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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.

Good Piece On Perry and the Texas Economic Miracle Print
Monday, 15 August 2011 13:34
The NYT did a nice job outlining the issues in an assessment of the economic performance of Texas under Governor Perry. The piece is not an exhaustive (no short news story could be), but it touched the main points at issue.
Fun With Robert Samuelson Print
Monday, 15 August 2011 05:00

It's always fun to read Robert Samuelson's column on Monday morning to see what silliness he is pushing to justify cuts to Social Security and Medicare. Today he has his plan for balancing the budget over the next decade (the country's most important problem for people who never heard about unemployment).

As part of his argument for cutting benefits for the elderly Samuelson tells us that, "in 2008, the median net worth of married elderly couples was $385,000." (Actually, if we check his source, it looks like the year is 2007.)

Okay boys and girls, can anyone think of anything that might have affected the net worth of the elderly between 2007 and today? Apparently no one at the Post has noticed anything or they might have suggested that Samuelson try to use more recent data in his column.

Naturally, Samuelson doesn't suggest doing anything about the real cause of his deficit crisis story, exploding private sector health care costs. Nor does he consider any measures that might hurt the Wall Street folks that helped inflate the housing bubble that wrecked the economy. But who would expect more from Samuelson or Fox on 15th Street?

WAPO Should Make Clear, Constraints on Monetary and Fiscal Policy Are Political Print
Monday, 15 August 2011 04:47

A front page Washington Post piece was headlined, "Geithner, Bernanke Have Little in Arsenal to Fight New Crisis." This piece should have made it clear to readers that the obstacles to additional action are political not economic. All the obstacles noted in the piece are political in nature. The one possible exception is the S&P downgrade of U.S. government debt, which does not appear to be an obstacle at all. The markets laughed off this downgrade, sending U.S. bond prices soaring on the first trading day after the announcement.

A better headline for this piece would have been, "Political Obstacles Obstruct Response to Economic Crisis."

NYT Tries to Explain Why Unusually High Levels of Consumption Are Not Even Higher Print
Monday, 15 August 2011 04:20

One of the bizarre statements that is routinely repeated by people who should know better is that consumers are not spending and that is one of the reasons that the recovery has been so weak. The NYT has a piece along these lines this morning. The reason why this argument is bizarre is that consumption is still unusually high, not low.

The saving rate out of disposable income has been averaging just over 5 percent for the last 3 years. This is above the near zero rate at the peak of the housing bubble, but still well below the 8.0 percent average that households averaged for most of the post-war period prior to the growth of the stock bubble in the 90s and the housing bubble in the last decade. (Due to measurement issues, specifically capital gains showing up as income in the national income accounts, the official data likely understate the drop in savings at the peak of the bubbles and the subsequent rise since the crash.)

The predicted result of the ephemeral wealth created by these bubbles would be a surge in consumption, which implies a drop in the saving rate. Now that both bubbles have deflated we should expect the saving rate to return to normal levels or perhaps even somewhat higher as households must make up for the years when they did not save adequately.

This is one of the reasons that competent economists saw these bubbles as so dangerous. Once the economy gets on a specific growth path it is difficult to change courses. Specifically, it is not easy to find a source of demand to replace $600 billion or so in lost consumption coupled with $600 billion in lost bubble-driven construction demand.

Click for Larger Image.


Source: Bureau of Economic Analysis.

Perry's Growth Failure in Texas Print
Sunday, 14 August 2011 20:08

After getting my numbers wrong last time, I thought I would take one more look. Folks love to look at per capita GDP growth as a measure of economic progress. It's certainly not everything, but it does tell you something.

So how does Texas look under Governor Perry compared to his predecessors? Using data from the Bureau of Economic Analysis (I had to chain these two series), I get that in the years 1987-2000 per capita GDP growth averaged 2.2 percent in the U.S. as a whole. In Texas it averaged 2.8 percent, a 0.6 percentage point gap. However, in the years 2000-2010 the gap goes the other way. Per capita GDP in the U.S. as a whole grew at an average rate of 0.6 percent, while it grew at a 0.5 percent rate in Texas, a difference of 0.1 percentage point in favor of the U.S. 

Texas_growth_27052_image002Source: Bureau of Economic Analysis.

What does this say about Governor Perry's success as the steward of the Texas economy? It doesn't tell us much. There are all sorts of reasons that Texas's per capita GDP growth might have slowed relative to the rest of the country that have nothing to do with the effectiveness of Perry's policies. However, if we are looking for quick comparisons, per capita GDP growth is a common one, and it goes the wrong way for the Perry economic miracle story. 

The Post Gets It Right on the Debt Downgrade and the Stock Market Print
Sunday, 14 August 2011 16:35
The Post featured an Outlook piece by Liaquat Ahmat that made the obvious point that Standard and Poor's downgrade could not plausibly be blamed for the stock market plunge. The downgrade most immediately was an assessment of the creditworthiness of U.S. government bonds. These soared in price. The most obvious basis for the plunge in stock prices was the fear of the break-up of the euro and a financial freeze-up of the type that followed the bankruptcy of Lehman in the fall of 2008.
Republicans Say That Tax Increases are "Job Killers," the WAPO Doesn't Know What They Believe Print
Sunday, 14 August 2011 16:28

More journalism 101 for the Washington Post. It told readers in a front page story that tax increases on the wealthy

"are considered 'job-killing' and off-limits by many Republicans."

Of course Republicans call tax increases job killers, but politicians often say things that they do not believe to be true. Many members of Congress are old enough to remember the 90s when the economy created 3 million jobs a year even though the higher Clinton era tax rates were in effect.

The Post should restrain itself to telling readers what politicians say and do; it does not know what they actually think.

Germany Uses Work Sharing Print
Sunday, 14 August 2011 07:48

Roger Cohen has an interesting column touting the performance of Germany compared to the United States in the years since the onset of the crisis. He concludes by suggesting that Germany can save the United States with its ideas as to how to manage an economy and society.

While Cohen mentions several important differences between the United States and Germany, remarkably he did not mention Germany's work sharing system. Even though growth in Germany and the United States has been comparable since the beginning of the downturn, Germany has actually seen a decline in its unemployment rate of more than half a percentage point from the pre-recession level.

This is due to the fact that Germany encourages firms to reduce work hours rather than lay people off. In a standard arrangement, workers may put in 20 percent fewer hours and end up taking home 4 percent less pay. Most of the difference comes from a government unemployment benefit that is converted to a subsidy for short-time work. The company is also expected to make up some of the pay. This system is very popular across the political spectrum in Germany. It has been embraced by the conservative government although it was originally put forward by a Social Democratic minister in the previous unity government.

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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.