CEPR - Center for Economic and Policy Research


En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press

Beat the Press

 facebook_logo  Subscribe by E-mail  

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. 

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. 

<< Start < Prev 231 232 233 234 235 236 237 238 239 240 Next > End >>

Page 239 of 426

Support this blog, donate
Combined Federal Campaign #79613

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.