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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.

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.

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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.