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New Unemployment Claims Data Are Not a Sign of a Recession Print
Friday, 19 August 2011 05:12

The business media have become obsessed with the notion of a double dip recession in a context where the economic data we are now seeing is not very different from the data that we have been seeing for months. These data point to a picture of an economy that is growing weakly, however it is still growing. However reporters who are now obsessed with the "double dip" are reading numbers consistent with weak growth as implying a recession. 

For example, a Washington Post article that raised the prospect of a second recession in the 5th paragraph told readers:

"The latest figures on unemployment, considered another key piece in any recovery, also proved disconcerting. The Labor Department said Thursday that weekly unemployment benefits again rose above the 400,000 level last week, a benchmark figure that many economists take as a sign of a declining economic trajectory."

Actually, economists who are familiar with unemployment data would not consider 400,000 new unemployment claims "a benchmark figure that many economists take as a sign of a declining economic trajectory." The reason is that unemployment claims have been above 400,000 in every week since the beginning of April, except for two weeks ago when there were 399,000 claims. Weekly unemployment claims were also above 400,000 in every week of 2010, a year in which the economy grew 3.1 percent.

The misplaced obsession with a double-dip has consequences because it creates a situation in which the slow growth that the economy is now experiencing appears to be good. For example, the July jobs report, which showed 117,000 new jobs, was widely seen as good news. However, this pace of job growth is only slightly faster than the 90,000 rate needed just to keep pace with the growth of the labor force. At the July rate of job growth it would take close to 30 years to replace the jobs lost in the downturn.

It would be helpful if reporters would try to discuss what the data show and not frame their story on misplaced optimism or pessimism from ill-informed commentators.


 
What's the Moral Argument Against Shorting Stock? Print
Friday, 19 August 2011 04:51

The NYT featured an extraordinary comment by a Merrill Lynch strategist in an article on how the wealthy are often able to make money in a period of market volatility:

"There seems to be a moral argument against shorting, but from a purely practical point of view it leaves (hedge funds) in a better position to manage volatility."

It would have been interesting to know what the moral argument is against shorting. When an investor shorts a stock they are betting that it is over-valued, just as when they buy a stock they are betting that it is under-valued. In both cases, in principle the investor stands to lose their own money if they are wrong, but they are giving information to the markets and helping to appropriately direct capital if they are right.

If a company's stock is over-valued, then it benefits the economy to drive the price down so that it will be more difficult for it to raise capital in the future. In the standard economic story, this would mean that more capital will be available for corporations that have more growth potential. The loss of wealth by the company's shareholders would also free up resources to be used elsewhere in the economy.

In short, there is symmetry between buying and shorting a stock. There is no obvious reason that one act would be viewed as more or less moral than the other.

 
NPR Exposes Structural Unemployment: Managers Who Don't Have a Clue Print
Thursday, 18 August 2011 16:31

National Public Radio reporters need to do a bit more homework before they do pieces on the economy. Today they had a piece on a Precision Iron Works, a specialty steel company. The piece told listeners that Precision relies on highly skilled workers. It also told us that it has a hard time finding new workers.

"finding workers like him [the experienced worker interviewed in the piece] is difficult. For months, the company has been advertising several job openings without much success. The company says there's not much interest in gritty, physically demanding work."

But the main point of the story is to tell listeners how government regulations are impeding the growth of business. The piece continues:

"And staffing is just one of many challenges facing Precision Iron Works as it tries to double its revenues from about $10 million to $20 million a year.

A state law that's been on the books for more than a half-century requires Washington companies to pay their workers a prevailing wage — or an hourly rate set by the government — on state-funded projects.

But as Precision's Leighton explains, companies in states like Idaho and Utah, which don't have prevailing wage laws, can pay their workers less.

'It puts us at such a disadvantage,' he says. 'There could be a project right out on our backdoor out here that I can't get because a company in Utah gets such a competitive advantage by not having to pay these rates.'"

Okay, now let's just review what we have been told. Precision Iron Works "has been advertising several job openings without much success." This would imply that the wage it is offering is too low. Higher wages attract more workers [econ 101]. If Precision Iron Works can't get workers, then it needs to offer higher wages.

But then the piece tells us that the real problem is that an outdated Washington state law requires Precision Iron to pay higher wages than its competitors. Okay, but the piece just told us that the market is telling Precision Iron that it has to pay higher wages than it is already paying.

This means that it is not the law that is requiring Precision Iron to pay higher wages, it is the market. If the piece's assertion that Precision Iron can't attract workers is true, then it's claim that the government regulation is hurting business is false. 

[Thanks to Jonathan Lundell.]

 
Good News, There are Federal Limits on Greenhouse Gas Emissions! Print
Thursday, 18 August 2011 09:08

Those who are concerned about global warming will be happy to discover when they read the Washington Post that the federal government has limits on greenhouse gas emissions. The Post had a page two article that told readers how the world would be different if the Tea Party folks, as personified by the House Republicans, ran the country.

The second item in the Post's list of differences is:

"It would no longer have federal limits on greenhouse gases."

Yes, that would be a big difference if the country actually did have limits on greenhouse gas emissions. The bill cited in the article would prohibit the Environment Protection Agency from using its regulatory powers to restrict emissions of greenhouse gases. However, there is no current statute that actually limits greenhouse gases, so the Tea Party folks don't have very much that they could change in this area. 

 
Health Care Will Only Crowd Out Other Employers If We Don't Need Health Care Jobs Print
Thursday, 18 August 2011 08:29

The NYT had an interesting, if somewhat confused, piece on whether the health care sector will continue to be a reliable source of job creation. The piece notes that the health care sector has been the one major sector that has consistently added jobs since the beginning of the downturn, however it notes that cost pressures are likely to slow the rate of employment growth in the future.

The article concludes with the comments of Joshua Shapiro, chief United States economist at MFR Inc.:

"If spending on health care continues at its current pace, it will choke out other vital sectors and end up hurting the rest of the economy, ... I think the path that we’re on now is clearly unsustainable.”

This statement is somewhat misplaced in the article. As long as we are in a period of high unemployment, then the health care industry's growth will not be constraining growth elsewhere in the economy. This would only be an issue if we have returned to something close to normal levels of employment. Of course if we have returned to normal levels of employment, then we won't be dependent on the health care sector to provide jobs.

 
If S&P's Downgrade Was So Important to Financial Markets, Why Did Bond Prices Soar? Print
Thursday, 18 August 2011 07:07

It's pretty bad when our nation's leading newspaper can't tell which way is up. The NYT told readers today that:

"members of Congress are investigating why S.& P. removed the nation’s AAA rating, which is highly important to financial markets."

If the triple A rating is so important to financial markets, then why did bond prices soar in the first trading day after the downgrade? The downgrade should have meant U.S. government debt is viewed as more risky. This means that government bonds should command a higher risk premium and therefore sell for a lower price. The exact opposite happened.

Of course the stock market did plummet, but that is another obvious explanation: the fear that the debt crisis in Italy and Spain could lead to the collapse of the euro and another Lehman-type financial freeze-up. This explanation fits the pattern of movements in financial markets. The idea that the markets panicked over the downgrade doesn't.

The article also discusses the inherent conflict of interest that results from having the issuer pay the credit rating agency for its rating. It would have been worth mentioning a provision in the Dodd-Frank bill introduced by Senator Franken which would eliminate this conflict. The Franken amendment would have the SEC pick the rating agency.

Representative Frank put in a provision in the conference report that delayed the implementation of the Franken amendment, pending the outcome of an SEC study of the issue.

 
Casey Mulligan Unloads the Kitchen Sink Print
Wednesday, 17 August 2011 05:20

Casey Mulligan has been putting on a one-economist show in his NYT blog, arguing week and after week that the downturn is really a supply story and has little or nothing to do with the plunge in demand created by the collapse of the housing bubble. This week he sums up his evidence.

Most of it has to do with the fact that even in the downturn employers will hire better qualified workers over less qualified workers and lower paid workers over higher paid workers. He infers from this fact that if all workers were better qualified and/or lower paid that we would not have an unemployment problem.

This is more than a bit of a bizarre argument since it is producing evidence that does not in any way contradict anything argued by Keynes or his followers. Does anyone believe that employers stop caring about workers' qualifications in a downturn? Or, alternatively, that they stop caring about wages?

Keynes' point is that changes that could increase any individual's chance of employment (e.g. improved education or accepting lower wages) would not necessarily lead to lower unemployment in general. In other words, if all workers could instantly get a college education then the main result would be that we would have more unemployed college grads.

This story would seem to be supported by two basic facts about the downturn. First, huge numbers of people who had the skills and desire to work before the collapse of the housing bubble, now do not have jobs. It seems difficult to explain the sudden loss of millions of jobs as a supply side phenomenon. The other basic fact is that unemployment has risen across the board in every major skills grouping and geographical location. This is very hard to explain as a supply side story.

I can't imagine that any Keynesian would have thought that skills don't matter for an individual's employability nor that the wages they expect affects their likelihood of finding a job. So the evidence that Mulligan finds along these lines hardly seems much of refutation of Keynes.

 
Any Hope That the ECB Will Stop Adhering to Superstitions? Print
Wednesday, 17 August 2011 04:52

The NYT had a piece on the prospect that the euro zone countries might move to a closer fiscal union. The piece commented that one positive aspect to the recent growth numbers for most euro zone countries,

"was the hope that slower growth would lead to less inflation, giving the European Central Bank [ECB] more leeway to keep interest rates low and intervene in bond markets."

Of course it is also possible that sufficient evidence that the euro zone is growing way below its potential could in principle lead the euro zone to abandon its worship of 2 percent. Unlike the Federal Reserve Board, the ECB makes no pretense of targeting full employment. It has indicated a willingness to sacrifice trillions of dollars of output and leave tens of millions of workers needlessly unemployed due its exclusive focus on its 2 percent inflation target. If the banks board could be influenced by evidence then it might in principle be possible for them to alter this focus and switch to a policy designed to boost growth.

The article also peculiarly attributes the growth slowdown to the sovereign debt crisis. The more obvious explanation is the austerity programs that most countries have implemented in response to the crisis. The predicted effect of the cuts in government spending and tax increases put in place to reduce budget deficits is to slow growth. It appears that the economies of Europe are responded as expected.

 
NYT Notes Problem With GDP Accounts, but Gets the Solution Wrong Print
Wednesday, 17 August 2011 04:33

The NYT reported on the fact that the large revisions to GDP that the Commerce Department reported last month changed our view of the state of the recovery. (Although it is not accurate to term the 1.8 percent growth rate originally reported for the first quarter as respectable. This growth rate is not even sufficient to keep pace with the growth of the labor force.) The data are often subject to large revisions which can substantially change the assessment of the economy from the originally reported data.

However, it is wrong in arguing that the picture would be improved by relying on the income side measure of GDP. There have been two instances in which the income side measure has diverged sharply from the output side measure. One was associated with the growth and later collapse of the stock bubble in the 90s and the beginning of the 00s. Income-side GDP exceeded output side when the bubble was growing and then trailed it in the quarters following the bubble's collapse.

The second major divergence was in the middle of the last decade. We saw the exact same pattern around the growth and collapse of the housing bubble. Income-side GDP growth exceeded output side when the bubble was growing, it fell behind output growth when the bubble burst.

It seems likely that the issue here is that some of the capital gains generated by the bubbles are being misclassified as ordinary income. (Capital gains should not appear in GDP.) In fact, regression results strongly support this case.

To get this outcome, all we need is an assumption that some percentage of capital gains are always misclassified as ordinary income. When capital gains rise relative to GDP, as they do in a bubble, the amount of misclassification rises, causing income-side GDP to exceed output-side GDP. The story is reversed when the bubble bursts and capital gains plummet.

 
Didn't Anyone Tell the NYT About Work Sharing in Germany? Print
Tuesday, 16 August 2011 04:40

The NYT has a front page piece touting the health of the Germany economy. While the piece notes employment protections in Germany that make it difficult for employers to lay off workers, it doesn't explicit mention the country's shortwork program. This program (noted today by columnist Joe Nocera) encourages companies to reduce work hours rather than lay off workers. Largely as a result of German policies promoting short work (which go beyond the official program), the unemployment rate in Germany is now a full percentage point lower than it was at the start of the downturn.

Germany's extraordinary record on unemployment is almost entirely due to its labor market policy. Its record on growth since the start of the downturn is not especially impressive.

This article also should have used the OECD harmonized unemployment rates, which are calculated in a way similar to the U.S. measure, rather than the German government measures. While the German government measure shows an overall unemployment at 7.0 percent, the OECD measure shows German unemployment at 6.1 percent in June. Since almost no readers will be familiar with the distinction between the German government's methodology and the U.S. methodology with which they are familiar (Germany counts some part-time workers as unemployed) there is no reason not to use the OECD measure.

 
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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.

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