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"Strong" Growth Ain't What It Use to Be Print
Thursday, 22 December 2011 05:25

The NYT has a good piece noting factors that are likely to lead to somewhat stronger growth for the 4th quarter of 2011, but which will not be present in 2012. As a result, it suggests that we will see growth close to 3.7 percent in the fourth quarter, but this will fall back to 1.5-2.0 percent in the first half of 2012.

It is worth noting that even at a 3.7 percent annual growth rate it will take us until almost 2017 to get back to the economy's potential GDP. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential level of output. With a potential annual growth rate of 2.5 percent, 3.7 percent growth GDP growth reduces this gap by 1.2 percentage points a year. That means it will take roughly five years of growth at this rate to close the gap.

Following steep recessions in the 70s and 80s, the economy had years of growth between 6-8 percent. In this context, a 3.7 percent growth rate does not look especially strong, even if it is more rapid than the economy is likely to see over the next couple of years.

NYT Conflates Counterfeits and Unauthorized Copies Print
Thursday, 22 December 2011 05:10

The NYT reported on the Immigration and Customs Enforcement Agency's seizure of unauthorized copies of goods, which it priced at $77 million. (It's not clear whether this is the value of the copies or the price of the goods that were being copied.) The piece repeatedly refers to these goods as "counterfeit."

It is not clear from the article that the goods were in fact counterfeit. If they were counterfeit, then consumers were deceived into believing that they were getting the brand product that was being copied. Often consumers know that they are getting copies of the brand product, not the actual product produced by the company. In this case, the product cannot properly be termed "counterfeit."

This distinction is important because the consumer is being ripped off in the case of an actual counterfeit item. They would presumably cooperate with law enforcement in efforts to eliminate counterfeit items. However, consumers are often happy to buy unauthorized copies of brand products because they sell for much lower prices than the brand product. In this case, consumers will be allied with the sellers in trying to evade law enforcement, since both are benefiting from the transaction.

This piece provides no indication that the products seized were in fact counterfeit. It is only clear that they were unauthorized copies. Reporters should be careful to note this distinction.

Erratic Patterns in Monthly Housing Starts Print
Wednesday, 21 December 2011 14:12

After being the big optimist who was bashing the double-dip gang in the summer and fall, I am now back to being the killjoy who refuses to join in the celebrations over the November data on housing starts reported yesterday. The point that I made in a prior post is that these numbers are highly erratic. This is especially true of the monthly data on starts of multi-family units, which were driving the jump reported for November.

This chart gives the basic picture.

Click for Larger Image


Source: Census Bureau.

This chart shows three important pieces of information. First construction of both single family units and multi-family units has plummeted since the peak of the bubble in 2006. Second, the monthly data on starts are far more volatile for multi-family units than single family units. Third, in the last year, starts of multi-family units have recovered much more than starts for single family units, which are still near their 2009 trough.

Combining points 2 and point 3, we can conclude that the monthly number on starts will be far more volatile now that multifamily units account for around one-third of all starts as compared to the good old days when they accounted for less than one-fifth. So this is why I am not celebrating just yet (except for Hanukkah). 

Protectionism for Lawyers Print
Wednesday, 21 December 2011 06:04

The NYT had a good piece on Sunday on how the American Bar Association limits the numbers of law schools and lawyers in the country. This inflates the salaries of lawyers.

This sort of restriction should be viewed the same way as a tariff on imported steel. It has all the same negative effects on consumers and the economy. The main differences are that the restrictions on lawyers redistribute income upward to the top 5 percent or even 1 percent and the economic distortions are almost certainly much larger. The other major difference is that the protectionism that benefits lawyers gets much less attention from economists, reporters, and columnists.  

Housing Is Back!!!! Yet Again Print
Wednesday, 21 December 2011 05:35

The Post has another piece showing some pre-mature optimism on the housing market. The proximate cause was the jump in housing starts that the Commerce Department reported for last month. As the piece notes, this jump was driven almost entirely by an increase in starts reported for multi-family units. In fact, most of the gain was attributable to sharp rises in starts in the Northeast and West. The gains in the South were modest and starts in the Midwest actually fell. 

In fact, housing starts, especially for multi-family units and near the end of the year, are highly erratic. For example, multi-family starts jumped 92.8 percent in January of this year. These erratic movements are often related to tax or regulatory changes that can make it desirable to rush ahead with a project before the end of the year or to delay it into the next year. This is why it is desirable to see several months data before assuming that the reported change is real.

The other items cited as evidence of a recovering housing market are also dubious. The piece asserts that house prices have stabilized. Actually, the Case-Shiller 20-City index shows prices falling since April. The piece reports a rise in rents, but this is largely due to the impact of higher utility prices. The owner equivalent rent index, which excludes utilities, has increased at just a 1.9 percent annual rate over the last 3 months and a 2.1 percent rate over the last six months. The latter is almost identical to the overall rate of inflation over this period.

The piece also argues that shortages of housing are starting to appear because the 1.2 million trend annual rate of household formation is wearing away at the excess supply created by the building boom of the bubble years. Actually, the trend rate is almost certainly well below 1.2 million given the country's current demographics. The Congressional Budget Office projects labor force growth at around 1 million a year. This would put us at a considerably slower rate of household growth even if every new worker started their own household. In terms of the underlying balance of supply and demand, the Commerce Department shows that vacancy rates are still at a near record high.

(Note: some have raising doubts about the vacancy data. These calculations failed to note that when dilapidated housing is put back into use or non-residential property is converted to residential use, these units do not appear in the housing start data.)

What Jobs Should Big Government Train Workers For? Print
Wednesday, 21 December 2011 05:20

The NYT reported that the Republicans in the House want the federal government to allow states to use unemployment insurance tax revenue to pay for job training. It quotes Representative James B. Renacci on this topic:

"In this uncertain economy, using unemployment dollars to subsidize the training of a new employee to re-enter the work force is just good public policy."

It would have been worth pointing out that there is no major sector of the economy that seems to be short of workers. Real wages are flat or declining in every major occupational grouping. There is no occupation where job openings are especially high relative to job seekers (the overall average is more than 4 to 1).

If there are not obvious jobs for which to train workers, government training programs sound like a great example of ill-considered social engineering.

PolitiFact Goes Post-Modern Print
Tuesday, 20 December 2011 16:52

I will join in the piling on exercise. Politifact, which is supposed to verify the veracity of claims made by politicians, jumped into the world of language devoid of meaning in its selection of the "lie of the year." 

Politifact's "lie of the year" was the claim by Democrats that the House Republicans voted to end Medicare when they voted for Representative Ryan's system of premium supports, or vouchers. Under this plan, people who turn age 65 after 2022 would not get the traditional Medicare plan. Under the Ryan plan, seniors would be given a sum of money by the government, which they could then use to buy into a range of plans. The proposal includes no guarantee that the money provided by the government would be sufficient to purchase an adequate plan. The Congressional Budget Office's (CBO) projections imply that it would be grossly insufficient to pay for a Medicare equivalent policy. 

Those are the basic facts [read the CBO analysis and/or the projections that we derived from the CBO analysis]. Given these facts, how can it be a "lie" to say that the Republicans voted to get rid of Medicare? 

In the Politifact world, if a company replaces its defined benefit pension with a 401(k) plan, workers who said that the company was getting rid of the pension would be liars. The Medicare system has existed as a fee for service program for almost half a century. It does allow for other options, but people have always been able to choose the traditional fee for service plan and the vast majority of beneficiaries have always chosen this option.

Representative Ryan and his Republican colleagues in Congress voted to take away this option for people turning age 65 after 2022. That is the truth on Planet Earth, in Politifact-land this counts as not only a lie, but as the "lie of the year."

The Wall Street Journal Has Not Heard About the Housing Bubble Print
Tuesday, 20 December 2011 14:03

The housing bubble apparently still has not gotten word about the housing bubble. Of course it is easy to see how an $8 trillion bubble whose collapse wrecked the economy could escape the attention of the nation's premier business publication.

If the WSJ had gotten word about the housing bubble it would not have said silly things about the baby boom cohorts like:

"In part because of improvidence and weak wage growth, in part because many have lost jobs and in part because of the severe recession, Baby Boomers as a group are unready for two or even three decades of life after they stop working."

See people who have heard of the housing bubble, and the stock bubble that preceded it, know that tens of millions of baby boomers did not save because their house was doing it for them. If a $250,000 home goes up 10 percent in price, this is as good as putting $25,000 into a 401(k).

This is the well-known (among people who have taken intro econ) housing wealth effect. There is also a stock wealth effect. These asset bubbles are the main reason that baby boomers did not save sufficiently for retirement. 

This predicted effect of asset bubbles is one of the reasons why people who know economics thought it was incredibly bad policy for Robert Rubin, Larry Summers and Alan Greenspan to celebrate the stock bubble in the 90s and for George W. Bush, Robert Rubin, and Alan Greenspan to celebrate the housing bubble in the last decade. The fact that tens of millions of baby boomers would end up ill-prepared for retirement was a 100 percent predictable outcome from these bubbles.

Unfortunately the people who were making economic policy at the time did not give a damn and the Wall Street Journal is covering up for them now.

Inequality and Growth: Charles Lane Tells It Like It Isn't Print
Tuesday, 20 December 2011 08:00

Charles Lane tells Washington Post readers that:

"Western Europe’s recent history suggests that flat income distribution accompanies flat economic growth. Which European country recorded the biggest decrease in inequality between 1985 and 2008? That would be Greece."

An argument based on a sample of one may fit the standards of the Washington Post, but it is not the sort of thing that normal people would find compelling. If we look the IMF's data on per capita GDP growth since 1980 one would be hard-pressed to find a clear relationship between inequality and growth.

The United States, an outlier for being unequal, does do relatively well in this picture. However, the much more egalitarian Swedes and Dutch fared even better by this measure. In fact, the per capita GDP growth record of most West European countries was not very differently from the U.S. over this period.

It is also worth noting that most Western European countries took much of the gains of higher productivity in the form of shorter work hours. It is now standard across the continent for workers to have 4-6 weeks a year of vacation. As a result of more vacations and benefits like paid family leave and paid sick days, the average work year for workers in West Europe is around 20 percent shorter than for workers in the United States. When we adjust for hours worked, it would be difficult to identify any growth dividend in the United States from its greater inequality.  

The fact that there is no clear link between inequality and growth suggests that inequality is the result of the institutional and political structure, not the dynamics of the economy. For example, in the United States we allow banks to enjoy the benefit of too big to fail insurance from the government, which means that they can take big risks with money borrowed from creditors. When the bets pay off, the executives get huge paychecks. When they don't, the taxpayers get the bill. This policy promotes rent-seeking, not growth.

Also, unlike Europe and Asia, we have rules of corporate governance that allow top executives to rip off their corporations by paying themselves huge salaries, even when they fail. This policy also does not contribute to growth.

We also have a policy of making it difficult for foreign professionals to compete with highly paid professionals in the United States. This raises the cost of health care and other services, by forcing people to pay more for doctors, lawyers and other highly paid professionals.

And, we have a policy that gives patent monopolies to drug companies. This allows the drug companies and their top executives to make large amounts of money at the expense of patients. These monopolies increase the annual cost of drugs by more than $250 billion a year, approximately 5 times the amount at stake with the Bush tax cuts to the wealthy.

These and other policies that redistribute income upward do not promote growth. Unfortunately, these policies will almost never be discussed in the pages of the Washington Post which restricts itself to the sort of simplistic growth versus inequality nonsense presented by Lane.

Marketplace Radio Gets Economics of AT&T Merger Wrong Print
Tuesday, 20 December 2011 05:53

Marketplace Radio had a segment on the proposed merger of AT&T and T-Mobile. It reported that AT&T argued that the acquisition of T-Mobile would allow it to better serve consumers by giving it a large number of cell phone towers in areas where AT&T currently provides inadequate coverage. The segment then said that the Federal Communications Commission (FCC) saw things differently. They blocked the merger because they argued it would lead to excessive concentration and higher prices for consumers.

Actually, there is no conflict between these views. AT&T was arguing that there are substantial economies of scale in the industry that can still be gained even for a firm that already has a 25 percent market share. The FCC argued that allowing firms to gain an even larger market share would imply substantial monopoly pricing power.

These are totally consistent positions. This is why phone companies have historically been either publicly owned or subject to government regulation. The argument is that the nature of the technology would lead to natural monopolies (in the old days, no one was going to lay a parallel set of wires to the old AT&T network).

It is desirable to let firms take advantage of all the available economies of scale to reduce their costs. However, if left unregulated they would take advantage of the lack of competition to gouge consumers. The answer is to have regulators set their prices based on an assessment of their actual costs. It is remarkable that this standard economic solution has not been raised in the public debate over the merger. 

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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.