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The Decline In Male Employment: Look to Large Trade Deficits and Small Budget Deficits Print
Friday, 12 December 2014 06:56

The NYT had an interesting piece on the decline in employment rates among prime age male workers. While it discusses many of the causes of this decline, it missed the most obvious: policy decisions that have depressed demand in the economy. Many readers of the piece may wrongly believe that the current low employment rate is primarily the result of a long-term trend. This is not true.

From 1979 to 2000 the employment to population ratio (EPOP) fell by 2.1 percentage points. If it had continued this pace of decline, it would have fallen by roughly 1.4 percentage points since 2000. In fact, it has dropped by 5.1 percentage points. The most obvious explanation for this more rapid rate of decline is weak demand. The weakness of demand is in turn caused by a decision to keep down the size of the budget deficit and to sustain an over-valued dollar. These are both policy decisions made in Washington that have nothing to do with the character and skills of the workers who do not have jobs.

It's also worth noting that wages for the jobs that these men may be able to get would be considerably higher if the government decided to run a high employment policy. As Jared Bernstein and I show in our book, wages for those at the bottom of the income distribution are strongly influenced by the unemployment rate.

 
Chronic Lyme Disease, the State of Science, and the Trans-Pacific Partnership Print
Wednesday, 10 December 2014 20:37

I apologize for a bit of a digression here for personal reasons (my wife has chronic Lyme disease), but if you'll bear with me, I think I can make some connections. The immediate prompt for this post is a snide article in Slate by Brian Palmer, warning readers that, "New York is about to change its medical misconduct law to protect quacks."

The "quacks" referred to in the article's sub-headline are doctors who provide long-term antibiotic treatment for people who have chronic Lyme disease. As the article tells us, chronic Lyme does not exist:

"The Infectious Diseases Society of America—the association of scientists and clinicians who study this sort of thing—has repeatedly characterized chronic Lyme disease as 'not based on scientific fact.'"

It's great that Palmer can be so confident of this assertion, but it turns out that the evidence is far weaker than the association of scientists and clinicians who study this sort of thing might lead you to believe. There are actually very few studies that have tried to evaluate the effectiveness of long-term antibiotic treatment of people who believe themselves to be suffering from chronic Lyme.

As explained in an analysis by Brown University researcher Allison DeLong, one of the studies was poorly designed so that it would have been almost impossible for it to have found a significant effect from antibiotic treatment. A second study did find evidence that treatment alleviated symptoms, however this finding was dismissed because the symptoms returned after the treatment stopped. (Effectively this study was testing whether six months of treatment would cure patients, some of whom had years of prior treatment. It really shouldn't have taken too much background in science to know the answer to that one would be no.)

The third study actually did find statistically significant evidence that treatment improved patients' outcomes by its main measure, a survey on fatigue. However it dismissed this finding because the researchers decided that the blind nature of the study had been compromised. When surveyed after the fact, 70 percent of the control group wrongly guessed that they had been treated. However two-thirds of the treatment group somehow recognized that they were being treated. Therefore the researchers decided that they could not accept the results, since the people in the treatment group knew they were being treated.

I'm not making this up. You can find the study here. It was published in a major medical journal and its negative findings are routinely cited by doctors arguing that chronic Lyme disease does not exist and long-term antibiotic treatment is pointless. (If you haven't figured it out yet, the study found exactly what you would want in the comparison between the control and the treatment group. The same percent of people in each group thought they were being treating. This means that the blind nature of the study was not compromised.) 

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Single Parents and the Break-Up Between the White Working Class and the Democratic Party Print
Wednesday, 10 December 2014 05:28

Thomas Edsall has as interesting piece this morning discussing the changing plight of working class whites in the United States and their increasing estrangement from the Democratic Party. He gets much of the story right. Certainly they can no longer be assured of a comfortable middle class existence. And, if they do manage to get middle class jobs, they certainly cannot guarantee that their children will be as lucky.

However some of the argument is misplaced. Edsall notes the sharp growth in single mothers among women without college degrees. He then refers to research showing worse outcomes for children of single parents, implying that the problems for children stem from the increasing ability of parents to get divorced. This does not follow.

To take the simplest story, imagine a world in which no one is allowed to get divorced. Some children grow up in happy families with two committed parents. These children are likely on average to do well in life. On the other hand, some children grow up in dysfunctional families where parents regularly fight and a father may be abusive, alcoholic, or have other serious issues. These children will probably on average do less well in life.

Now suppose we allow couples to divorce. Presumably the happy couples stay together and the unhappy ones get divorced. If we compare outcomes of the children we would likely find that the children raised by two parents do better than the children raised by single mothers. However, it would be wrong to conclude that the problems for the children of single mothers stemmed from the fact that they are divorced, it would stem from the fact that they had been in bad relationships.

Given that divorce and single parents are a reality, the obvious policy response is to ensure that children get the education and support they need regardless of their family background. Good public child care, access to pre-K education, and affordable college education seem like obvious policy responses to these circumstances, along with laws that guarantee family friendly workplaces (e.g. paid sick days and paid family leave). These are policies that the Democrats have typically advocated.

The other set of policies for the white working class that the Democrats could (and sometimes have) advocate have to do with full employment. As Jared Bernstein and I argued in our book, Getting Back to Full Employment (download is free), full employment disproportionately benefits those at the middle and bottom of the wage distribution. The only period in the last four decades where these workers enjoyed sustained real wage gains was in the period of low unemployment from 1996 to 2000. Barring other changes in the economy, we will have to return to unemployment rates below 5.0 percent before most workers will again see substantial real wage gains.

There are three policies that the Democrats can push to again get the unemployment rate down to these low levels. The first involves additional government spending which would boost demand, growth, and employment. Unfortunately, superstitions about budget deficits makes this unlikely in the foreseeable future.

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Lowering Down Payments Increase Risk of Mortgage Default (see correction) Print
Tuesday, 09 December 2014 08:02

The housing bubble was apparently too far in the past for many of the people writing about housing to remember. Part of the problem was that many borrowers got loans that they were ill-situated to repay.

One of the factors that is a strong determinant of whether people will be able to pay a mortgage is the size of the down payment. The equity from a down payment serves as a cushion in bad times. It also reduces the risk to lenders, since this is money they stand to recover in the event of a default.

The NYT misled readers about the relative risk from low down payment loans in an article on the decision by the government to allow Fannie Mae and Freddie Mac to purchase loans with just 3 percent down payments. The piece cited several commentators saying that the risk of defaults would not increase substantially by lowering down payment requirements.

A study by the Center for Responsible Lending found that the default rate for loans with down payments of between 3 to 10 percent was 6.8 percent. This is 45 percent higher than the default rate it found for mortgages with down payments of 10 percent or more. The gap would be even larger of the comparison was restricted to those with down payments between 3 to 5 percent, with mortgages with down payments of 20 percent or more.

It is dubious housing policy to encourage moderate income people to take out mortgages on which they are likely to default. Furthermore, since the median period of homeownership among low income homebuyers is less than five years, a relatively small portion of households who are able to buy homes through this policy will accumulate any substantial amount of wealth. By contrast, the policy is likely to help the banking and real estate industries accumulate wealth.

 

Addendum:

In response to the questions in the comments, the study did not directly give the 57 percent figure, you had to back it out from the numbers they did give. According to their data, the additional low down payment mortgages raised the overall average from 4.7 percent to 5.2 percent. In order for this to be the case, the default rate on the additional mortgages had to be 6.8 percent -- in other words, 45 percent higher than the higher down payment mortgages.

In fact, assuming their analysis is like every other analysis of default rates, it found a strong inverse relationship between the size of the down payment and the default risk. The likelihood of defaults for those putting down 3-5 percent is probably close to four times as high as those putting down 20 percent. I think it's great to help low and moderate income people get good housing. But this policy is about helping banks get their bad mortgages insured by taxpayers.

One more point, it is a lie to say that this is an issue about people being able to get a mortgage with a low down payment. This is an issue about people being able to get a government guaranteed mortgage with a low down payment. We are talking about people paying a higher interest rate that reflects the actual risk associated with their mortgage.

 

Correction: An earlier version had put the difference at almost 80 percent due to an arithmetic error. Thanks to Bill Sermons, at the Center for Responsible Lending for calling the error to my attention.

 
Solid Common Sense from Catherine Rampell on Uber Print
Tuesday, 09 December 2014 07:55

Catherine Rampell's column on Uber is well worth reading. The basic point is very simple and should be obvious. There are good reasons for regulating cabs. They should have proper insurance, meet safety standards (both car and driver), and should also be limited in number. (Cabs create congestion and pollute.)

Whatever regulations are established should apply across the board. Uber doesn't get an exemption because it is run by incredibly rich twenty somethings.  

 
Is Educating Matt Yglesias a Full-Time Job? Print
Monday, 08 December 2014 14:23

Sorry, I usually find Matt's stuff interesting, but I couldn't resist the cheap shot. Anyhow, Matt seems to have gotten himself stuck in the mud of a silly debate between Obama haters and Obama apologists.

The haters are saying that all the jobs created under the Obama administration are part-time jobs -- pointing out that full-time employment is still below the pre-recession peak. Meanwhile the apologists are pointing out that most of the jobs created under Obama have been full-time jobs. With the wisdom of someone other than Solomon, Matt pronounces them both right.

Okay, let's step back for a moment and deal with two separate issues. The first is overall employment. We saw a huge fall in employment that began before Obama stepped into the White House and continued for his three months in office. Since that point the economy has gained back more jobs than it initially lost. However since part-time employment (both voluntary and involuntary, a distinction to which we return momentarily) is well above pre-recession levels, full-time employment is still below its pre-recession level.

How should this appear on the Obama scorecard? Well, it's pretty damn silly to blame Obama for the downturn. He walked into an economic disaster that was not of his doing. We can argue that the recovery should have been more robust. I know the Republicans blame Obamacare, taxes, regulations and the Redskins' defense, but none of these explanations can pass the laugh test.

The more obvious explanation, which some of us did say at the time, is that the stimulus was not large enough to fill the hole in demand created by the collapse of the housing bubble. There is a question as to whether Obama could have gotten more stimulus through Congress, either at the time or in subsequent efforts, but the main problem was congressional opposition, not the actions of President Obama.

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Washington Post Comes Out for Protectionist Trade Deals Print
Monday, 08 December 2014 08:01

In prior decades trade deals were largely about reducing tariffs and quotas that obstructed trade between countries. Due to the impact of these past deals, these barriers are now quite low or non-existent.

That is why the trade deals currently being negotiated by the Obama administration, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP), are not really about reducing trade barriers. These deals are about locking in place a corporate friendly structure of regulation. This structure will limit the ability of elected governments to impose regulations on the environment, health and safety, and other areas.

Some of these regulations increase barriers to trade, such as increased patent and copyright protection. The Washington Post once again enthusiastically endorsed the TPP and TTIP in its lead editorial today. Since it is entirely possible that the increased protectionism in these trade deals will have a larger economic impact than any reduction in trade barriers, we should recognize that the Post may be an ardent supporter of protectionism for U.S. industries who find they can't make enough profit in a free market.

The paper also deserves some ridicule for touting the possibility that the Fed will raise interest rates:

"Indeed, if favorable trends such as low oil prices continue, the economy might achieve the long-awaited “escape velocity” that would enable the Federal Reserve to end its zero interest-rate policy without harming growth."

In fact, it will take about two and a half years of the job growth that we saw in November to restore the demographically adjusted employment to population ratio that we had before the recession. It is also striking how the Post seems to see it as an end in itself that the Fed raise interest rates. Low unemployment and income growth are standard economic goals, a federal funds rate is not typically viewed as a goal of economic policy.

 
Are Public Pensions Taking Excessive Risks? Print
Sunday, 07 December 2014 11:21

Andrew Biggs had a column in the Wall Street Journal last week complaining that public pension funds were taking excessive risk by having 70 percent to 80 percent of their holdings in risky assets, such as stocks and various alternative investment vehicles. In a few cases, holdings of risky assets apparently cross 80 percent. Biggs argues that this is far too high and that underfunded pension plans are now taking big gambles in the hope of closing their funding gap.

Bigg's basic argument stems largely from an inappropriate comparison of pension investment patterns to individual investment. Biggs tells readers:

"Many individuals follow a rough '100 minus your age' rule to determine how much risk to take with their retirement savings. A 25-year-old might put 75% of his savings in stocks or other risky assets, the remaining 25% in bonds and other safer investments. A 45-year-old would hold 55% in stocks, and a 65-year-old 35%. Individuals take this risk knowing that the end balance of their IRA or 401(k) account will vary with market returns.

"Now consider the California Public Employees’ Retirement System (Calpers), the largest U.S. public plan and a trendsetter for others. The typical participant is around age 62, so a '100 minus age' rule would recommend that Calpers hold about 38% risky assets."

The logic of an individual following this rule is that some point individuals will retire and basically be dependent on their savings and Social Security for all their income. Retirement is usually a pretty sharp break. If the stock market happens to be down at that point, they will be in trouble if they hold lots ot stock, especially if their intention had been to buy an annuity to support themselves in retirement. They will be forced to sell their stock at a depressed value since they won't have the option to wait for the price to recover.

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TPP & TTIP Are Not Your Grandfather's Trade Agreements Print
Sunday, 07 December 2014 11:18

The NYT had an article which discussed the potential political implications of a better than expected economic picture. At one point the article comments:

"The White House’s push for fast-track trade negotiating powers — and eventually for a major Trans-Pacific Partnership trade pact — could be eased by growing confidence in the economy and the nation’s ability to compete internationally."

This comment is essentially a non sequitur. The major pacts up for negotiation, the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP) will have almost no impact on traditional trade barriers in the form of tariffs or quotas. They are about imposing a regulatory structure on federal, state, and local governments that will be more business friendly.

For example, the deals are likely to limit the sorts of environmental and health and safety restrictions that can be put in place. They will also likely limit the ability of governments to put in place privacy restrictions on the use of personal data. And they will increase patent and copyright protections, likely putting in place rules similar to those that Congress tried to impose through the Stop Online Piracy Act (SOPA). There is almost nothing about the likely provisions of the TPP and TTIP that would become more acceptable to the public due to a stronger economy.

This article also includes the bizarre comment:

"The Republican Congress will again want to pursue a balanced budget while also cutting taxes."

If the republicans want to balance the budget and cut taxes, then they want to cut spending. It would have been simpler and more informative to just say Republicans want to cut spending to offset the revenue lost through tax cuts and lower the deficit. 

It is also important to note that economy is not really doing much better than expected. Through the first three quarters of 2014 the economy has grown at a 2.1 percent annual rate. At the start of the year, the Congressional Budget Office projected the economy would grow by 3.1 percent in 2014. Employment has grown more rapidly than projected and unemployment has fallen by more than projected. This is due to lower than expected productivity growth and people dropping out of the labor force.

Tax collections have been higher than expected largely as a result of the run-up in the stock market and the resulting capital gains. Part of the story of the strong stock market has been the redistribution from wages to profits. Unless the we see several more years of strong job growth like the 321,000 job gains in November, workers are not likely to see substantial wage gains. Untill workers start seeing wage growth, and thereby share in the benefits of economic growth, most people will not view the economy as strong.

 
More on the Continuing Weakness of the Labor Market Print
Saturday, 06 December 2014 09:05

The November jobs numbers were unambiguously good news. The economy is moving in the right direction and at a faster pace than we had seen in years. But we have to realize how far the labor market has to go before it makes up the ground lost in the recession.

The simplest and best measure is the employment to population ratio (EPOP), which gives the percentage of the adult population which is employed. This stood at 59.2 percent in November (unchanged from October). This is 1.0 percentage points above the low of 58.2 percent last hit in the summer of 2011, but it is still more than four full percentage points below the pre-recession peaks and more than five full percentage points below the all-time highs hit in 2000.

Many people have dismissed these comparisons by pointing to demographic changes, specifically the aging of the baby boomers. With much of the baby boom cohort now in their sixties, we would expect to see more people retiring, but if we look at prime age workers (ages 25-54) we get a similar story. The OECD reports that the EPOP for this group was 76.8 percent in the third quarter of this year, compared to 79.9 percent in 2007 and 81.5 percent in 2000. People in their thirties and forties have not just suddenly decided that they want to retire. This drop in employment is almost certainly due to the weakness of demand in the labor market.

Some other measures of slack are also useful to note. Some reports have noted the upturn in quit rates as reported in the Job Opening and Labor Turnover Survey. The most recent data puts the quit rate at 2.0 percent compared to a low of 1.3 percent at the trough of the recession. This means that more people are prepared to quit a job with which they are unhappy. But this figure is still down from 2.2 percent as a year-round average in 2006. (We should remember that even in the pre-recession period, the labor market was just getting tight enough to see some wage growth.) The quit rate at the end of 2000 and start of 2001, when the survey began, was as high as 2.6 percent. (When considering these numbers it is important to realize that the shift in employment over this period from low quit sectors like manufacturing to high quit sectors like restaurants would have added at least 0.1-0.2 percentage points to the quit rate.)

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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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