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Robert Samuelson Trots Out the Second Great Depression Bogeyman Again Print
Sunday, 02 January 2011 22:15

The economy is doing well compared with the Great Depression, but not by any other measure. This is why Robert Samuelson and other spokespeople for the rich and powerful are so anxious to raise the prospect of the Great Depression. It implies that we should somehow be thankful for 9.8 percent unemployment, as he said in his column today. As informed observers know, this is a joke.

In a worst case scenario where the banking system did literally collapse, the Fed could have brought it back to life through its unlimited ability to print money. The first Great Depression was not the result of bad decisions at its onset. Rather it was the result of a decade of inadequate policy response. If the government had spent large amounts of money to boost the economy, as it finally did to fight World War II, the depression would have ended much sooner.

Samuelson uses the second half of his column to repeat Fox News talking points about how firms are not hiring because of concerns over the cost of the health care reform bill. If the Post required its columnists to have some evidence for its assertions Samuelson would have been forced to show that the firms most affected by the coverage requirement in the bill are more reluctant to hire than other firms. This would presumably mean that firms with just under or just over 50 employees are hiring fewer workers than other firms. This would be the case because almost all larger firms already provide health insurance for their workers and smaller firms will not be affected by the coverage requirements in the bill. Of course the data does not show any weaker hiring performance in firms of near 50 than in firms of larger or smaller size.

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When Obama/Bush Work to Increase Boeing's Profits, The NYT Tells Us They Are Concerned About Jobs Print
Sunday, 02 January 2011 21:21

In reporting on a WikiLeaks cables showing U.S. State Department officials acting as sales agents for Boeing, the New York Times decided to tell readers that the real motivation was high-paying jobs for American workers. This leak might be seen as rather embarrassing since most small businesses cannot count on top State Department officials spending their time pushing their product. These businesses have to pay for their own marketing.

However, the NYT threw in the comment:

"It is not surprising that the United States helps American companies doing business abroad, given that each sale is worth thousands of jobs."

Of course most immediately each sale means tens of millions of additional profit for Boeing. The NYT presents no basis whatsoever for its assertion that the concern for American jobs was a larger motivational factor for the State Department sales pitches than the concern for Boeing's profits.

It is also worth noting that in the standard trade models that economists use to argue the merits of lower trade barriers, each sale is not worth "thousands of jobs." The standard trade models assume a fully employed economy. In these models, at best an additional sale could mean that a small number of workers are employed at modestly more productive jobs, leading to small gains in wages and efficiency. If administration officials actually believed that each sale of a Boeing jet abroad means thousands of jobs then they do not accept the standard economic arguments that are used to push for trade agreements. 

 
No One Told the NYT About the Housing Bubble Print
Sunday, 02 January 2011 09:31
A chart accompanying an NYT piece on the difficulty of saving shows the sharp decline in the national savings rate in the 90s and the 00s. The piece suggests that this is due to the increased difficulty that people have in saving. The more obvious explanation is that the wealth created by the stock bubble in the 90s and the housing bubble in the last decade led people to consume more and save less. The effect of wealth in increasing consumption is one of the most widely accepted behavioral effects in economics.
 
Has Anyone at the NYT Heard of Drug Patents? Print
Sunday, 02 January 2011 09:20

It seems not from this article on how drug companies are now giving out coupons to cover part of the patients' co-payment for expensive brand drugs. The logic is simple: the patent monopoly allows the company to sell the drug for a price that could be several hundred times its cost of production. This gives it an enormous incentive to try to get patients to use their drug and for doctors to prescribe it. This means that it can be very profitable to give out coupons that get around the co-payment which insurers charge as a disincentive to use expensive drugs.

This is the sort of gaming that economic theory predicts would result from government intervention in the market, like a patent monopoly. If this sort of behavior occurred in response to a government intervention intended to help low and moderate income people, like for example rent controls, the coverage would likely include comments from economists ridiculing such ill-advised interventions in the market. However, this piece includes no discussion whatsoever of the fact that the resources wasted in this gaming, and the possible negative health outcomes from people using less than optimal drugs, are entirely the result of patent monopolies. None of this would be occurring if drug research was financed through other mechanisms and drugs sold at their free market price, which would typically be less than $10 per prescription.

 
NYT Warns that Southern Europe Suffers from a Disastrous Shortage and Surplus of Labor Print
Saturday, 01 January 2011 22:28

The NYT can't quite decide whether the southern European countries (Spain, Portugal, Italy and Greece) suffer from too many or too few workers, but it is anxious to tell readers that the situation is disastrous. The article begins by telling the story of a young Italian lawyer who can't find a job commenting that:

"the most highly educated generation in the history of the Mediterranean hits one of its worst job markets."

This is the story of too many workers and too few jobs. It sounds and is really bad.

But then the NYT flipped 180 degrees and decided that the real problem is the opposite, too few workers:

"experts warn of a looming demographic disaster in Southern Europe, which has among the lowest birth rates in the Western world. With pensioners living longer and young people entering the work force later — and paying less in taxes because their salaries are so low — it is only a matter of time before state coffers run dry."

Okay, is the problem too many workers with too few jobs or too few workers, with too much demand? Either one of these stories is possible, but both are not, or at least not at the same time.

To help clarify matters, the NYT gives us this quote from Boston University Economist Lawrence Kotlikoff:

"If these [low] fertility rates continue through time, you won’t have Italians, Spanish, Greeks, Portuguese or Russians, ... I imagine the Chinese will just move into Southern Europe.”

According to Professor Kotlikoff, there should be a huge shortage of young workers, which would drive up wages, and plunging demand for homes, which will make housing cheap. This sounds like a great story for young people in southern Europe, as long as they are not prejudiced against the Chinese.

But then we get back to the labor surplus story:

"'This is the best-educated generation in Spanish history, and they are entering a job market in which they are underutilized,' said Ignacio Fernández Toxo, the leader of the Comisiones Obreras, one of Spain’s two largest labor unions. 'It is a tragedy for the country.'”

Then we shift back to a simultaneous surplus and shortage of labor with another quote from Professor Kotlikoff:

"For Dr. Kotlikoff, the solution is simple: 'We have to change the labor laws. Not gradually, but quickly.'” But the piece then complains that changes are coming slowly:

"New austerity measures in Spain, where the unemployment rate is 20 percent, the highest in the European Union, are further narrowing the employment window. Spain has pledged to raise its retirement age to 67 from 65, but incrementally over the next 20 years.

"'Now people are being sent into early retirement at age 55,' said Sara Sanfulgencio, 28, who has a master’s degree in marketing but is unemployed and living in Madrid with her mother, who owns a children’s shoe store."

Okay, so if the retirement age were instantly raised to 67, as this article is advocating, how is this supposed to create more jobs for young people like Ms. Sanfulgencio? In a context of an economy operating well below full employment it would seem her job prospects are improved by reducing the competition from older workers, which means keeping the retirement age low.

In short, the NYT clearly does not like the economic policies in southern Europe and it is anxious to tell readers that they are disastrous, it is just not sure why.

One important item missing from this picture is the European Central Bank (ECB). It could be buying up large amounts of public debt from Spain and other European countries both to boost demand and to alleviate their debt burden. (The interest on debt held by the ECB could be refunded back to European governments, thereby imposing no burden on their taxpayers.) This could help to increase employment. Also, if it leads to a modest increase in the inflation rate from its current new zero level, it would alleviate debt burdens and help to facilitate the necessary process of real wage adjustments between countries. 

It is also worth noting that the current downturn is the result of the incompetence of the ECB which opted to ignore the growth of dangerous housing bubbles in Spain, Ireland and elsewhere. Remarkably, no one at the ECB lost their job or probably even missed a promotion as a result of this disastrous policy failure.

 
Public Pension Problems: No One Told the NYT About the Financial Crisis Print
Saturday, 01 January 2011 22:22

The NYT apparently has not learned about the financial crisis that followed in the wake of the collapse of the housing bubble. That is the only possible conclusion that readers can take away from an article about anger at public sector workers that failed to note that the plunge in the stock market in 2008-2009 was the major cause of the shortfalls in public sector pensions. 

Certainly if the reporters and/or editors at the NYT had known about the financial crisis and the stock market plunge it would have been featured prominently in this piece.

 
Contrary to the NYT's Assertion, Japan Does Not "Face a Looming Demographic Squeeze" Print
Saturday, 01 January 2011 12:25

For some reason the NYT wants to scare its readers about Japan's economic situation, warning that the country faces a "demographic squeeze" because its population is declining. Simple arithmetic shows that this is nonsense.

The article tells readers that the share of the population over 65 is projected to rise from 25 percent in 2010 to 40 percent in 2050. Given that roughly 20 percent of the population is under age 20, this implies that the current ratio of people ages 20-65 to people over age 65 is approximately 2.2 to 1. Assuming the under 20 portion falls to 15 percent of the population by 2050, in that year the ratio will be 1.4 to 1.

If productivity growth averages just 1.5 percent annually (it has been averaging more than 2.0 percent in the U.S. over the last 15 years), then output per worker will be more than 80 percent higher in 2050 than it is today. If the average retiree currently consumes 70 percent as much as a prime age worker, then this increase in productivity would allow retirees in 2050 to enjoy a 50 percent rise in living standards above current levels, while still leaving workers almost 30 percent better off.

The situation will be even better insofar as more workers are pulled into the labor force. As this article notes, because of weak demand, many younger workers cannot find jobs. If Japan were facing a "demographic squeeze" then young workers will have no problem finding jobs since there will be a shortage of workers. Also, because of the longevity and relative good health of many older Japanese, it is likely that many people will opt to continue working past age 65.

The decline in population is in fact a benefit in many respects for Japan. It is a very crowded island with expensive land prices. A falling population will reduce the pressure on land making housing more affordable. It will also reduce congestion in cities. In addition, the decline in population will make it easier for Japan to meet commitments for reducing greenhouse gas emissions, if countries are ever held responsible for the contributions to global warming.

 
If Congress Was Not Dominated by Protectionists Medicare Costs Would be Easily Manageable Print
Friday, 31 December 2010 15:10

USA Today ran a piece warning of the projected rise in Medicare costs associated with the baby boom cohorts turning 65, the age of eligibility. While the article told readers that the projected increase in Medicare costs will eventually exceed the program's revenues, it would have been worth mentioning that Medicare would be easily affordable if the U.S. did not pay more than twice as much per person for health care as other countries.

There are simple ways in which the United States could benefit from the lower cost of health care in other countries but the protectionists in Congress refuse to consider such options. Unfortunately this article relied exclusively on protectionists as sources.

 
Ryan Avent at the Economist Still Has Not Heard of the Housing Bubble Print
Friday, 31 December 2010 08:37

It would be such a great thing if the people who made and wrote about economic policy learned third grade arithmetic. Then they would be able to recognize little things like $8 trillion housing bubbles before they reach such enormous sizes where their collapse can wreck the economy.

The latest person flaunting his ignorance in this area is the usually sensible Ryan Avent who tells us that, "I find the arguments for another big drop in national prices to be rather implausible."

Avent gets many things wrong in making his case. Among the biggest is his assertion that price to rent ratios are about normal. In fact rents are roughly at the same level they were at in the mid-90s in real terms, while real house prices are still close to 30 percent above their mid-90s level. This basic measure suggests that prices still have considerable room to fall.

Avent's effort to explain the price decline reported in recent months' data on short-term economic fluctuations makes no sense. House prices have never responded in any significant way to short-term economic conditions. House prices have never fallen in the past because of 3-4 months of weak job growth or soared because of a similar run of strong job reports. In other words there is zero reason to believe that house prices would be moved in any noticeable way by 1-2 good or bad quarters.

If you look at the Case-Shiller data there is a very simple story. The first time buyers credit supported the market first and foremost by pushing up prices in the bottom tier. This support disappeared when the credit disappeared. Prices in the bottom tier have been plummeting in the few months of post-credit data that we have available. In the four available months since June, prices in the bottom tier fell by 6.4 percent in Seattle, 8.0 percent in Portland, 12.5 percent in Minneapolis, and 23.0 percent in Atlanta.

The logic is that the credit most immediately affects the bottom tier. (This is where first time buyers mostly buy.) It will soon feed over into the higher end homes, since the people buying these homes are selling homes in the bottom tier.

In terms of the fundamentals, the basic story is that we continue to have a record supply of vacant units. It was an astounding failure of the economics profession that almost no one in a prominent position was able to see an enormous and dangerous development like the housing bubble. It shows the incredible lack of controls within the profession that no one seems to have paid any career consequence for this failure.

As economic theory would predict,  when there are no negative consequences for poor performance, we see more of it. That appears to be the case as the people who write and talk about the economy still don't seem to have a clue about the housing bubble and its impact on the economy.

 
People Were Not Signing Home Sales Contracts in November 2009 to Get the Tax Credit Print
Thursday, 30 December 2010 18:02

The NYT told readers that the November 2010 index for pending home sales was:

"5 percent lower than November 2009 when buyers were scrambling to close purchases to qualify for the first federal tax credit."

Actually, the credit that expired in November of 2009 was based on completed sales. It typically takes 6-8 weeks from when a home is put under contract until the sale is completed. As a result, no one who signed a contract in November of 2009 could have reasonably expected to complete the sale in time to qualify for the tax credit. The actual surge in contracts was in September and October. Pending homes sales in November of 2009 were 18 percent below the October level.

 
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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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