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It's Stupid to Talk About Demography When Countries Suffer from Inadequate Demand Print
Friday, 29 July 2011 05:17

The NYT told us "it's the demography stupid" as the explanation for the economic crisis afflicting the United States and the world. This piece is truly remarkable for its ability to confuse just about every basic economic fact relevant to the crisis.

The fundamental problem facing the U.S. and European economies is the lack of sufficient demand to fully employ their workers and their productive capacity. There are few economists who dispute that if there were more demand, there would be more employment and output.

The key feature of the "demography stupid" story is that the ratio of the elderly to the working population is too high. This means that workers do not have much left in wages for themselves after the taxes or capital earnings of the elderly are pulled out of the economy.

Of course this is 180 degrees at odd with the problem the U.S. and European economies face. If the elderly suddenly went on a huge buying binge it would create millions of jobs for younger workers. In the current economic situation the young would be better off if the elderly either had more money or there were more elderly spending money.

The article also seems oblivious to productivity growth which is by far the most important factor determining living standards. Increases in productivity, which have averaged more than 2.0 percent annually in the United States over the last 15 years, swamp the impact of changing demographics. This is the reason why the United States has been able to have substantial increases in living standards even as it has experienced a continual rise in the ratio of retirees to workers (although this has been partially offset by declines in the ratio of children to workers).

The failure to understand productivity growth also leads to the bizarre claim that China faces a problem because of its slow growing population. China has been experiencing productivity growth in excess of 7 percent annually. At this rate output per worker will nearly quadruple after 20 years.

With this pace of productivity growth, if workers were taxed to the extent necessary to provide retirees with incomes equal to 70 percent of the before-tax wage of the average worker, after-tax wages could still quintuple over 30 years even if the ratio of workers to retirees dropped from 5 to 2 over this period. This is a much faster drop in the ratio than any country has ever experienced. People writing on economic issues for the NYT should know about productivity growth.

This piece also seems to have little understanding of the impact of population growth on living standards. People who have heard of global warming recognize that larger populations will make it more difficult to limit greenhouse gas emissions. Countries that have lower population growth, or even negative population growth, will find it easier to hit emission targets than countries with rapidly growing populations.

Lower population growth also contributes to well-being in ways that are often not accurately measured in national income data. For example, public transportation and recreational facilities are likely to be less crowded. We know that people are willing to pay more for less crowded planes, trains, buses, or beaches, however this quality improvement is not picked up in most price indexes.

Finally, it is striking that the piece relies on former Treasury Secretary and top Citigroup executive Robert Rubin as an authority on this issue. Mr. Rubin is best known for putting the U.S. on a high dollar path that led to the enormous trade deficit and the huge economic imbalances that eventually crashed the economy. He also pushed for the deregulation of the financial industry, which helped to facilitate the financial crisis. As a top executive of Citigroup he personally pocketed over $100 million dollars as the bank plunged into insolvency, eventually requiring multiple bailouts from taxpayers. This is not the sort of person who would usually be presented as an authority.

It's a Debt Ceiling Crisis, Not a Debt Crisis Print
Friday, 29 July 2011 04:45

The NYT headlined a section that gave some facts on the size of the debt, its holders, and the reaching of the debt ceiling, "Charting the American Debt Crisis." Actually, there is no debt crisis. Investors were willing to lend the U.S. government trillions of dollars at very low interest rates. There is no evidence that this was about to change any time soon. The United States and other countries have had much higher debt burdens and still faced no problem borrowing.

The problems at the moment stem from the refusal of Congress to raise the debt ceiling. This would be like a family where one member burned the check book (assuming no Internet banking). The problem is arranging to get new checks, not that there is no money in the account. The NYT should be able to keep this straight.

New York Times Puts Another Anti-Social Security Editorial In the News Section Print
Friday, 29 July 2011 04:10

The NYT again complained in its news section that Congress did not make cuts to Social Security, Medicare, and Medicaid, telling readers that the debt reduction plans under consideration "defer tough decisions." (Here's the previous editorial.) It then turns to Robert Bixby, the executive director of the Peter Peterson-funded Concord Coalition, to tell readers that the real budget problems are the entitlement programs, Medicare, Medicaid, and Social Security.

Of course the reality is that Social Security is projected to be fully solvent for the next quarter century with no changes whatsoever. Even after that date the trustees' projections show that it will be able to pay almost 80 percent of benefits indefinitely.

Medicare and Medicaid show much more rapid cost growth, however the problem with these programs is the projected growth of private sector health care costs. The United States already pays more than twice as much per person for health care as other wealthy countries. This gap is projected to grow in the decades ahead. If the health care system is not fixed it will have a devastating impact on the economy regardless of what is done with the public sector health care program. By contrast, if we fix our health care system, then there is no long-run deficit problem.

Does Everyone Know How Much $2.2 Trillion Is Over the Next Decade? Print
Thursday, 28 July 2011 05:10

It seems unlikely that many people, even among the relatively well-educated readers of the New York Times and Washington Post, have much clue as to how much money is at stake in the battle over the debt ceiling. As some points of reference, the government is projected to spend roughly $46 trillion over the next decade. This means that $2.2 trillion in cuts would be around 4.8 percent of projected spending.

However, the impact is likely to be much larger on specific portions of the budget. If Social Security, Medicare, and Medicaid are left off the table, and most of the cuts come from the discretionary portion of the budget (which includes most government investment in infrastructure, education and research), then $2.2 trillion in cuts would come to 15.2 percent of projected spending. There is also the question of the division of the cuts between domestic discretionary spending and military spending. In the extreme case where all the cuts came from the domestic side of the budget, the cuts would be 32.8 percent of projected spending.

Finally, it is worth asking how large these proposed cuts are relative to the size of the economy. GDP is projected to be almost $200 trillion over the next decade. This means that if the government could raise taxes by an amount equal to 1.1 percent of projected income it would raise enough money to the spending cuts being debated by Congress.

Tell NPR, It's a Debt Ceiling Crisis, Not a Debt Crisis Print
Thursday, 28 July 2011 04:29

NPR misrepresented the nature of the crisis in a comment introducing a Morning Edition segment on the pending default of Jefferson County, Alabama. It referred to the country suffering a debt crisis. This is not accurate.

The problem is one of Congress refusing to raise the debt ceiling. This would be comparable to someone losing their checkbook even if they had still had $20,000 in their account. They may face a problem getting money out of their account until they get more checks (or learn on-line banking), but there is no problem of a lack of a funds.

The United States will be in a comparable situation after August 2. No one thinks that it would have problems getting the money needed to pay its bills by borrowing in financial markets. The only problem is that Congress will have denied the government the legal authority to pay its bills.

Mulligan’s Tale for Older Workers Is Easily Explained by Shifts in Relative Demand Print
Wednesday, 27 July 2011 07:23

I’m glad to see that Casey Mulligan responded to my earlier post responding to his argument that the rise in employment among seniors indicates that the overall drop in overall employment is explained by supply factors, not demand factors.  I countered by pointing out that if this were true, then we would expect that there was decline in earnings for seniors relative to earnings for other workers. The data show the opposite, median weekly earnings for seniors actually rose somewhat more rapidly than for prime age workers (ages 25-44).

Mulligan counters by arguing that if it was a demand shift then it is difficult to explain the fact that the unemployment rate for seniors rose during the recession, albeit not as rapidly as for the population as a whole.

There are two problems with Mulligan’s analysis. First, there need be only a relative demand shift, not an absolute increase in demand to explain the events we are seeing. The idea is that employers are quicker to lay off newer employees, who tend to be younger, and to hold on to older employees. This may be both because they are more experienced and also simply due to institutional factors that lead employers to encourage loyalty.

An analogous situation can be seen with employment patterns among college grads. As can be seen, there has been some increase in employment among college grads since the recession began.


Source: Bureau of Labor Statistics.


However, note also that there unemployment rate has risen, as is the case with older workers.


Source: Bureau of Labor Statistics.

This can easily be explained by a shift in relative demand, where less educated workers are laid off before college educated workers.

The other part of this story for both college educated workers and older workers is that there is a supply issue. There has been a long-term trend of rising employment rates among workers over age 55. Part of this is attributable to the fact that these workers are increasingly educated and are likely to have jobs where they are able and willing to work later in life. And part of the increase is undoubtedly attributable to fact that these workers are less likely to have pensions and retiree health care benefits than in past decades and therefore need to work to pay the bills.

The issue here is what do employment patterns look like relative to the trend. Here it is clear that there has been a falloff in the rate of employment growth. If employment of people over age 55 had stayed on its 2002-2007 trend, it would be about 400,000 higher today. This dropoff is approximately 2.7 percent of current employment among this group.



Source: Bureau of Labor Statistics.

This is consistent with the story that a senior workforce that is more highly educated and more committed to the labor market than was the case in prior years is having trouble finding jobs just like the rest of population. It sure looks like demand to me.

NYT Does PR Push for the Bond Rating Agencies Print
Wednesday, 27 July 2011 05:08

Let's see, if the bond rating agencies lower the credit rating for the U.S. then, if we look at the NYT chart, the interest rate on U.S. Treasury bonds may fall from today's 3.0 percent to 1.1 percent paid by AA- paid by Japan. There is little evidence that the markets pay a great deal of attention to the credit rating agencies. Note that many countries with lower ratings pay considerably less in interest than those with higher ratings.

The piece also includes a bizarre paragraph stating:

"But in the broader economy, if money that might have gone to new purchases or increased investment were instead diverted to higher interest payments, the result could be slower economic growth and a higher jobless rate for the remainder of the year, analysts warn.

Macroeconomic Advisers said the country’s gross domestic product could slow in the second half of this year to 2.6 percent from a forecasted 3.2 percent, and that the jobless rate could end the year at 9.6 percent, above the 9.2 percent expected."

This sounds bad, but then we hear:

"Joel Prakken, chairman of Macroeconomic Advisers, said any change in interest rates would probably be small and not felt for several years."

Okay, so the impact on interest rates and will be small and not felt for several years, but yet we have the same outfit projecting sharply lower growth in the second half of 2011. These are not consistent.

The piece continues with the quote from Prakken:

"'The real story is whether the uncertainty will cause consumers and companies to stop spending,' he said.

On that front, some analysts noted that corporations stopped spending long before the debt-limit debate hit the news.

'Companies clearly have had record cash on the books for a year and a half now,' said Alec Young, an equity strategist at Standard & Poor’s Equity Research. 'Yes, they’re not spending the money, they’re not hiring, but is it because of this issue?'”

No, this ain't what the data show. New orders for non-defense capital goods rose 5.8 percent in May from April. For the year to date they are running 14.0 percent above last year's levels.

The deference in this article to the judgement of the credit rating agencies shows a remarkable ignorance of recent events. At this point, these outfits are one step ahead of the law. They should hardly be dictating fundamental political decisions to the nations.



Is Thomas Friedman Impervious to Facts? Print
Wednesday, 27 July 2011 04:55

The evidence suggests that he is. He gives yet another of his diatribes about the need to cut Medicare, Medicaid, and Social Security in order to advance his grand agenda for the country. Of course Social Security is financed by its own designated tax and is projected to be fully solvent for the next quarter century, so it is a bit bizarre to have this one on the list.

More importantly, the entire budget problem is the result of a broken health care system. This is why serious people point to the need to fix the health care system, which is the real source of the country's projected long-term budget problem. Of course the current shortfall is the result of the collapse of the housing bubble. But Friedman has not heard about that.

Is NPR Doing PR Work for the Credit Rating Agencies? Print
Wednesday, 27 July 2011 04:12

The major credit rating agencies, Moody's, Standard and Poors, and Fitch are best known for rating hundreds of billions of dollars of subprime mortgage-backed securities as investment grade. (They got paid tens of millions of dollars for these ratings.) They are also famous for missing the shipwrecks at Bear Stearns, Lehman, Enron and many other major corporate bankruptcies.

This is important because NPR told listeners this morning that President Obama had to fear not just a default, but also a downgrading from the credit rating agencies. It then had a quote from Jim Kessler, the vice-president of Third Way, a Wall Street-backed think tank. Kessler told listeners that a country with a second-rate credit rating is a second rate country and that a downgrading would be a serious liability for President Obama in his re-election campaign.

This one is pretty far removed from reality even for a major news organization. No poll has ever showed a credit rating to be a major factor in determining voters' decisions. It is difficult to imagine that people who would have otherwise voted for President Obama would instead vote for his Republican opponent because one or more credit rating agencies has downgraded the country's debt.

As a practical matter, the financial markets completely ignored the downgrading of Japan's debt in 2002. It can still pay less than 1.5 percent interest on its 10-year bonds. It is likely that the financial markets respect for the credit rating agencies' judgment has not increased since the collapse of the housing bubble. It is also worth noting that the credit rating agencies are seeking politicians' support in minimizing the impact of the regulations in the Dodd-Frank bill.

This piece also bizarrely asserted that a debt reduction package that included "changes" to Social Security, Medicare, and Medicaid would help President Obama in his re-election campaign. First, the proposals on the table involve cuts to these programs. Politicians use the term "changes" to try to conceal the fact that they want to cut these extremely popular programs. Serious news organizations try to inform their audiences, they are not supposed to use politicians' euphemisms to help conceal what is at issue.

This raises the second point. NPR presented no evidence whatsoever that President Obama would gain electorally if he were to cut programs that draw overwhelming support not only from Democrats, but also Independents and Republicans. If it has some basis for this assertion, it would be interesting to know what it is.

The Housing Bubble Was Visible in the National Data Print
Tuesday, 26 July 2011 12:20

Paul Krugman picks up on a blogpost by Mark Thoma, where the latter argues that academic economists should occasionally listen to those outside the temple. Thoma uses the example of the housing bubble as one case where those outside the temple got it right.

Krugman correctly notes that Robert Shiller, who as a Yale economics professor certainly qualifies as an academic economist, was one of the first (after me) to get the bubble right. He also reminds readers that he also had warned of the bubble. (As I recall, the first time was in 2002, after some other economist raised the issue.) However, he adds that it was necessary to look at local data focusing on areas where the bubble was concentrated.

Actually, it was easy to see the bubble in the national data. Local data could be helpful (obviously prices were more out of line in some areas than others), but there are cases of real house appreciation in locations that become more popular for whatever reason. In principle, an examination of the fundamentals of these markets should be able to reveal a bubble, but the national market provides a very useful anchor. When real house prices nationwide had risen by 30 percent in real terms, after a century of just tracking inflation (I could only trace this pattern for 43 years back in 2002), there was a very good reason to believe that there was a bubble.

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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.