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Accounting Identities for Thomas Friedman Print
Wednesday, 19 October 2011 04:05

Thomas Friedman tells readers that we should want China to raise the value of its currency, but the real problem for the United States is that we are not building up our infrastructure and we don't save. While the first point is right, the second suffers from ignorance of national income accounting.

If we have a trade deficit then we must have negative national savings. At full employment, we will have a large trade deficit, unless our currency declines in value. This means that we will either have large budget deficits (which Friedman really doesn't like) or we will have negative private savings. There is no way around this. So the problem of low savings is the problem of an over-valued currency, they are not separate issues.

The Post Wrongly Tells Readers That Central Banks Can't Do More to Boost Growth Print
Tuesday, 18 October 2011 05:00

In an article about the IMF reversing its pro-austerity stance, the Post told readers:

"Central banks, which have already reduced interest rates to extremely low levels, have little remaining ability to boost economic activity."

This is not true. Central banks could explicitly target higher rates of inflation. This would lower real interest rates and reduce debt burdens. This policy has been advocated by many prominent economists, including Paul Krugman, Ken Rogoff, the former chief economist of the IMF, and Ben Bernanke when he was still a professor at Princeton.

David Brooks: People Prefer Values to Jobs Print
Tuesday, 18 October 2011 03:50

David Brooks is so cute when he tries to talk about economics. He apparently never heard of the "wealth effect," one of the most basic concepts in economics. Brooks tells readers that we are seeing a change in American values with people turning away from debt.

Actually, people have simply seen much of their wealth disappear with the collapse of the housing bubble. Close to $7 trillion of housing wealth has disappeared since the peak of the bubble. In the bubble years, people went into debt because they had this wealth to cover their debt. Now that this wealth has vanished, people are reducing their debt accordingly. This is the principle that you can get a larger mortgage on a $400,000 home than a $200,000 home. That is not a change in philosophy as Brooks suggests.

The other part of Brooks piece is the implicit celebration of unemployment. Brooks tells us (correctly) that people are cutting back consumption. He also proudly tells us that they don't the government to spend more money either. That's just great. We get less demand from the private sector and we also get less demand from the government. This translates into less demand. That means fewer jobs and more unemployment.

That could be a counter to this if investment would rise, but there is no plausible story under which it would. Firms don't rush out to invest because the economy is shrinking. The world doesn't work that way. 

Ultimately, the U.S. will have to get the dollar down to restore full employment without large net borrowing by either the public or private sector. A lower valued dollar will make U.S. goods more competitive internationally and reduce our trade deficit. However, this will not happen tomorrow and certainly does not appear to be a phenomenon that Brooks has thought about.

Argentina Suffering From Default: Not on This Planet Print
Monday, 17 October 2011 14:41

NPR's Planet Money made its entry in the Stake Your Claim game show with a segment on Friday that claimed that Argentina is suffering horribly as a result of its decision to default at the end of 2001. It turns out that Argentina has actually been doing quite well since its 2001 default as the most recent data from the IMF show.

Click to Enlarge


Source: International Monetary Fund.

As can be seen, Argentina was already in a severe recession prior to default. It had tied its currency to the dollar, which went through the roof following the East Asian financial crisis in 1997. While the United States could support the trade deficit that resulted from the over-valued dollar, Argentina could not. It eventually had no choice but to break its peg with the dollar and default on its debt in December of 2001. Its economy fell sharply in the next quarter, but had stabilized by the summer of 2002. It then began to grow rapidly and was above its pre-recession level by the end of 2004. It has continued to grow rapidly in the subsequent years, although the 2009 recession did bring growth to a halt for a year.

The IMF projects that Argentina's GDP this year will be almost 60 percent above its pre-recession level. This is where Planet Money's claim breaks down. 

If Our Children Don't Do Better Than Us, It Will Be Because the Top 1 Percent Took It All Print
Monday, 17 October 2011 04:46

Robert Samuelson warns that our children may not do better than us. His warning is based on rising health care costs, aging of the population and the resulting rise in Social Security and Medicare expenses, and the risk of an end to productivity growth. Remarkably the upward redistribution of income doesn't feature in his story.

This is striking since upward redistribution is such a huge part of the picture. His example of workers not gaining is taken from a Health Affairs article that reported that 95 percent of compensation growth from 1999 to 2009 for a median four person family was eaten up by inflation and health care costs. However, if there had not been an upward redistribution of income over this period, compensation for a typical family would be about 10 percent higher (@$10,000 in today's dollars).

Samuelson also raises the prospect of productivity growth winding down. He wrongly says that productivity growth is already committed to supporting an aging population. In fact, it would take just 5 percent of the projected wage growth over the next 30 years to make the Social Security trust fund fully solvent for the rest of the century.

Health care costs are projected to take more of people's income, but this is far more the result of our broken health care system. If we paid the same per person for our health care as other wealthy countries we would be facing enormous budget surpluses in the decades ahead. If our per person costs were the same as the average of other wealthy countries it would free up more than $1.2 trillion a year ($4,000 per person) for other uses.

It is difficult to reduce health care costs because the public debate on health care is dominated by protectionists like Samuelson who are resistant to allowing more trade in health care services.

Republican Presidential Candidates Want to Build Keystone Pipeline to Reduce Unemployment by 0.01 Percentage Points Print
Monday, 17 October 2011 04:27

The Washington Post told readers that jobs have become a big factor in the Obama administration's decision on building the Keystone pipeline, which would allow tar sands oil from Canada to be shipped across the United States. According to the article the pipeline has become a big cause among the Republican presidential candidates because it would generate 20,000 short term jobs in an economy with 9 percent unemployment.

The labor force is slightly over 150 million people. This means that the 20,000 jobs created by the construction of the pipeline would reduce unemployment by slightly more than 0.01 percentage points. This context would have been helpful for readers.

Steve Rattner Gets It Wrong on Globalization in the NYT Print
Sunday, 16 October 2011 10:20

Wall Street financier Steve Rattner gets just about everything wrong on globalization in a column in the NYT yesterday. He argues that the country will continue to lose manufacturing jobs, since we can't compete with low paid workers in the developing world. He argues that instead we should focus on highly-paid service sectors like software, entertainment and finance. Remarkably, he never once mentions either the trade deficit or the value of the dollar.

The reason why the United States has lost so many manufacturing jobs to trade is because that has been an explicit goal of U.S. trade policy. Trade agreements like NAFTA were deliberately designed to place U.S. manufacturing workers in direct competition with low-paid workers in the developing world. In these circumstances the predicted and actual result is a loss of manufacturing jobs and a drop in wages for the jobs that remain.

This was not a pre-determined outcome. Trade agreements could have been structured to put doctors and lawyers and other highly paid professionals into competition with their counterparts in the developing world. There is no shortage of intelligent people in countries like Mexico, India, and China who would be happy to train to U.S. standards and learn English, if this would give them an opportunity to work as professionals in the United States.

However, we did not design our trade deals to facilitate the flow of foreign professionals into the United States, we designed them to put downward pressure on the wages of U.S. manufacturing workers. In this story the difference between autoworkers and doctors is that autoworkers were smart enough to know that they needed protection, but not powerful enough to get it. Doctors were too dumb to know that they needed protection, but powerful enough to get it.

The trade deficit and the value of the dollar are central parts of this story because the U.S. is currently running a trade deficit that is equal to 4 percent of GDP and would rise to closer to 6 percent of GDP if the economy were at full employment. This is not sustainable unless we think that countries will give us their products for nothing indefinitely. Since that is difficult to envision, the dollar will have to drop at some point (this is the adjustment mechanism for a trade deficit in a system of floating exchange rates) and we will then export more and import less.

While Rattner envisions that we will actually import even more manufactured goods and presumably pay for this with increased exports of services, any look at the data would show this view to be absurd. The volume of trade in these services is swamped by our trade deficit in manufactured goods. Furthermore, there is no reason to believe that we will be any more able to overcome the enormous gap in wages for our service workers compared to the rest of the world than we could overcome our gap in manufacturing sector wages. The United States already faces a large deficit in computer software with India, which will almost certainly grow rapidly in the years ahead.

In short, Rattner has a completely unworkable answer to a problem that he totally misrepresents. It is inconceivable that the United States will not have a large manufacturing sector in the future with a considerably lower trade deficit in this area than it has today.

[Btw, Rattner is also very misleading in his use of statistics. He asserts that the wages of college graduates have risen by 4 percent in the last decade, after adjusting for inflation. This is misleading because it is entirely the result of wage increases for workers with post-graduate degrees. The wages of workers with college degrees but nothing beyond have not risen more than inflation over the decade.]

Thomas Friedman, Bard of the 1 Percent, Reports on the Problem of Incompetent CEOs Print
Saturday, 15 October 2011 19:34

After referring to David Brooks as the "Bard of the 1 Percent," I was assaulted with a barrage of threatening letters and phone calls from representatives of Thomas Friedman who insisted that he holds this title. I will let the two NYT columnists slug it out between themselves and deal with the substance. 

In Sunday's column Mr. Friedman inadvertently warns us about the potential economic risks this country suffers from being run by incompetent CEOs. Friedman recounted a conversation he had with Chicago's new mayor, and former Obama chief of staff, Rahm Emanual. Emanual reportedly told him:

"I had two young C.E.O.’s in the health care software business in the other day, sitting at this table. I asked them: ‘What can I do to help you?’ They said, ‘We have 50 job openings today, and we can’t find people.’ ”

Friedman then goes on to add:

"Doug Oberhelman, the C.E.O. of Caterpillar, which is based in Illinois, was quoted in Crain’s Chicago Business on Sept. 13 as saying: 'We cannot find qualified hourly production people, and, for that matter, many technical, engineering service technicians, and even welders, and it is hurting our manufacturing base in the United States. The education system in the United States basically has failed them, and we have to retrain every person we hire.'"

While Friedman favorably quotes Emanual describing this as, "staring right into the whites of the eyes of the skills shortage," the most obvious shortage of skills in this story is with the CEOs. Competent CEOs know that in a market economy you attract good workers by offering higher wages.

This is known as the principle of "supply and demand." If the demand exceeds the supply, then the price of the item in question is supposed to rise. In this case the item in question is labor. If these companies were run by competent CEOs then they would be offering higher wages in order to attract the workers that they say they need. If they offered high enough wages people would leave competitors to work for their companies. They would also move from other parts of the country or even other countries to accept their job offers. In the long-run more people would train to get the skills needed to fill the positions these employers are offering.

However, there are no major occupational categories that show large wage gains at present. This means that if employers really are having trouble attracting good workers then it must be due to the fact that they don't understand the basics of a market economy. Unfortunately nothing in Friedman's column indicates that Emanual or anyone else is educating CEOs on how they can raise wages in order to attract the workers they need.

It is also worth noting that Friedman implies that the Chicago school system is desperately in need of the reform that Emanuel plans to give it. Emanuel's predecessor as mayor, Richard Daley, also placed an emphasis on reforming Chicago's schools. From 2001 to 2009 he installed Arne Duncan, currently President Obama's Secretary of Education, as head of the Chicago school system. If Friedman and Emanual's complaints about the current state of Chicago's schools are accurate, this would imply that Duncan must not have been very successful in his tenure even though he was widely acclaimed as a reformer at the time. 

Post Does the Old He Said/She Said on Perry Energy Plan Print
Saturday, 15 October 2011 07:24

Texas Governor Rick Perry announced an energy program yesterday that involved drilling everywhere in sight. According to the Post article on the plan, Perry claimed that his plan would create 1 million jobs. In classic he said/she said style the Post told readers:

"Perry predicted his energy plan would create more than 1 million new jobs. Weiss [a researcher at the Center for American Progress] sharply disagrees."

This is utterly useless information for readers. A Washington Post reporter should have the time to talk to some experts on this issue and/or read some of the key articles. Post readers do not have the time. Simply reporting opposing claims that readers have no ability to access is a pointless exercise. Trees died for nothing.

(Perry's claim is nonsense -- it is unlikely that it would in the long-run lead to even 100,000 additional jobs [0.07 percent of total employment]. The short-run effect would be considerably less.)

Does the Post Get Paid to Push Trade Agreements? Print
Friday, 14 October 2011 07:47

One would hope so, since its reporting on the topic is so embarrassing. The paper told readers:

"There have been some compromises on jobs measures this year, as both parties have sought small wins. On Wednesday, Congress approved new trade agreements with Colombia, Panama and South Korea, lowering barriers to American exports."

While politicians from both parties, including President Obama, have called these trade pacts job bills, it would be very difficult to find any economist anywhere who is not obviously on someone payroll who would claim that these deals would lead to any notable number of jobs ever, and certainly not in the next few years. Most analyses show that these deals will have very little impact on jobs and it is entirely possible that they will end up as net job losers in the short-term as has been the case with past trade deals.

The piece also described the repeal of a 3 percent withholding tax on payments to businesses that contract with state and local governments as a jobs measure. This is nonsense. The withholding an effort to increase tax compliance by small businesses who often cheat on their taxes, just like paycheck withholding is an effort to keep workers from cheating. Ending the withholding is a sop to these businesses for political reasons, no one believes that it will create any jobs.

[In response to popular demand, here is the International Trade Commission (ITC) report on the South Korea deal, by far the biggest of the three. It projects that when fully implemented (@ 10 years), it would increase GDP by around $10 billion or approximately 0.05 percent. The ITC projections for trade agreements have generally proven to be overly optimistic.)

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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.