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President Clinton, The Economy Started Losing Manufacturing Jobs While You Were in Office Print
Monday, 20 June 2011 09:52

If you ever wondered why manufacturing employment has not done well over the last 15 years, President Clinton gave us part of the answer in a column giving advice on job creation [thanks hapa]. His 13th item on job creation is "Enforce Trade Laws," where he tells readers:

"We lost manufacturing jobs in every one of the eight years after I left office. One of the reasons is that enforcement of our trade laws dropped sharply. Contrary to popular belief, the World Trade Organization and our trade agreements do not require unilateral disarmament. They’re designed to increase the volume of two-way trade on terms that are mutually beneficial. My administration negotiated 300 trade agreements, but we enforced them, too. Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending. Since they are now our bankers, it’s hard to be tough on their unfair trading practices. This happened because we abandoned the path of balanced budgets 10 years ago, choosing instead large tax cuts especially for higher-income people like me, along with two wars and the senior citizens’ drug benefit. In the history of our republic, it’s the first time we ever cut taxes while going to war."

Okay, we have some real serious confusion here from the former president. First, it is true that the economy lost manufacturing jobs in the eight years after President Clinton left office, but the job loss began in his last three years in office. Here are the numbers:

                               Change in Manufacturing Jobs

1998                         -140,000

1999                         -170,000

2000                         -99,000

 

It is true that the pace of job loss picked up after Clinton left office, but this was due first and foremost to the recession caused by the collapse of the stock bubble. Blaming President Bush for that downturn would be like blaming Obama for the Lehman crisis if it happened to occur in February of 2009 rather than September of 2008. The downturn caused by the collapse of the bubble was the result of President Clinton's team failure to try to rein in the bubble. As a result of the collapse of the stock bubble, the country had at the time the longest period without job growth since the Great Depression. It only began to create jobs again once the housing bubble began to fuel a construction and consumption boom.

Now for the other part of Clinton story:

"Enforcement dropped so much in the last decade because we borrowed more and more money from the countries that had big trade surpluses with us, especially China and Japan, to pay for government spending."

Actually, if President Clinton paid attention to economic data he would have noticed that not only were we losing manufacturing jobs during his last three years in office, but the trade deficit was soaring. The trade deficit grew from just over 1 percent of GDP in 1996 to over 4.0 percent of GDP by the 4th quarter of 2000. President Clinton's team must have been doing one heckuva job enforcing trade laws.

More importantly, the rest of his story makes no sense either. The United States borrows from China, Japan and other countries because of our trade deficit, not our budget deficit. We were borrowing huge amounts from Japan and China at the end of the Clinton presidency, but most of their loans went to buy stocks, private bonds, and mortgage backed securities, not government bonds. In fact, by the end of the Clinton presidency, because of the large trade deficit, the country was accruing debt to foreigners at a then record pace.

Anyone who thinks that this didn't matter because the foreigners were holding private assets and not government debt should realize that if they desired for some reason to own government debt, any day of the week they could sell their stock, bonds, or mortgage backed securities and buy government debt. The issue is indebtedness to foreigners and the potential drain on future income. It matters not at all whether the debt is on the public or private side.

This raises the final point, why did the trade deficit soar in the last years of the Clinton administration (aside from the fact that President Clinton apparently was not paying attention)? The answer is simple. The value of the dollar soared.

This was the result of Treasury Secretary Robert Rubin's high dollar policy. This was a rhetorical point when he first took over as Treasury secretary in 1995. He put the muscle of the IMF behind it in the East Asian bailouts of 1997. These bailouts forced the East Asian countries to repay debts in full. This could only be done by allowing the value of their currencies to plunge against the dollar, making their exports hyper-competitive.

Also, the IMF bailouts were considered so onerous by the rest of the developing world that every country that could decided it had to accumulate massive amounts of reserves to avoid ever being forced to turn to the IMF. This meant pushing down the value of their currencies against the dollar as well. In the late 90s, the normal flow of capital from rich countries to poor countries was reversed in a major way, with developing countries becoming massive lenders to the United States.

This was definitely bad policy, but it was President Clinton's policy, not President Bush's. The dollar actually depreciated moderately under President Bush. He certainly should have done more to push down its value, which would have corrected the imbalances built up in the Clinton years, but President Clinton has events seriously backward in this piece.

 
Robert Samuelson Calls Attention to the Incompetent Management Problem Print
Monday, 20 June 2011 04:59

Robert Samuelson devoted his column today to the problem of structural unemployment. He tells us that many positions are going unfilled, in spite of the high rate of unemployment. In fact, according to the Bureau of Labor Statistics, the job opening rate is just 2.2 percent.

samuelson-btp-6-2011

Source: Bureau of Labor Statistics.

Since there will always be some time involved in replacing new workers, this rate can never fall to zero. If the rate were to fall to 1.7 percent, its low for this downturn, this would imply that another 650,000 of the 14 million unemployed would have jobs. It is also worth noting that it would be reasonable to expect that employers would be more choosy about their hires, therefore taking longer, in a period in which they face weak demand (and therefore have little urgency for new workers) and have many good workers to choose from.

In a context where the economy is strong and relatively few people are looking for work, employers would be expected to try to hire quickly since there will be little benefit to waiting for a better job candidate. However, in the current labor market, there is a strong likelihood that an employer can find a better candidate if they wait longer to hire. This fact would be expected to raise the number of job openings even if there is no reduction in the quality of the workforce.

It is also important to note that if there really is a serious problem of structural unemployment (firms are unable to find qualified workers for vacant positions) then there should be substantial sectors of the economy where wages are rising rapidly. It is difficult to identify any major sector where this is the case. Wages for workers at all education levels are at best just keeping pace with the rate of inflation.

This implies that if employers are really having trouble finding qualified workers then it is likely because they are offering wages that are below the market rate. The problem then is a lack of qualified employers, not a lack of qualified workers.

 
The NYT Has Not Heard of the European Central Bank Print
Monday, 20 June 2011 04:04

That's what readers must be thinking of an NYT piece on the changes Greece needs to make in order to restore economic growth. The piece never mentions the European Central Bank (ECB). 

The ECB is an incredibly important force, either promoting or constraining growth. It is currently doing the latter. It set its overnight interest rate at 1.25 percent. This is higher than the 1.0 percent rate set by the Fed from 2002 to 2004 when the U.S. economy was trying to recover from the stock market crash. It is generally expected to raise its rate further over the course of the year.

By contrast, if the ECB was interested in promoting growth in Greece and elsewhere in the euro zone, it could push its short-term rate to zero, like the Fed. It could also target a 3-4 percent inflation rate to reduce real interest rates further and lesson the debt burden on governments and households across the euro zone.

This path has been advocated in various contexts by Olivier Blanchard, the IMF's chief economist, Federal Reserve Board Chairman Ben Bernanke, and Nobel prize winning economist and NYT columnist Paul Krugman. Reporters who write about what is necessary for Greece to grow should be familiar with this argument.

 
Why Is Third Way an Unlikely Ally for a Corporate Tax Break? Print
Sunday, 19 June 2011 22:12
That's what NYT readers must have been asking when they heard the Wall Street-backed group described by the NYT as a "unlikely ally" of business efforts to get a special tax concession that would allow them repatriate foreign profits at a near-zero tax rate. What is "unlikely" about a business-funded group supporting a tax break for business?
 
The Post Discovers Inequality Print
Sunday, 19 June 2011 08:10

The Post had a major front page article on the growth in inequality in the United States over the last three decades. While it is good to see the Post taking note of this enormously important development, the piece does manage to misrepresent some key points.

First, there has been new research that sheds additional light on the identity of the top earners, but we have long had a pretty good idea of who the big earners were. There are regular reports from Fortune and other sources on the pay of top executives at the major corporations. The growing gap between this pay and the pay of ordinary workers has long been noted in reports by my friends at the Economic Policy Institute and Institute for Policy Research and elsewhere. So telling us that many of the big earners are CEOs at major companies is not exactly news.

Neither is it news that many of the top earners are Wall Street types. There are news articles every year on the bonuses paid out at Goldman, Citigroup and the rest. We already knew that the financial sector accounted for a hugely disproportionate chunk of the top earners.

The other major flaw in this piece is its seeming willingness to accept the explanation that higher pay is explained by the growth of companies. First, this does not appear to have been the case in the 50s and 60s when the economy and many companies grew very rapidly, with no comparable explosion in pay at the top.

Second, the rise in pay for top executives far exceeds the growth of companies. While there has been some increase in concentration over the last three decades, it has not been nearly large enough to explain the rise in pay of top earners. Many of the huge companies of the 60s and 70s, for example General Motors and AT&T, have been seriously downsized relative to the size of the economy.

The increased size of companies could at best explain a small portion of the rise in executive pay and would not explain at all the huge gap between the pay for top executives at U.S. companies and the pay for top executives for large foreign corporations like Toyota or Volkswagon. These gaps are likely explained by the corruption of the corporate governance process in the United States where the CEOs get to largely decide the people who determine their pay. Stockholders are likely to exert more control elsewhere and thereby keep pay for top executives more in line with the market.

 
The Post Tells Readers that Business Leaders are "Exasperated" Despite Record Profits Print
Friday, 17 June 2011 07:24

Readers of the Washington Post article on a meeting between a group of business leaders and President Obama's chief of staff William Daley must be wondering how the Post knew that the executives were "exasperated," as the Post told readers in the third paragraph. 

The Post told readers that the executives had complaints over environmental regulations and stalled "free-trade deals." (What the Post describes as a "free-trade deal" would be described as a "trade deal" by neutral reporters rather than advocates. These deals have little to do with creating free trade between the countries involved.)

Of course businesses will always want more profit and if they looking "exasperated" helps them get their way with a weak president and a gullible media, they will look as exasperated as possible. In reality, the profit share of income is at record highs, so environmental regulations of the Obama administration and the stalled trade deals are not having too much of a negative impact on the bottom line.

The article also described the May jobs report as "surprisingly glum." While it was glum, there was nothing surprising about it to people who follow the economy. There was considerable evidence of weakness in the economy and the labor market prior to the release of the report, most importantly a jump in the number of weekly unemployment claims to averages well above 400,000. This number of claims is inconsistent with strong job growth.

 
Michael Gerson Doesn't Have Access to Data on Interest Rates Print
Friday, 17 June 2011 06:59

That is what readers of his column will undoubtedly conclude when they see him say that if President Obama agrees to a deal with large reductions in spending:

"Credit markets would find it reassuring that the federal government is not completely paralyzed."

Those who have access to information about credit markets know that they are already very reassured as demonstrated by their willingness to hold U.S. government debt at extremely low interest rates. The interest rate on 10-year Treasury bonds has been hovering near 3.0 percent. It is unlikely that any deal on the budget will lower this significantly or that any further reduction in rates would have a noticeable impact on the economy.

 
David Brooks Discovers That It Was All Fannie Mae's Fault Print
Friday, 17 June 2011 05:01

"Night is day," "slavery is freedom," okay David Brooks edited those lines out of his column on Fannie Mae today, but this is pretty much how the rest of it reads. He tells us that the economic crisis was the result of Fannie Mae pushing bad mortgages and buying off everyone who tried to stand in their way.

There's a small problem in this story. The worst junk mortgages that inflated the housing bubble to extraordinary levels were not bought and securitized by Fannie and Freddie, they were securitized by Citigroup, Merrill Lynch, Goldman Sachs, Lehman and the other private investment banks. These investment banks gobbled up the worst subprime and Alt-A garbage that sleaze operations like Ameriquest and Countrywide pushed on homebuyers.

The trillions of dollars that the geniuses at the private investment banks funneled into the housing market were the force that inflated the bubble to its 2006 peaks. Fannie and Freddie were followers in this story, jumping into the subprime and Alt-A market in 2005 to try to maintain market share. They were not the leaders.

Just to be clear, Fannie and Freddie were serious bad actors. They are both huge companies that do nothing else but deal with housing. It is incredible that they did not recognize the housing bubble and take steps to try to deflate it, and protect themselves, before it grew to such dangerous levels.

Suppose that Fannie and Freddie started demanding appraisals of rental values and refused to buy any mortgage where the ratio of sale price to annual rent was higher than 20. This action by itself likely would have shaken some sense into the housing market. I said this back in 2002, when I first warned of the housing bubble and predicted the collapse of Fannie and Freddie. I also frequently criticized Fannie and Freddie in public forums, including debates with their chief economists. Unlike Brooks, I wasn't worried about non-issues as economic disaster loomed on the horizon.

As much as Fannie and Freddie deserve blame for incompetence and corruption, no serious person can make them the main culprits in this story. The Wall Street crew made hundreds of billions on pushing fraudulent mortgages. Furthermore, if we had competent economists running the Fed, they would have been shooting at the housing bubble as early as 2002 also. This does not mean raising interest rates in an economy that was struggling to recover from the collapse of the stock bubble. (I'll say that again, since people have a hard time understanding "do not raise interest rates." The Fed should not have raised interest rates.)

If Greenspan had paid attention to the economy he would have had the Fed's staff devoted full-time to documenting the evidence for the housing bubble and he would have used every public appearance (e.g. congressional testimonies, public speeches, international forums) to warn of the risks posed by the housing bubble. He also would have used the Fed's full regulatory authority to police the mortgage issuing practices of the banks under its supervision. He also would have prodded other regulators to use increased scrutiny for the institutions under their control. (Greenspan was never shy about making suggestions to others.)

My guess is that these actions would have by themselves crashed the bubble and done so long before it grew to such dangerous levels. They would be essentially costless, so it is difficult to see why a vigilant Fed chair would not have followed this route.

It is difficult to believe that these actions would not have been sufficient to deflate the bubble. After all, the David Brooks of the world can ignore Dean Baker warning of the housing bubble, they cannot ignore the Fed chair issuing such warnings, backed up by endless Fed papers documenting the case.

It is incredible, that even after the collapse of the housing bubble has wrecked the economy and wiped out the life's savings of tens of millions of middle class and moderate income families (this loss of wealth is why people are not spending, it has little to do with "pessimism"), there is still so little effort to re-examine the fixation on homeownership in this country.

Why on earth is President Obama looking to push a renewed Fannie and Freddie type system? Does the public really need to subsidize mortgage interest rates through a government guarantee system, in addition to the mortgage interest deduction?

Brooks might devote some of his fire to these loonie schemes. He might also shoot at the whiners who think no one will issue a mortgage if they have to maintain a 5 percent stake in it. And, he might also call for some criminal investigations of the banks that pushed and securitized fraudulent mortgages. But none of this seems to fit Brooks' agenda.

 

Addendum:

I had occasion to quote from this 2006 Moody's assessment of Freddie Mac. It does a great job of putting Fannie and Freddie's subprime dealings in context:

Freddie Mac has long played a central role (shared with Fannie Mae) in the secondary mortgage market. In recent years, both housing GSEs have been losing share within the overall market due to the shifting nature of consumer preferences towards adjustable-rate loans and other hybrid products. For the first half of 2006, Fannie Mae and Freddie Mac captured about 44 percent of total origination volume -- up from a 41 percent share in 2005, but down from a 59 percent share in 2003. Moody’s would be concerned if Freddie Mac’s market share (i.e., mortgage portfolio plus securities as a percentage of conforming and non-conforming origination), which ranged between 18 and 23 percent between 1999 and the first half of 2006, declined below 15 percent. To buttress its market share, Freddie Mac has increased its purchases of private label securities. Moody’s notes that these purchases contribute to profitability, affordable housing goals, and market share in the short-term, but offer minimal benefit from a franchise building perspective. (p 6)

 
The Deals are "Trade" Pacts, Not "Free Trade" Pacts Print
Thursday, 16 June 2011 06:45

If you are an advocate pushing for the new trade pacts with South Korea, Colombia, and Panama you might call them "free trade" pacts. The idea of "free trade" has considerable resonance with an important segment of the public (i.e. business people). However, the deals do not free all trade (don't expect to see a flood of Korean doctors into the United States) and they actually increase many barriers, most importantly by strengthening intellectual property protection. So, when the Post calls the deals "free trade" pacts it is acting in its role as an advocate, not as a newspaper.

The Post also tells readers:

"The Korea deal is expected to generate more than $10 billion in additional annual sales for U.S. companies."

Actually people hold expectations. The Post doesn't tell us which people. This is important, since many people's expectations prove to be unjustified. For example, many "expected" NAFTA to lead to a U.S. trade surplus with Mexico, creating hundreds of thousands of jobs. These expectations proved to be wrong. It would be interesting to know if the same people are the ones who expect $10 billion in additional annual sales from the Korea trade pact.

 
Why Does the Public Hear: "tales of six-figure pensions and public employees comfortably retiring in their early 50s"? Print
Thursday, 16 June 2011 05:24

The NYT told readers that many states are planning to increase employee contributions to their pensions. One of the reasons is that legislators are hearing:

"tales of six-figure pensions and public employees comfortably retiring in their early 50s."

This is true because the media have been repeating tales circulated by right-wing and business organizations who are attacking public sector workers and public sector unions. In fact, the vast majority of public sector workers do not retiree in their early 50s and do not enjoy especially generous benefits.

For example, in New York state, which is featured prominently in this article, the average benefit in 2010 paid by the state's main pension program was $18,300. Most of the workers who retiree in their early 50s are public safety employees like police and firefighters.

If the media had been doing a competent job reporting on this issue, legislators would be hearing tales of 70-year old retirees trying to get by on less than $20,000 a year. (Roughly 30 percent of public sector employees do not get Social Security.)

The article also includes the bizarre assertion that, "the era of generous compensation for public-sector employees is ending." In fact, after adjusting for education and experience the compensation for public employees is slightly less than for their private sector counterparts.

This article also cites a Pew Center study that refers to a public pension shortfall of more than $1 trillion. It would have been worth noting that this shortfall is equal to approximately 0.25 percent of projected GDP over the next 30 years (the time horizon for most pensions). It also would have been worth noting this study found that New York state's pension is 100 percent funded, contrary to the assertion cited in the article by New York Governor Andrew Cuomo that its pension is unsustainable. The article should have corrected Mr. Cuomo on this point.

 
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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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