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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.

There Is Little Disagreement That Drilling Off the U.S. Coast Will Have Almost Zero Impact on the Price of Gas Print
Sunday, 04 March 2012 19:51

In an article on the debate over offshore drilling, the NYT told readers:

"while candidates have sparred over the reasons for rising prices, there is little disagreement over the call for more drilling, onshore and offshore."

The NYT should have also told readers that there is almost no disagreement among economists that drilling everywhere all the time offshore will have almost no impact on the price of gas in the United States. The reason is that we have a world market for oil. The additional oil that might come from offshore drilling is a drop in the bucket in a world oil market of almost 90 million barrels a day.

It is unlikely that drivers would even notice the difference between a policy where we told the oil industry that it could drill wherever it wants and pay no attention to the number of people it kills in the process or the resulting damage to the environment and local economies and a policy where we banned all new offshore drilling. Over the next 2 years the difference would be virtually non-existent and even after 10 years it is unlikely to change the price of gas by more than 2-3 percent.

The media should point out this fact to readers and that politicians who claim otherwise either do not understand the oil market or are being dishonest. It also would have been worth reminding readers that politicians of both parties receive large campaign contributions from the oil industry.

Will the French Have to Work Fewer Hours to Compete With Germany? Print
Sunday, 04 March 2012 10:54

The NYT had an article comparing the relative success of Germany's economy compared with France. It notes that Germany has a considerably lower unemployment rate and stronger growth.

The article highlights France's stronger labor market protections as a factor explaining the different outcomes. In this vein, the article includes a quote from a German official that, "the French work to live and the Germans live to work.”

The data suggest otherwise. In 2009, the most recent year for which data is available, the average German worker put in 10 percent fewer hours than the average French worker, according to the OECD.

It seems more likely that the difference in economic outcomes is attributable to the better training received by German workers as well as the greater labor-management cooperation in the workplace in Germany. These factors are mentioned in the article, but are given considerably less attention that the differences in labor market protections.


[Addendum: I chose 2009 because it was the last year for which data is available from the OECD, it is not cherry-picking. I am the hugest fan of anywhere of Kurzarbeit, German's short-work program, but that is not the explanation for why the average work year is shorter in Germany than in France. In 2008, the OECD reports that the average French worker put in 1560 hours compared to 1426 in Germany. In 2007, it was 1556 hours in France compared to 1430 hours in Germany. In short, the gap between the length of the average work year in France and the average work year in Germany predates the recession. The story that the French work less is an invention of the NYT, it does not correspond to the world.]

An Arithmetic Lesson for Steven Pearlstein Print
Sunday, 04 March 2012 09:00

Washington Post business columnist Steven Pearlstein often has thoughtful things to say about the economy; not today. He has one of those charming "pox on both your houses" pieces in which he even-handedly denounces the left and the right.

The denunciation of the right is fine. Complaints about economic harm from high taxes and over-regulation are utter nonsense as we all know. (We have low taxes and business-friendly regulation already.) It's the attacks on the left that defy arithmetic and logic.

He begins the piece by touting the economy's 3 percent growth rate in the fourth quarter and recent job creating pace of 200,000 a month. Then he tells readers:

"There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more."

Okay, let's assume that the growth rate remains ate 3.0 percent, which is somewhat higher than most forecasts. Currently the economy is operating at about 6 percent below its potential. Potential growth is around 2.5 percent annually according to the Congressional Budget Office. This means that we will make up our shortfall at the rate of 0.5 percentage points annually. That puts 2024 as the year when we again reach potential GDP.

Taking the jobs side of the picture, the economy is currently down by around 10 million jobs from where it would be had we continued on our pre-recession job growth trend. We have to create roughly 100,000 jobs a month to keep pace with the growth of the labor force. This means that if we create 200,000 jobs a month, then we are cutting into this shortfall at the rate of 100,000 jobs a month. That gets back to full employment in 100 months or 8 and a half years.

Hey, who can call this a depression?

The substance is perhaps even more irksome than Pearlstein's arithmetic problems. He complains:

"It is true, for example, that with additional borrowing and spending, we could rehire laid-off teachers and police officers. That would certainly boost employment in the short term, reduce class sizes and make us all feel safer. But the reality is that, even if the economy were to improve as a result, it would be many years before tax revenues return to where they were at the height of the bubble. At some point, spending by state and local governments will have to be brought down to match the level of taxes that their voters are willing to pay. The notion that once unemployment falls below 6 percent everyone will join hands and finally put the fiscal house in order — well, that’s nothing more than political fantasy."

If Pearlstein ever paid any attention to the people who is criticizing, he would know that they advocate federal support for these services at the state and local level. The federal government can of course borrow very cheaply and cover the cost of this aid when the economy is in a downturn. When the unemployment rate returns to more normal levels, contrary to what Pearlstein seems to imply here, state and local governments will have the necessary tax revenue to pay for these services. (That is not true everywhere, but there are always growing and declining regions of the country.)

Pearlstein then goes on to trumpet spending on improving infrastructure, education, and research and development, all investments that will have long-term payoffs. Maybe there is someone on the left who does not support aggressive spending in these areas, but I challenge Pearlstein to find this person.

Finally, it is incredible that in a piece focused on the need to restructure the economy, Pearlstein does not once mention the value of the dollar. The fundamental imbalance in the U.S. economy is its large trade deficit. This will only be corrected by a sharp decline in the value of the dollar against the currencies of our trading partners, something that Pearlstein has written about frequently in other columns.

It certainly would have been worth mentioning this point here. When the dollar does fall to more competitive levels, the United States stands to gain 4-5 million manufacturing jobs. This will have an enormous impact on re-balancing the U.S. economy.

Fracking Jobs in Ohio: Numbers Please! Print
Sunday, 04 March 2012 08:51

The Washington Post had a major story on the front page of its business section about the dilemma that Ohioans face over allowing fracking. After all, most believe that it will create jobs, but they also believe that it will damage the environment. That is really a tough call.

It would have helped if the paper had devoted a paragraph or two to putting some numbers behind this tradeoff. While it is difficult to put numbers on the environment side, in large part because the industry has worked hard to conceal evidence, it is not very hard to put numbers on the jobs side.

Based on the experience in Pennsylvania, it is likely that fracking would create less than 10,000 jobs in Ohio. While this is not altogether trivial, it would make up only about 3 percent of the 320,000 jobs lost since the recession began. This information would have been useful to people trying to assess the relative importance of the economic benefits and environmental risks.

Only in the Washington Post: No Link Between Growth and Jobs Print
Sunday, 04 March 2012 08:35

The link between job growth and economic growth is one of the most solid relationships that you will find in economics. The reason is that it is almost definitional.

If we hold the length of the average work year constant (it doesn't change quickly -- although perhaps it should), then the rate of economic growth is equal to the rate of productivity growth plus the rate of job growth. (Yes, there is a multiplicative element here for serious nerds, but it doesn't matter for what we are talking about.) This means that if the economy grows more rapidly, then we will see more rapid job growth, unless productivity just surges for some reason.

Faster productivity growth is in general good news. This means that we are getting richer, producing more in each hour of work. We can adjust to this either by further boosting demand or by shortening workweeks or providing longer vacations.

However as a practical matter, we don't just see booms in productivity growth. There are erratic movements in productivity around business cycles, however periods of greater than trend productivity growth are inevitably offset by slower than trend productivity growth, as for example happened when productivity surged in 2009 only to be followed by slower growth in 2010 and 2011.

In short, the link between economic growth and job growth is rock solid. That means the Walter Kiechel was spewing nonsense in the Washington Post when he criticized Governor Romney's plan to create jobs by getting the economy going:

"Savvy consultants also know that the data indicate a sneakier problem with 'just get the economy going again' as an answer to unemployment. As you can read, for example, in a 100-page report from the McKinsey Global Institute, the link between economic recovery and job creation in the United States has been growing weaker for at least the past 20 years. While employment was harder hit in the most recent recession, the recoveries after the 1990 and 2001 downturns also featured slower rates of job growth than the historical norm. As the report states, 'In the years from 2000 to 2007, the United States recorded its weakest employment growth for any comparable period since the Great Depression.' And that was during a Republican administration, one hell-bent on reducing unnecessary regulation and further kneecapping unions."

There is good reason to question whether Governor Romney's tax cutting and business friendly regulation strategy will lead to strong economic growth. But if it did, there is little doubt that it would create jobs.

Spain's "Debt Crisis" Was Created by the ECB Print
Saturday, 03 March 2012 09:07

The NYT had an article on how Spain is struggling to both reduce its deficits to address its debt crisis and try to simultaneously promote growth. It would have been worth pointing out that Spain's debt crisis is almost entirely a result of the European Central Bank's policy.

By explicitly refusing to act as a lender of last resort and imposing austerity conditions on Spain and other euro zone countries, the ECB has raised questions in financial markets about Spain's ability to pay its debt. Spain had been running budget surpluses before the crisis and its debt to GDP ratio remains below that of the UK, the United States and many other countries that have no difficulty borrowing in financial markets.

The French Don't Need Rich People to Spend Money Print
Saturday, 03 March 2012 08:59

An article in the NYT on a proposal by French presidential candidate Francois Hollande to raise the top marginal tax rate on people earning more than $1.3 million a year to 75 percent told readers:

"Many economists argue that a 75 percent tax bracket — compared with the current top bracket, 48 percent — would be self-defeating, driving high-paying jobs and the spending that comes with them to countries like Britain and Switzerland."

It is unlikely that many economists complained about the prospective loss of spending associated with rich people leaving the country. While most countries (including France) are suffering from inadequate spending at the moment, economists are more typically concerned with too much spending in an economy, hence the obsession with deficit reduction.

Private sector spending on current consumption pulls away resources from investment in the future in the same way that public sector spending on consumption does. If rich people opted not to spend, most economists would argue that the resources would be freed up for investment.

Ireland's Economy Is Slumping BECAUSE It Is Following the ECB-IMF Bailout Program Print
Saturday, 03 March 2012 08:42

A Washington Post article on the weak state of Ireland's economy began by telling readers:

"Of all Europe’s crisis countries, Ireland has been perhaps the most adamant about pushing ahead with the budgetary, banking and other steps urged by its international lenders.

"Yet more than a year into its bailout, economic growth is lagging, high unemployment seems entrenched, and households and banks remain weighed down by the debts accumulated during a heady real estate boom."

The second sentence would have been more accurate if it said:

"As a result, more than a year into its bailout, economic growth is lagging, high unemployment seems entrenched, and households and banks remain weighed down by the debts accumulated during a heady real estate boom."

The poor performance of Ireland's economy is not a surprise to people who know economics. Sharp cutbacks in government spending in the middle of an economic downturn are expected to lead to weaker growth. Ireland's economy is doing badly precisely because it has been following the ECB-IMF program so closely.

Job Training That's Cheap, but Not Necessarily Useful Print
Friday, 02 March 2012 12:52

There's an old story about a drunk who is looking by the curb for his car keys in the middle of the night. A bystander offers to help and asks the drunk where he lost his keys. The drunk tells him that he dropped them in the bushes. The bystander asks the drunk why he is looking by the curb if he dropped his keys in the bushes, to which the drunk replies, "the light is better here."

That seems to be the logic that the NYT discovered in a piece that looked at job training programs. It notes several instances in which governments have cut back funding for training for positions where there is a recognizable shortage of workers. Instead they are funding training for jobs where there is already a glut of applicants. It seems that the reason is that the latter type of training is cheaper.

That's not good policy.

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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.