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How Many Jobs Does it Take to Hold the Unemployment Rate Constant? Print
Saturday, 06 November 2010 08:08

This one should not be all that hard but the papers have numbers all over the place. Let's turn to our old friend, arithmetic, to shed some light on the topic. The Congressional Budget Office tells us that the labor force is growing at the rate of 0.7 percent a year. The current size of the labor force is 153.9 million. This implies that we need about 1.1 million jobs a year to keep even with the growth of the labor force. (The number would be a bit less if the 6 percent share of self-employed in the labor force held constant.) That translates into a bit over 90,000 a month.

The 151,000 jobs reported for October is about 60,000 more than is needed to keep the unemployment rate from raising. At this pace it would reduce the pool of unemployed workers by 720,000 over the course of a year. With a gap of about 10 million jobs at present, this rate of job growth would fill the gap in around 14 years.

In order to fill this gap in a reasonable period of time, say 3 years, we would need job growth of 370,000 a month. This would bring the economy back to normal levels of unemployment by late 2013, six years after the onset of the recession.

 

 
Tell the Post: Representative Cantor Cannot Acknowledge Something That is Not True Print
Saturday, 06 November 2010 07:53

In pushing its editorial line that Social Security and Medicare must be cut the Post told readers in a news story that:

"Cantor acknowledged that any effort to solve the nation's budget problems 'is going to have to deal with entitlements' - big, popular programs such as Social Security and Medicare (emphasis added)."

A real newspaper would have used a term like "asserted" or "claimed." Of course it is not necessary to deal with programs like Medicare and Social Security to fix the country's projected long-term budget problems as can be easily shown. It is necessary to fix the country's health care system. If per person health care costs in the United States were comparable to costs in other wealthy countries then our budget problems would be easily manageable.

 
NYT Gives Pointless Numbers on California's Budget Print
Saturday, 06 November 2010 07:39

In an article on the challenges faces Jerry Brown, California's newly elected governor, the NYT tells readers that the state faces a $20 billion dollar budget deficit. It notes that Brown left his successor with a $1.8 billion deficit when he left office in 1982.

These numbers will be completely meaningless to almost all of the NYT's readers since few have an idea as to how large California's economy is today compared with 1982. The current deficit is equal to roughly 1.1 percent of $1.8 trillion California's gross state product (GSP). By contrast, the $1.5 billion deficit in 1982 would have been equal to a bit less than 0.4 percent of California's $390 billion GSP in that year. This means that the burden posed by California's current deficit is almost three times as large as the burden that Brown passed on to his successor.

Reporters are supposed to have time to look this stuff up, readers don't. 

 
Should Bill Gates Be Able To Collect His Federal Flood Insurance? Print
Friday, 05 November 2010 05:49

I have no idea if Bill Gates has any land where he may have taken out flood insurance that was provided by the federal government, but let's suppose that he did. If there was a flood, should he be able to collect on his insurance? After all, he certainly doesn't need the money.

This probably seems like a nutty question. After all, he paid for the insurance, why shouldn't he be able to collect on it like anyone else?

While that seems pretty straightforward, for some reason the same question apparently causes people great pain when applied to Social Security. Today Floyd Norris labors over the fact that rich people will collect Social Security benefits. Of course, they collect much less relative to what they paid in than poor people, so the structure of the program is progressive. But, they do get something back, so even Bill Gates and Warren Buffet will be able to pocket around $2,400 a month.

The reality is that the genuinely affluent get very little money from Social Security because they are few of these people. The discussion about cutting benefits for "affluent" retirees is aimed at people like school teachers and firefighters who may have had incomes in the range of $50,000 to $70,000. Such incomes don't fit the usual definition of "affluent," but folks use different logic when it comes to Social Security.

 
Tell NPR, Consumers Are Spending Print
Friday, 05 November 2010 05:39

Morning Edition told listeners that consumers are not spending because they are worried about their jobs. While they undoubtedly are worried about their jobs, they are spending nonetheless. The savings rate for the 3rd quarter was 5.3 percent, well below the post-war average, which is close to 8.0 percent. This level of consumption is a falloff from the peak housing bubble years when the saving rate fell to near zero, but it is still higher than we should expect when house prices fully adjust.

The point is important because it is ridiculous to expect increased consumer spending to lead a recovery. Households, especially those near retirement, must rebuild their wealth after seeing close to $6 trillion in housing wealth disappear. Those who bemoan the lack of consumption apparently still have not recognized the housing bubble and its impact on the economy.

 
Real Estate Prices Have to Fall So That They Can Then Rise and Boost the Economy Print
Friday, 05 November 2010 05:20

That seems to be the argument in a Washington Post column by David M. Smirk. I'm not kidding, here is the essence of the argument laid out in the 3rd and 4th paragraph of the piece:

"A more compelling theory [than inadequate stimulus] is that global assets remain overvalued. Specifically, the price of real estate debt and sovereign debt on bank balance sheets, propped up by government actions, remains too high. The economy can't gain traction until these prices reflect realistic valuations.

Asset prices are important because America has never had a recovery without residential housing leading the way. Real estate values are still high by historic standards. The value of all real estate is roughly $18 trillion, with mortgage debt about $10 trillion. The ratio of mortgage debt to GDP value is 56 percent. In the 1960s and 1970s, the ratio was 29 percent. In the late 1990s it was only 38 percent."

Smirk is right that real estate is still over-valued, but it is hard to understand how a decline in real estate prices will boost the economy. What matters for a residential housing lead recovery is the need for residential housing. This results from excess demand for housing. We have record levels of vacant housing in the country right now. We will have to see quite a drop in housing prices in order to fully absorb the existing supply.

This gets back to the mortgage debt part of the story which has nothing to do with current real estate values, but rather with their past values. Of course the mortgage debt to GDP ratio is too high, that is what happens when you have a housing bubble. People borrow against inflated housing values. Unfortunately, the Washington Post did not have room for columns from people making this point in the years from 2002-2006 when the housing bubble was growing.

It is not clear how Smirk thinks that a drop in housing prices helps this picture. This will worsen the debt burden of homeowners, leaving them with less wealth thereby further reducing consumption. The decline in house prices must happen (we can't sustain bubble-inflated prices indefinitely), but it makes the immediate economic situation worse, not better.

In the real world, this recovery cannot be led by housing construction because this is not the traditional sort of recession. The normal recession comes about because the Fed raises interest rates to slow the economy. This leads to a plunge in housing construction creating pent-up demand. When the Fed decides to take its foot off the brakes and get the economy going again it just lowers interest rates, triggers the pent-up demand for housing and the economy takes off.

This recession was the result of the collapse of a housing bubble which led to a huge excess supply of housing. Interest rates are also just about as low as they can possibly be, taking away the option of further declines by simple Fed actions.

Apparently Smirk and the Post failed to notice the difference between this recession and prior downturns. Therefore we get this attack on Obama and Paul Krugman that is incoherent in just about every way.

 
Does it Take Two Days for News from the U.S. to Reach Asian Financial Markets? Print
Friday, 05 November 2010 04:48

That is what the NYT is asking readers to believe when it told them that a rally in Asian markets on Friday was due to the Fed's decision on Wednesday to engage in another round of quantitative easing. Usually, analysts think of markets as forward looking, anticipating events. The NYT is asking us to believe that the Asian markets are still rising in response to a widely anticipated move by the Fed that was announced two days earlier.

It is worth noting that explanations for movements in financial markets is always guess work. The markets do not tell anyone why they moved in the way they did. The movements are the result of millions of individual decisions, some carrying much more weight than others. In some cases it may be evident why a particular movement took place (e.g. a high inflation number leading to a drop in bond prices), but in many cases the explanations are an analyst's interpretation, which may well be wrong.

 
Budget Deficits and Trade Deficits: NYT Reporters Do Not Understand National Income Accounting Print
Thursday, 04 November 2010 07:11

The NYT seems very concerned that the dollar will fall if the budget deficit is not reduced. Usually economists believe that a large budget deficit will increase the value of the dollar. The logic is that higher budget deficits are believed to cause higher interest rates, which makes holding bonds and other dollar denominated assets more attractive. This is how a budget deficit can cause a trade deficit.

The mechanics of this process are somewhat dubious in that there is very little relationship between budget deficits and trade deficits. (In 2000, when the country was running a huge budget surplus, we also had a large and rapidly growing trade deficit.) However, there is a relevant accounting identity which is always true. The trade surplus is equal net national savings. This means that if we have a trade deficit, then net national savings must be negative. The implication of a large trade deficit is that either public savings must be very low or negative (i.e. a large budget deficit) and/or we must have very low private savings. There is no possible way around this accounting identity.

This means that if the U.S. has a large trade deficit, as it currently does, then it must be the case that either households have very low saving or the country has a budget deficit. At the peak of the housing bubble, private saving was very low, since households spent based on their housing bubble wealth. Now that much of this bubble wealth has disappeared with the collapse of house prices, saving has moved back toward more normal levels. This means that to sustain the same level of output, the budget deficit must rise. There is no way around this identity.

A drop in the value of the dollar is the main mechanism for adjusting the trade deficit. This decline is exactly what would be expected in a system of floating exchange rates. However, the people who are concerned about the decline in the dollar, and also want the U.S. government to reduce its budget deficit, must want to see the level of output in the United States to fall and its unemployment rate to rise. That is the only plausible way that the accounting identities can be kept in balance.

The NYT should have pointed out to readers that the people concerned about the decline in the value of the budget deficit lowering the value of the dollar apparently want to see an increase in the unemployment rate in the United States.

This article also includes inappropriate adjectives, like "huge" before "budget deficit" and "expensive" before "entitlement programs." Such adjectives should be left to the opinion page. This would be a more accurate and shorter article without them.

 
Why Does the NYT Think That Politicians Are Philosophers? Print
Thursday, 04 November 2010 05:24

It would seem pretty obvious that politicians respond to the concerns of interest groups. A successful politician manages to garner the support of enough powerful interest groups to get the money and votes to put himself or herself in office. They don't have to pass tests in political philosophy.

Therefore it is peculiar that a NYT article would refer to the "the core philosophical disagreements" between Republicans and Democrats. It is not clear what this means since there is little evidence that either side is guided by philosophy rather than political expediency. Philosophy does not win elections.

 
Doesn't Representative Ryan Know that Firing Workers Slows the Economy? Print
Thursday, 04 November 2010 05:15

That would have been a reasonable question for the Post to ask him after he said:

"We should not allow any tax increases, period, because it's going to slow the economy down ...If you want to get this deficit down, you need two things: economic growth and spending cuts."

While tax increases in a depressed economy so would firing government workers or other forms of spending cuts. Both actions take money out of people's pockets at a time when the economy desperately needs demand.

Representative Ryan should know this fact, but the quote printed by the Post implies that he doesn't. Since Mr. Ryan is in line to be head of the House Budget Committee this is the sort of gaffe that should draw huge attention. It is about five orders of magnitude more important than the sort of comments (e.g. then Senator Obama's reference to "bitter" working class whites in the campaign) that tend to draw attention in the media.

 
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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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