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Should the Fact that Upstate New York is Economically Depressed be an Argument for Fracking? Print
Tuesday, 10 January 2012 05:46

The NYT implies that it is when it tells readers that:

"Many of those involved [in the fracking debate] said it was unlikely that Governor Cuomo would turn his back on the gas industry and ban drilling in the rich Marcellus and Utica shale deposits covering much of the economically depressed southern and western reaches of the state."

If the industry creates relatively few jobs, most of which go to skilled workers from outside of the state, and then leaves the area permanently scarred, it is not clear that fracking is beneficial to economically depressed areas.

David Brooks Says I Don't Exist! Print
Tuesday, 10 January 2012 05:06

I've become accustomed to people in elite circles saying that I do not exist, as in "nobody saw the housing bubble," but it still hurts. Okay, excuse the self-indulgence, there is a point here.

In his column today, David Brooks notes that rent-seekers often benefit from government programs, then complains that:

"You would think that liberals would have a special incentive to root out rent-seeking. Yet this has not been a major priority. There is no Steve Jobs figure in American liberalism insisting that the designers keep government simple, elegant and user-friendly."

I actually have been yelling at the top of my lungs for much of the last decade about how the government has been used by the wealthy to redistribute income upward. This is the point of the not subtly titled book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer. And there is my more recent book, The End of Loser Liberalism: Making Markets Progressive. (Both are available as free e-books, for those interested.)

These books have not attracted much attention, I would be fairly certain that Brooks has never heard of either one. Some of this undoubtedly reflects my skills as a writer, but there is a deeper issue here.

The people who dominate what passes for "liberal" politics in the United States would have little interest in promoting the views expressed in these books. Would Robert Rubin and his Wall Street friends want to promote the argument that they got rich primarily because they could rely on too big to fail insurance provided at no cost by the government? Those who question the importance of Wall Street interests in the Democratic Party should note that making a fortune on Wall Street seems to be a pre-requisite for being chief of staff in the Obama administration.

Similarly, both books point out the enormous waste associated with patent and copyright protection. Patent protection for prescription drugs costs us more than $250 billion a year compared to having drugs sold in a free market. This is five times as much money as what is at stake with extending the Bush tax cuts to the richest two percent. But the Hollywood crew, another important base of funding support for the Democratic Party, have little interest in calling attention to the government interventions that keep their industry alive in its current form.

The books also note the protectionist barriers that make it difficult for foreign professionals (e.g. doctors, dentists, and lawyers) from competing with professionals in the United States. This ensures that these professionals will benefit from international trade, since the goods they buy (including trips to Europe) will be cheaper as a result of trade, while the services they sell will continue to command a high price. However, the professionals who design policy for the Democratic Party have little interest in calling attention to the barriers that protect the high pay that they and their family members enjoy.

In short, there are clear structural obstacles to those advancing an argument that we should restructure the government so that it does not redistribute income upward. Those who control the purse strings that finance politics and policy research and the institutions that dominate public debate (e.g. the New York Times, Washington Post, and National Public Radio) have a clear interest in not having this argument get a wide audience.

This is why David Brooks can tell his readers that there are no liberals who are trying to combat rent-seeking that redistributes income to the wealthy. His friends, in both parties, do their best to ensure that anyone making such arguments never gets heard.

(I should mention Jacob Hacker and Paul Pierson as two people who have made a similar argument to a somewhat larger audience.)


Is China Going Down? Print
Monday, 09 January 2012 05:59

That's a good question, but Robert Samuelson doesn't shed much light on the topic in his column today. He notes the considerable evidence of a housing bubble in parts of the country, which may now be deflating. In considering consequences he acknowledges China's successful stimulus 3 years ago, but then comments:

"Finally, China’s government will have a harder time deploying a stimulus than during the 2008-09 financial crisis. Government debt rose from 26 percent of gross domestic product in 2007 to 43 percent of GDP in 2010."

This one must have readers all over the world scratching their heads. A country with a debt to GDP ratio of 43 percent, that is growing at an annual rate close to 10 percent, has trouble borrowing money to finance a stimulus? That's not true on this planet.

The United States had no problem financing its stimulus even when its debt to GDP ratio was over 60 percent, with a prospective growth rate of less than 3 percent. And Japan pays less than 1 percent interest on its debt even though it has a debt to GDP ratio of more than 200 percent of a trend growth rate under 2 percent.

It might also be a good idea if Samuelson relied on someone other than Nicholas Lardy as his expert on China's economy. Lardy is known for predicting that China would suffer a crippling banking crisis more than a decade ago. That has not happened yet.

More on the Celebration Over December's Job Report Print
Saturday, 07 January 2012 08:29

Economists tend not to be very good at economics. We know this because almost none of them were able to see the $8 trillion housing bubble that was driving the economy from 2002 to 2007. This was an oversight of astonishing importance, sort of like a physicist not noticing gravity.

Their failure to understand the economy has led to enormous misreporting of the December jobs data. There are two basic problems. They fail to accurately put the job growth numbers in the context of the economic downturn and they badly misread the December data leading them to overstate the true growth path we are now on. 

Taking the two in turn, the reports were full of the good news that the economy had created 200,000 jobs and the unemployment rate had dropped to 8.5 percent. Creating 200,000 jobs is undoubtedly better than creating 100,000 jobs and much better than creating no jobs at all, but is this good?

From December of 1995 to December of 1999 the economy generated more than 250,000 jobs a month, and that was starting from an unemployment rate of under 6.0 percent. We expect more rapid job growth following a steep downturn like the one we saw in 2007-2009.

In the two years following the 1981-82 recession the economy generated over 300,000 jobs a month. Following the 1974-75 recession, the economy generated more than 340,000 jobs a month in the two years from December 1976 to December 1978, and this was with a labor force that was only 60 percent of the size of the current labor force. So we're supposed to be happy about 200,000 jobs in December?

Another way to think about this is that we currently have a shortfall of around 10 million jobs. If we generate 200,000 jobs a month, then we are cutting into this shortfall at the rate of 100,000 a month, since we need 90,000-100,000 jobs a month just to keep pace with the growth of the population. This means that in 100 months we should expect to be back to full employment. So the champagne bottles for that happy occasion will be dated 2020.

Okay, but this puts too bright of a picture on the data. The 200,000 jobs number reported for December was distorted by unusual seasonal factors, the most obvious of which was the 42,200 job growth reported in the courier industry. This is primarily companies like Fed Ex and UPS who hire additional workers to deal with holiday demand.

In principle seasonal adjustments should remove the impact of seasonal fluctuations, however these adjustments are always based on historical experience. When there is a sharp departure from historical patterns, like the explosion of Internet sales, the seasonal adjustments will not pick this up. We have good reason for believing this to be the case here because in 2010 the Labor Department reported an increase of 46,300 jobs in the courier industry, all of which disappeared the next month. In 2009, it was 30,100 jobs reported in December that all disappeared in January.

Here's the picture:

Employment in Couriers and Messengers (seasonally adjusted)


Source: Bureau of Labor Statistics.

What should we infer from this? We should assume that most, is not all of these 42,200 jobs reported in December will disappear in January. That puts our jobs number around 160,000. There were some other unusual factors that may have pumped the numbers in December slightly. Construction employment reportedly rose 17,000 in December after falling 10,000 in October and 12,000 in November. Did we turn the corner in the construction industry? Well the sector added 31,000 jobs in September. Construction employment is very erratic because of the weather. We had a relatively mild December in the Northeast and Midwest, which means that we would expect better than usual construction employment. Don't bet on this one being part of a trend.

There were a few other anomalies of less consequence in both directions, but a clear-eyed look at the December data puts the job growth at around 150,000. If we take the average job growth over the last three months we get roughly 140,000. Maybe we have a slight pick-up, but probably not much more. At 150,000 jobs a month, the full employment champagne bottles will be dated 2028.

What about the drop in the unemployment rate, surely that is good news? Well the unemployment data come from a separate survey of households. This survey is much more erratic than the establishment survey due to the fact that it has a much smaller sample. There are often large movements in this survey that clearly cannot be explained by movements in the economy.

For example, the survey showed the unemployment rate falling from 4.7 to 4.4 percent in the second half of 2006, a period when GDP growth averaged 1.4 percent. It then rose back to 4.7 percent in the first half of 2007, a period when growth averaged 2.1 percent. The monthly employment changes can be even more erratic. In the four months from July to November 1994, the survey showed the economy adding almost 1.8 million jobs or 450,000 a month. This was a period in which the economy was growing at a healthy, but not spectacular, 3.6 percent annual rate.

More recently, the survey showed employment plunging by 423,000 last June. Fortunately no one thought to seize on that change as marking the start of another recession. Over the course of a year, these erratic movements largely even out. If we look at employment from December of 2010 to December of 2011, it increased by 1,570,000 in the household survey. This is telling us pretty much the same story as the rise in payroll employment over this period of 1,640,000 jobs.

The other point to remember is that the unemployment rate is telling us not how many people are out of work, but rather how many people are out of work and looking for jobs. Many people give up looking for work if they feel their job prospects are hopeless. A better measure for most purposes is the employment to population ratio (EPOP). By this measure, we have made little progress since the trough of the recession.

The 58.5 percent number for December is up just 0.3 percentage points from the trough of 58.2 percent hit last summer. By comparison, the EPOP hit a peak of 63.4 percent in 2006. We still have almost 5 percentage points to go before we get back to this pre-recession peak. Or to put it slightly differently: we have made up just 6 percent of the lost ground.

Employment to Population Ratio


Source: Bureau of Labor Statistics.

In short, a serious look at the December report does not provide much cause for celebration. The economy is still in very bad shape and the current growth path provides little hope for much relief any time soon. Economists should know this, but unfortunately few seem to pay much attention to the data. Remember the double-dip recession?

Is Europe Unable to Compete? Print
Saturday, 07 January 2012 15:35

Adam Davidson tells us in the NYT Magazine that Europe is losing its ability to compete in the world economy. This is a bit hard to see.

First, the most simple measure of competitiveness is the market test. Is Europe able to sell goods and services successfully in the world economy? On this score the continent is doing much better than the United States. Over the last decade it generally had near balanced trade. Some years the European Union had small trade surpluses and in others it had small deficits. Of course the picture differs by country. Spain and Greece had large trade deficits while Germany had large trade surpluses, but the continent as a whole had pretty much balanced trade.

This contrasts with the United States, which ran large trade deficits over most of the decade, with a peak of nearly 6.0 percent of GDP in 2006. In short, by this market test it is the United States, not Europe, that has difficulty competing.

The second issue is whether productivity is growing at a decent pace. After all, this is the main long-run determinant of living standards. If we compare productivity growth in Europe with the United States it is hard to see the case for the imminent collapse of Europe.


Source: OECD.

U.S. productivity growth over this period is better than growth in Spain and Italy, but worse than Norway and Sweden. Productivity growth in the U.S. is virtually the same as in Germany and only slightly faster than in France. (The reason for showing 2007 and 2010 as separate endpoints is that many European countries have aggressively promoted policies to keep people at work during the downturn. This lowers unemployment -- the unemployment rate in Germany is just 5.5 percent -- but it also reduces productivity.) Productivity is difficult to measure and international comparisons should always be viewed with caution, but it is hard to make the case here for a European continent that faced serious economic problems before the economic crisis.

There is the more subjective view of competitiveness involving items like successful tech companies and relative importance in the new economy. Even here the case is not clear. After all, one of the key developers of Linux was Linus Torvalds, a Finn. Nokia has lost market share recently but had been the world's leading cell phone manufacturer. The Swedish company, Ericsson was another leading cell producer.

On measures of connectivity there is considerable variability across Europe. Northern European countries like Norway and Denmark tend to rank higher than the U.S. on areas like broadband penetration, Germany and France are comparable, and the southern European countries rank lower. On educational outcomes, by most measures, most of Europe does better.

In short, it would be difficult to find a generally accepted measure of competitiveness where Europe does poorly compared to the United States. The European Central Bank may be able to inflict enough damage so that in a few years this is no longer the case, but for now Europe's fundamentals still seem solid.

Does the Obama Administration Really Want People to Celebrate Job Growth That Will Get Us Back to Full Employment in 2028? Print
Friday, 06 January 2012 22:11

That's what reporters should have been asking as the Obama administration put a positive spin on the 1.6 million job growth in 2011. The economy has to create roughly 1 million jobs a year to keep pace with the growth of the labor force. With a shortfall of jobs that is currently near 10 million, it will take more than 16 years to get the economy back to full employment at the 2011 rate of job growth.

Reporters should have been ridiculing the Obama administration for their poor grasp of arithmetic for celebrating such a dismal job performance. They certainly should have pointed out to readers the absurdity of their boasts about the recent pace of job growth.

How Long Will It Take the Economics Reporters to Wipe the Egg Off Their Faces? Print
Friday, 06 January 2012 11:22

All the news reports on the December jobs data are very upbeat about the 200,000 jobs reported for December. The phrase for the day is "better than expected." However, as someone who told friends and family it would be 165,000, I see it as slightly worse than expected.

Look at the data boys and girls. We created 42,200 courier jobs in December. Was there really a big surge in hiring in the courier industry? Well, the Bureau of Labor Statistics showed a surge of more than 50,000 new courier jobs last December, all of which were gone in January and then some. In other words, pull out our 42,000 courier jobs and we are looking at job growth of 158,000, not much to celebrate.

By the way, even 200,000 jobs would not be much to celebrate. Job growth averaged almost 250,000 a month for the years 1996-2000. Coming out of a steep recession, we should be expecting job growth in the 300k-400k monthly range. Unfortunately, there has been a huge effort to lower expectations so that we come to accept dismal economic performance as the best we can do. (The double-dip recession crew deserve a special flogging in this story.)

When Romney Accuses President Obama of Wanting Equal Outcomes Regardless of Individual Effort and Success, He Is Not Telling the Truth Print
Friday, 06 January 2012 06:46

Suppose that a candidate, with no evidence whatsoever, accuses his opponent of being a child molester. Should the media simply report the accusation and the corresponding denial and not point out the fact that there is no evidence for the accusation?

This is the standard that the NYT uses in reporting Mitt Romney's claim that:

"Mr. Obama seeks a 'European-style welfare state' to redistribute wealth and create 'equal outcomes' regardless of individual effort and success."

The article points out that President Obama's supporters object to this characterization of his policies, but it fails to note that there is no evidence whatsoever for Romney's claim. In making this assertion, Romney is just making things up.

The media are being irresponsible when they imply that there is credence to a totally fabricated assertion. The responsible way to report on Romney's accusation is that he is inventing charges against President Obama, just as if he started calling President Obama a child molester based on no evidence whatsoever.


Paul Krugman's Affirmative Action for Romney and the Republicans Print
Friday, 06 January 2012 04:41

There he goes again, Paul Krugman is ignoring history to make the Republicans look better. His column today takes issue with Republican front-runner Mitt Romney's claim that the economy has lost 2 million jobs during the Obama administration. Krugman points out that all the job loss took place in the first six months of the Obama administration. When President Obama took office the economy was losing 700,000 jobs a month. The rate of job growth slowed in the late spring and summer, coinciding with the stimulus beginning to kick in. By the end of the year employment had stabilized. It has been rising slowly in the subsequent two years.

obama_jobs                                               Source: Bureau of Labor Statistics. 

Krugman points out that the Republicans routinely talk about the job growth record of President Bush beginning in 2003, ignoring the first two years of his administration during which the economy lost over 2 million jobs. However, Krugman ignores the fact that Republicans also routinely talked about the job growth record of President Reagan as beginning in 1983, ignoring the first two years of the Reagan administration. This was also a period in which the economy lost more than 2 million jobs.

In short, it is standard practice for Republicans to ignore the beginning of a president's term, attributing the bad events of that period to their predecessor. In President Obama's case, Mitt Romney is applying a different and obviously absurd standard that holds him responsible for the economic collapse that was already in process at the time he took office. (Romney would be right to say that the job growth under President Obama has been pathetic.)

David Ignatius Hides Upward Redistribution Policies as Market Outcomes Print
Thursday, 05 January 2012 06:26

People are inclined to give much more legitimacy to market outcomes than policy outcomes engineered by governments. That is why there is a whole industry devoted to convincing people that the upward redistribution of income over the last three decades, which has given the bulk of economic gains to the One Percent, is really just the result of the natural workings of the market.

David Ignatius is one of the people who works in this industry. His Post column today urges readers to contemplate the awful thought that, quoting Francis Fukuyama:

"What if the further development of technology and globalization undermines the middle class and makes it impossible for more than a minority of citizens in an advanced society to achieve middle-class status?”

It is very useful to the One Percent to pretend that their wealth and the near stagnation in living standards for everyone else is just the result of "the further development of technology and globalization." However this has nothing to do with reality.

Globalization has hurt the living standards of the middle class because it was designed to have this effect. Trade agreements like NAFTA were quite explicitly designed to make it as easy as possible for General Electric and other manufacturers to set up operations in the developing world and export their output back to the United States. This has the effect of putting U.S. manufacturing workers in direct competition with low-paid workers in the developing world.

We could have designed these deals to put our doctors, lawyers, economists and other highly paid professionals in direct competition with their much lower paid counterparts in the developing world. We could have constructed trade deals that remove all the obstacles that make it difficult for students in China, India, and elsewhere and to train to U.S. standards and then practice their professions in the United States.

If globalization had followed this path it would have produced enormous benefits to both the middle class and the economy as a whole. We would be able to get health care, university education and many other services provided by highly paid professionals at much lower cost.

In the same vein it is not technology by itself that has made some people very rich. It is largely government-granted patent and copyright monopolies that have made people rich. These polices are becoming increasingly inefficient mechanisms for supporting innovation and creative work.

In the case of prescription drugs alone, patent monopolies raise costs by more than $250 billion (@1.7 percent of GDP) a year compared to a situation in which drugs were sold in a free market. This amount is roughly 5 times as much as the amount that is at stake with extending the Bush tax cuts to the richest 2 percent of taxpayers. There are more efficient mechanisms for financing drug research however this topic is largely excluded from public debate.

The great fortunes that have been made on Wall Street come in part from implicit too-big-to-fail insurance from the government, exemption from fraud laws, and being granted special tax treatment. Even the International Monetary Fund has noted that the financial sector in the U.S. and elsewhere faces a much lower tax burden than other sectors.

If a town has twenty gambling casinos and 19 of them pay heavy taxes, then we would expect the 20th casino to enjoy much higher profits. This is a significant part of the story of the high pay and big profits on Wall Street.

There is a much longer list of ways in which the government redistributes income upwards. It is cute how people like Fukuyama and Ignatius pretend that the upward redistribution was just the natural workings of the market and then wring their hands over the unfortunate implications, but this is kids' stuff. Serious people need not pay attention to such 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.