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Nouriel Roubini Has NOT Consistently Been Right Print
Tuesday, 11 October 2011 05:04

Joe Nocera has a column touting what appears to be a very interesting recovery plan by Dan Alpert [a friend], Robert Hockett, and Nouriel Roubini. In describing Roubini, Nocera tells readers that his "consistently bearish views have been consistently right."

Actually, this is not true. I recall in the fall of 2008, following the Lehman collapse, Roubini was running around telling reporters that all credit had become unobtainable. He claimed that firms could not even get letters of credit to ship goods overseas and that therefore trade was grinding to a halt. His evidence for this was that the Baltic Dry Goods Index had fallen through the floor.

I bothered to look into this issue because many people were contacting me to get my views on Roubini's claim. On its face, it seemed wrong, since there were no reports of the sort of the shortages that would quickly result if trade had really stopped, but Roubini had been one of the people calling the crash so this seemed worth taking seriously.

It turned out that Roubini was right, both the quantity indexes and the price indexes had in fact fallen through the floor. The quantity indexes had fallen 80-90 percent from their pre-recession level and prices were also down by 30-40 percent or more.

This looks very scary, until you realize what the Baltic Dry Goods Index is. It is a spot shipping index. It measures the volumes and prices paid for shipping on the spot market. The vast majority of goods are not shipped on the spot market, they are shipped under long-term contract arrangements. Exxon-Mobil doesn't just get a huge pile of oil and then start looking for a tanker to carry it. They have this negotiated in advance.

The spot market carries the surplus. In the case of oil, this would be the extra oil that might suddenly be needed in an economy that is growing faster than expected.

For this reason, it is not surprising that the spot market falls through the floor in a downturn. There are few if any places where demand is greater than expected. Therefore the plunge in the Baltic Dry Goods Index was exactly what we should have expected in the downturn and had nothing to do with an inability to get letters of credit.

I would not recount this story except for the fact that Roubini was one of the main promulgators of the double dip recession story. It was because of the spread of phony fears of a double dip (absent a euro zone collapse) that many in the media told us that the dismal September jobs report was "better than expected." Instead of people being angered by what should have been seen as more evidence of a pathetic recovery, they were supposed to be relieved that at least the economy is not in a downturn.

It is irresponsible for economists to run around making sweeping claims that are not supported by evidence. When they end up being wrong their reputations should suffer so that their next round of irresponsible claims get less attention. I am sure that the paper that Nocera touts is well worth reading and I certainly intend to read it myself, but it is just wrong to say that Roubini's "consistently bearish views have been consistently right."

 

 

 
David Brooks: Bard of the 1 Percent Print
Tuesday, 11 October 2011 04:37

David Brooks delved deep into his storage locker of misinformation to tell readers that the idea of blaming the richest 1 Percent for the country's problems is just silly. He told us that the really big ideas aren't about reversing the upward redistribution of income from the top, they are from centrists who want to do things like cut our Social Security and make us pay more for health care. Let's have some fun with Mr. One Percent.

First he begins his piece by telling us:

"The U.S. economy is probably going to stink for a few more years. It is beset by short-term problems (low consumer demand, uncertain housing prices, too much debt) and long-term problems (wage stagnation, rising health care costs, eroding human capital).

"Realistically, not much is going to be done to address the short-term problems, but we can at least use this winter of recuperation to address the country’s underlying structural ones."

In other words, Brooks wants all those people who are unemployed and losing their homes to just suck it up. Nothing is going to be done to help you: get over it.

And why is nothing going to be done to help the 26 million people who are unemployed, underemployed or have given up looking for work altogether? The reason is that people like David Brooks and rest of the 1 Percent don't give a damn about you.

We do know how to do something about unemployment. According to research, the stimulus worked just about exactly as planned. It was designed to create 2-3 million jobs in a context where the economy needed 10-12 million jobs. There is no economic reason why we can't go the route of more stimulus -- aid to state and local governments so they don't have to lay off school teachers, infrastructure spending, youth jobs programs etc. -- it is just powerful people like David Brooks who don't want us to do anything.

The Fed could also be more aggressive. For example it could move to deflate the debt that millions of households face from mortgages and student loans. This would mean following the path advocated by Ben Bernanke for Japan's central bank when he was still a professor at Princeton; deliberately targeting a somewhat higher rate of inflation (e.g 4-6 percent).

And of course we could go the work sharing route. With no better growth than us, Germany has used work sharing to bring down its unemployment rate to below its pre-recession level. If we can't raise the demand for labor by making the economy grow, then we can just share the work that we have.

This is all pretty simple, but David Brooks and his 1 Percent friends have already decided that they aren't going to let any of this happen. The 99 percent are just going to have to suck it up and protesting on Wall Street isn't going to make a difference.

Not only does Brooks want to tell the 99 percent that the 1 Percent are not going to allow anything to happen that will help them, he tells readers that they better not blame the 1 Percent for this situation:

"Unfortunately, almost no problem can be productively conceived in this way. A group that divides the world between the pure 99 percent and the evil 1 percent will have nothing to say about education reform, Medicare reform, tax reform, wage stagnation or polarization. They will have nothing to say about the way Americans have overconsumed and overborrowed."

Of course this is not true, even if the media rarely give attention to the views of the 99 percent. The reason that Americans "overconsumed and overborrowed," was that we had a huge housing bubble. As every graduate of an intro economics class knows, people will spend based on their housing wealth. The $8 trillion bubble led people to spend vast amounts of money, exactly as economic theory predicts.

That bubble was easy for people not in the 1 percent to see, and it was entirely predictable that its collapse would lead to an economic disaster, but Alan Greenspan, Ben Bernanke and other people in the 1 Percent who had the responsibility for managing the economy opted to do nothing. This could have been due to astounding incompetence or it might have something to do with the fact that people in the 1 Percent with names like Angelo Mozilo, Richard Fuld, and Robert Rubin, were making money hand over fist off the mortgages that financed the housing bubble. In any case, this economic disaster was 100 percent due to the greed and/or incompetence of the 1 percent and was 100 percent preventable.

The other items on Brooks' list also have an awful lot to do with the greed of the 1 Percent and corruption of the political system. In the case of health care, we pay more than twice as much per person for our health care as people in any other wealthy country. The reason is that the richest 1 Percent -- executives in pharmaceutical and insurance companies, hospitals and highly paid medical specialists -- all make huge sums off our health care system. If we paid the same amount per person as people in any other country, our long-term budget projections would show huge surpluses, not deficits.

Education reform, in the sense of students learning in school, will fare much worse with Brooks' period of a stinking economy. When people lose their jobs and their homes they cannot provide the sort of stable environment that children need to do well in school. And of course wage stagnation and polarization has everything to do with the trade and regulatory policies that the 1 Percent have adopted to redistribute income upward.

In fact, the 99 percent-1 Percent divide has almost everything to do with current situation. But, David Brooks' 1 Percent status depends on him telling people the opposite twice a week in the NYT. You might as well learn to enjoy Brooks' ill-informed semi-weekly diatribes; realistically, not much is going to be done to address the situation.

 
The Boston Globe Hits It Out of the Park In Promoting Economic Fallacies Print
Monday, 10 October 2011 10:46

The Boston Globe ran an editorial over the weekend calling for a nationwide settlement to the mortgage fraud suits. The 824 word editorial managed to repeat most of the major fallacies being circulated about the economy today. It wrongly told readers that:

1) the bad financial position of banks, and their resulting hesitance to make loans, is a major factor impeding growth;

2) house prices are depressed because of the mess in the mortgage market;

3) that housing lock is a major factor in unemployment.

 

All three of these claims are seriously wrong and the Globe's editors should know it. On the first point, there is little evidence that lack of access to capital is a major factor holding back business at this point. The National Federal of Independent Businesses has been surveying their members about their biggest problems for more than a quarter century. By far the item they mention most frequently is lack of demand. Only around 10 percent of these small businesses list the availability or cost of finance as one of their two top problems. 

Furthermore, many larger businesses borrow directly on credit markets by issuing bonds. At present, both the real and nominal interest rates are at historically low levels. If smaller competitors are being prevented from taking advantage of investment opportunities by lack of access to credit then we should expect to see larger firms rushing in to steal market share. We don't see this. Even large firms like Wal-Mart and Starbucks have curtailed their expansion plans during the downturn.

The second claim is that we should expect house prices to go back up once the mortgage market is fixed. Why? The housing market was in a huge bubble. (Do the folks at the Globe still not know this?) This means that there is no more reason to expect house prices to return to their former value than there is to think that the NASDAQ would jump back to 5000 after its collapse. In fact, nationwide house prices are still above their long-term trend, so the general direction is more likely to be down than up.

Finally, there is no real support for the housing lock story. Undoubtedly there are some people who don't move to a place where jobs are more plentiful because they can't get out from an underwater mortgage, however this is almost certainly not a major factor in unemployment. My colleagues John Schmitt and Kris Warner did a paper that looked for evidence of a housing lock effect using the Displaced Worker Survey. They found that displaced workers in states with sharp prices declines were actually slightly more likely to move for a job than displaced workers in other states. This analysis is hardly conclusive, but it does indicate that housing lock is not likely a big factor in unemployment. (Of course if settling the lawsuit has no effect on house prices, then this point is moot anyhow.)

In short, the three reasons the Globe gave for the urgency of a mortgage settlement do not hold water. There is no obvious reason that the attorneys generals should be in such a rush for a settlement that they accept a bad one.

[Thanks to Ben Tafoya for calling this one to my attention.]

 
China Is Deliberately Slowing Its Economy Print
Monday, 10 October 2011 05:05

An NYT piece discussing weak consumer demand in China told readers that:

"Unless China starts giving its own people more spending power, some experts warn, the nation could gradually slip into the slow-growth malaise that now afflicts the United States, Europe and Japan. Already this year, China’s economic growth rate has begun to cool off.

"'This growth model is past its sell-by date,' says Michael Pettis, a professor of finance at Peking University and senior associate at the Carnegie Endowment for International Peace. 'If China is going to continue to grow, this system will have to change. They’re going to have to stop penalizing households.'"

Actually, the slowing of growth was by design. China's government has been trying to slow growth in an effort to stem inflation. The central bank has repeatedly raised banks' reserve requirements in an effort to reduce lending. It is wrong to imply that this represents a crisis for China's system, as the article implies. 

It is only at the very end of a lengthy article that the piece mentions the impact of raising the value of China's currency. This would allow for an increase in consumer purchasing power as imports become cheaper. It would also reduce inflation. While this would imply sectoral shifts -- from export dependent sectors to sectors producing primarily for the domestic economy -- China's economy has undergone much larger shifts in the recent past, for example using a massive government stimulus to boost growth in 2009.

 
The Downturn Is Whacking People, But We Need Good Data Print
Monday, 10 October 2011 04:37

People reading a front page story in the NYT might have been surprised to find that the situation of ordinary families is deteriorating even more rapidly than had been generally reported. The article tells readers that:

"Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials. During the recession — from December 2007 to June 2009 — household income fell 3.2 percent. "

This sounds really really bad. Of course the actual situation is really bad, but the report that is the basis for this article is extremely misleading. It relies on monthly data that are highly erratic. In particular, the horrible story for income over the last year is driven largely by an extraordinary run-up in inflation (largely driven by energy prices) that is already being reversed. Inflation rose at a 6.3 percent annual rate over the period from December 2010 to June 2011, the month for which the data is given. With hourly wages rising at around 2.0 percent annually, this implies a very bad income story.

This can be amplified by erratic monthly movements in hours, which can often rise or fall by more than half of a percent month to month. This is almost certainly due to measurement error, not actual changes in hours.

It is worth noting that there is almost no information that is freely available on the methodology used in this report. It is being sold for $20 on the web. There are many good sources for data on wages and working conditions in addition to the government data sources. CEPR provides frequent analysis of the micro data as does the Economic Policy Institute, my former employer. This data is freely available and fully transparent. The NYT should try to rely on such sources, rather than doing ads for dubious reports being sold for profit.

 

 

 
Ezra Klein on the Stimulus and After Print
Sunday, 09 October 2011 13:32

Ezra Klein has a seriously researched piece in the Post on why the stimulus was inadequate and what else could have been done. The major item missing in my book is any discussion of the overselling of the stimulus after its passage.

By all accounts, Obama's economic team knew that the stimulus they got through Congress was inadequate for the task. They needed a stimulus that was at least twice as large as what Congress passed and quite possibly three or four times as large. Nonetheless, President Obama was quickly running around touting the "green shoots of recovery" and talking about the need to focus on deficit reduction.

By overselling the stimulus and putting deficit reduction at the top of the agenda, Obama was virtually shutting the door on the possibility of getting further stimulus. Since they knew that additional stimulus would almost certainly be necessary, why did they dig themselves into this hole?

It would be interesting to some explanation of this situation. Nonetheless, the piece is well worth reading. The Post deserves some credit for running it.  

 
How Many Jobs Do We Need: Teaching Arithmetic To Economists Print
Sunday, 09 October 2011 08:10

I hate to harp on a seemingly small point, but it does offend me that professional economists and people who write on economics have such an aversion to simple arithmetic. One of the numbers that frequently in appears in discussions on the state of the economy is the number of jobs that we need to keep pace with the growth of the labor force. I have consistently been using 90,000 a month, however I see considerably higher numbers routinely thrown out, sometimes as high as 150,000 a month. For example, this Post article on the September jobs numbers told readers that the economy has to create 125,000 jobs a month to keep pace with the growth of the labor force.

There are two different ways to get to my 90,000 a month number. The first is to take the Congressional Budget Office's (CBO) estimates of the potential growth of the labor force. Its latest reports put this at 0.7 percent annually. Payroll employment peaked at just under 138 million before the downturn. Assuming normal growth, we would be at 142,000 million today Seven tenths of a percent of 142 million translates in 994,000 jobs a year, or roughly 83,000 jobs a month.

Of course CBO is not God, they could be wrong. But on the other hand, since their projections on the deficit are treated with such enormous reverence in the same news outlets, it would be absurd to just dismiss the economic projections that provide the basis for the budget projections. In other words, if we take CBO's budget projections seriously, then we must take their economic projections seriously. The latter are the basis for the former.

The other way we can get to the 90,000 a month number is by taking the Bureau of Labor Statistics (BLS) estimates of the growth in the non-institutionalized population and multiply by the employment to population ratio (EPOP). According to the BLS, the non-institutionalized population grew by 1,750,000 last year. If we apply assume a pre-recession EPOP of 63 percent, this implies an increase in employment over the last year of 1,103,000. If we assume that 6 percent of these workers will be self-employed (the average for the current workforce), this implies that we would have needed 1,036,000 payroll jobs to keep pace with the growth of the labor force over the last year, or 86,000 jobs a month.

This is how I get my 90,000 jobs a month, I don't know where others get their higher numbers. Again, this is not an especially important point in the context of an economy that is missing 10 million jobs, but the lack of respect for arithmetic is. It was a lack of respect for arithmetic that caused almost all economists and economics reporters to miss the housing bubble and the stock bubble before it. If we can't prod the people at the top of the profession to do the simple arithmetic that underlies the claims they make about the economy then we are in serious trouble.

 
Speaker Boehner Commits Huge Gaffe, Can't Do Simple Arithmetic Print
Saturday, 08 October 2011 09:01

Republican House Speaker John Boehner committed an enormous gaffe yesterday according to a Washington Post article. Mr. Boehner claimed that:

"Our unemployment rate has been higher than 8 percent for more than 21 / 2 years, far above what the Obama administration promised with the ‘stimulus.'”

Actually, the stimulus did not promise to keep the unemployment rate below 8 percent as Mr. Boehner would know if he ever looked at the administration's discussion of its stimulus proposal at the time. The report claimed that the stimulus as proposed would create between 3-4 million jobs by the end of 2010. However, the bill passed by Congress was substantially smaller than the stimulus requested by the president. The expected effect would therefore be in the range of 2-3 million jobs.

However, the economy was in much worse shape than the administration recognized at the time. It expected the unemployment rate to peak at 9.0 percent even without any stimulus. At the time, the economy was losing close to 700,000 jobs a month. The unemployment rate had already risen to 9.4 percent by May when the first stimulus related checks were just going out the door.

The best evidence available shows that the stimulus worked almost exactly as planned, creating 2-3 million jobs. However, the economy needed 10-12 million. The Obama administration's error was in underestimating the severity of the downturn, not overpromising for the benefits of the stimulus.

This is apparent to people who can read and know arithmetic. The Washington Post should have highlighted the fact that Mr. Boehner apparently either has difficulty with arithmetic or was deliberately trying to mislead the public.

 
Washington Post Calls Jobs Report Better than Incompetent Economists Had Expected Print
Saturday, 08 October 2011 08:37

The headline of the front page article in the Washington Post told readers that the September jobs report from the Labor Department "offers a respite." It added that the report, "was merely mediocre, not the horrible result that some economists had feared."

In fact, this was a very bad jobs report. The report showed that the economy created just 103,000 jobs in September, 45,000 of which were Verizon workers who were returning from being on strike in August and were therefore not counted in that month's job numbers. With modest upward revisions to the prior two months' data, the Labor Department reports the economy creating an average of 99,000 jobs a month, just slightly above the 90,000 jobs per month needed to keep pace with the growth of the labor force. At this pace, it would take many decades to return to full employment.

This should have been reported as a really bad jobs report. However, in recent weeks the Washington Post had reported the views of several economists who were highlighting the risks of a double-dip recession.

These economists obviously had a poor understanding of the economy. Every post-war recession has been caused by a sharp downturn in housing and car sales. With both sectors of the economy already badly depressed it was highly unlikely that either sector could turn sharply lower. Absent a big decline in these sectors, it is difficult to envision a scenario in which the economy would go into a recession, the one exception being a collapse of the euro zone caused by a disorderly default of Greece or one of the other debt-burdened governments.

The most likely scenario is simply the one that we are seeing, a prolonged period of weak growth in which almost none of the lost jobs are regained. However, because the Post had made a point of highlighting the views of ill-informed economists predicting a double-dip, it is now putting a positive light on the very dismal job and growth situation that the country is experiencing, since it is better than a second recession. This is comparable to the situation at the start of the downturn when it and other media outlets and politicians invented the possibility of a Second Great Depression to make us happy about the disastrous situation that the country was actually facing.

The Post has a long history of relying on poorly informed economists. During the run-up of the housing bubble the views of economists warning of the risks of the bubble were almost completely excluded from the Post's news and editorial pages. Its main authority on the housing market was David Lereah, the chief economist of the National Association of Realtors and the author of the 2005 bestseller Why the Real Estate Boom Will Not Bust and How You Can Profit from It.

 
Is It Possible that the Jobs Numbers Would Not Provide Ammunition to Republicans? Print
Friday, 07 October 2011 22:53

The NYT told readers that:

"The tepid jobs report provided more ammunition for Mr. Obama’s Republican rivals, who seized on Friday’s results as further evidence of what they say is the president’s ineffective stewardship of the economy."

This is true, the Republicans did blame President Obama for the weak economy. Of course President Obama requested more stimulus than Congress approved and he just asked for another round of stimulus that would likely involve more money in 2012 than his original stimulus package did for either 2009 or 2010.

This means that if the jobs numbers had been good, it would have provided ammunition to Republicans to denounce President Obama for unnecessary spending. At this point, it should be evident that the Republicans will use anything in the world as ammunition to criticize President Obama. Therefore, it is not especially newsworthy that they used the jobs report for this purpose.

 
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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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