The net burden is probably around half of this, since much of this interest is paid to Japan's central bank, which then refunds the money to the Treasury.) If there is a cautionary tale for the United States with Japan's debt, it is difficult to see what it is.

Student Loan Bubble Nonsense: Peter Peterson and the Washington Post Mess Up on the Economy Yet Again Print
Sunday, 11 March 2012 19:49

One of the main reasons that the housing bubble grew unchecked is that major media outlets like the Washington Post refused to present the views of those trying to call attention to the unprecedented run-up in house prices and the disaster that would inevitably follow its collapse. Instead the Washington Post was obsessed with reporting on the budget deficit, following the lead of billionaire investment banker Peter Peterson and his dependents, even though the deficits at the time were very modest by any reasonable measure.

The Washington Post refuses to allow its catastrophic failure in its non-coverage of the housing bubble to affect its reporting in the least. It continues to obsess on the budget deficit, relying almost exclusively for sources on "experts" who were unable to recognize the $8 trillion housing bubble.

It also continues to view the beneficiaries of Peter Peterson's largesse as valuable sources. Today it ran a piece from the Peter Peterson funded Fiscal Times warning about the "debt bomb" from student loan debt. (The Post did not identify Peter Peterson as the funding source for the Fiscal Times.) 

The piece manages to get just about everything wrong. To start with, it did not even get the rate of student debt accumulation right. It told readers:

"The amount of student borrowing skyrocketed from $100 billion in 2010 to $867 billion last year."

The data show that student debt was around $800 billion in 2010. It was already near $200 billion in 2000. The incredible rate of debt accumulation described in this sentence should have raised eyebrows among editors at the Fiscal Times and Washington Post, if they have any.

Perhaps more importantly, the basic premise of the piece is absurd on its face. The third paragraph has a quote from William Brewer, the head of the National Association of Bankruptcy Attorneys:

"'This could very well be the next debt bomb for the U.S. economy' — something akin to the housing mortgage loan crisis that triggered the U.S. financial crisis."

This is an absurd statement and any serious reporter should have been able to recognize that fact instantly. At the peak of the housing bubble in 2006, the residential housing market in the United States was worth more than $22 trillion. It has since lost close to $8 trillion in real wealth, which is the basis of the current downturn.

As the article explained, the student loan market is now valued at $867 billion, less than 1/25th the size of the housing market at its bubble peak. Furthermore, all of it will not default and the defaults that do occur will be spread over many years. And the government will cover most of the losses since it is guaranteed. How is this supposed to have the same impact as the collapse of the housing bubble?

None of this should be taken as minimizing the plight of recent college graduates who face a serious debt burden in an economy offering few jobs and even fewer good paying jobs. However, it makes no sense to compare this situation to the housing bubble; there is no relationship.

This is like comparing every atrocity to the holocaust. There are many horrible atrocities that have occurred in the last sixty five years but few, if any, can rightly be compared to the holocaust and it is foolish to do so. The advocates for students should make their case in a more honest manner and competent reporters should know better than to fall for this sort of hyperbolic nonsense. 

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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.