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The Mysteries of Labor Composition Print
Monday, 14 March 2011 11:10

David Leonhardt had a blogpost last week that left some of us here at CEPR stumped. It had two graphs, one on top of the other, showing patterns in wages since the start of the recession. The top graph showed wage gains by educational attainment. This showed that college grads had an increase of about 1.5 percent in their real weekly earnings, while everyone else saw modest declines. The second graph showed real wage growth by income cutoffs. Those at the 90th percentile saw real wage gains of 8.0 percent, but everyone else also saw modest wage gains as well.

At first glance, these seemed inconsistent and we thought that Leonhardt had made a mistake. After checking his data, we saw that he was exactly right. The explanation was a change in the composition of the employed workforce. There was a sharp drop in employment among workers without high school degrees and those with just a high school degree between 2007 and 2010. On the other hand, the number of people employed who had advanced degrees actually increased slightly.

 

educational_mix2_31489_image001

Source: Bureau of Labor Statistics.

 

What happened here is that the change in composition means that much of the bottom portion of the workforce is no longer employed. Therefore the 90th percentile worker in 2010, might have been the 92nd percentile worker in 2007. And, in 2007 the 92nd percentile worker earned 6.3 percent more than the 90th percentile worker.

So, what looks like a big rise in wages for higher-end workers is in fact the result of comparing different workers. This is worth keeping in mind. The wage growth at the middle and lower-end of the income distribution in the late 90s looks even better when we consider that many less educated workers found jobs in this period. 

 
Washington Post Decides That the Markets Are Wrong About Japan Print
Monday, 14 March 2011 08:59

The financial markets seem relatively unconcerned about Japan's fiscal situation as evidenced by the fact that investors are willing to buy 10-year Treasury bonds from the Japanese government at an interest rate around 1.4 percent. Nonetheless, the Washington Post told readers that:

"Japan is already groaning under government debt equal to twice its yearly economic output."

As a result of the low interest rate on its debt, Japan's interest burden is actually smaller measured as a share of GDP than the interest burden in the United States. Also, close to half of Japan's debt is held by its central bank. The interest paid on debt held by the central bank is refunded to the government and therefore imposes no burden on Japan's budget.

Also, Japan has no fears whatsoever of inflation. As the article notes toward the end, many forecasters project that the economy will weaken further as a result of the earthquake/tsunami and cause another burst of deflation.

 
What's Ideological About Wanting the Government to Give Money to Rich People? Print
Monday, 14 March 2011 04:46

E.J. Dionne had a good piece pointing out that the country is not "broke" as many of the deficit hawks have been claiming. Dionne rightly points out that per capita income is continuing to rise; the problem is that the bulk of income gains have been going to those at the top. Dionne rightly identifies the claim of national poverty as part of an "excuse" for "policies to lower taxes on well-off people and business while reducing government programs."

However, Dionne bizarrely describes this effort as "ideologically driven." It's not clear what ideology Dionne sees here and he certainly doesn't identify one. The more obvious story is that wealthy people pay for the political campaigns of politicians who will support give policies that will give them more money. Ideology plays no more obvious role in this scenario than it does in the operations of the Mexican drug cartels.

 
Those Damn Chinese Are Going to Buy Our Wheat Print
Sunday, 13 March 2011 08:29

The Post really outdid itself in running confused pieces when it ran a column by Lester Brown in its Outlook section warning us that China will start buying our grain in massive quantities. It's common for a column to get 2 or 3 things wrong, but just about every single assertion in this column is mistaken.

To start with, we are supposed to be concerned about China's ability to buy our food based on its holdings of $900 billion in Treasury bonds. Actually, as a country, China's ability to buy our wheat depends on its holding of any U.S. asset. It would have just as much ability to buy U.S. wheat if it did not have a single dollar in Treasury bonds, but instead held $900 billion worth of the stock and bonds of private corporations. (Most estimates put China's holdings of U.S. assets considerably higher than this.)

This distinction is important because U.S. indebtedness to China is a function of the trade deficit not the budget deficit. Many people deliberately promote this confusion in order to use xenophobic fears to promote their deficit reduction agendas. In reality, those who are concerned about indebtedness to China and other countries should want to see the value of the dollar decline. If we eliminated the budget deficit completely, and somehow maintained full employment, we would be borrowing just as much money from China and other countries each year, if we did not lower the value of the dollar. Conversely, if we lowered the value of the dollar to the point where our trade was balanced, the country would not be borrowing a penny from China or anyone else, on net, even if the federal government was still running large deficits.

This logic is also important in the threat that we would supposedly face if we tried to restrict grain sales to China. Brown tells us that China might then boycott our Treasury auctions.

Let's carry this one through for a moment. We have been pushing China to raise the value of its currency relative to the dollar. The way that they keep the value of their currency down is by using the dollars they earn from their trade surplus to buy Treasury bonds instead of just dumping them on international currency markets and allowing the dollar to fall. Of course if the dollar fell, then our trade deficit with China and other countries would shrink. 

So, China will threaten to do exactly what we have been asking them to do -- they will stop propping up the value of the dollar against the yuan. This is supposed to have us scared.

Finally, the real bad news in the picture -- China pushing up the price of wheat -- actually is not scary for people in the United States at all. The U.S. currently produces about 2 billion bushels of wheat a year, roughly half of which is exported. Prices have fluctuated a great deal in recent months, but let's start with a price of $10 a bushel, the higher end of the recent range.

At this price, we spend roughly $10 billion a year on the wheat we consume domestically and get $10 billion a year from the wheat we export. Suppose the buying by the Chinese doubled the price to $20 a bushel. This means that the wheat we consume would cost us another $10 billion a year. Meanwhile the wheat we sell overseas would allow us to buy twice as many imports as it had previously. The $10 billion rise in food prices would come to a bit more than $30 per person per year -- less than 10 cents a day. Are you scared yet?

Even if we said that the price of wheat tripled because of the Chinese and then doubled this impact because of China's buying up of corn, soy beans and other crops, we still only get 40 cents per person per day. In short, higher food prices are not going to be bad news for people in the United States.

Where this column misses the boat is that higher food prices will be a problem for the world's poor who must subsist on just 1-2 dollars a day. Hundreds of millions of people in Sub-Saharan Africa and other poor regions of the world will face serious consequences if world food prices rise substantially. Remarkably, these people did not find their way into this column.

 
Public Pensions: Arithmetic Please Print
Saturday, 12 March 2011 09:38

It's so fashionable these days to beat up on public sector pensions that the rules of arithmetic no longer appear to pose a binding constraint. The New York Times concluded an article complaining about the cost of state pension with a quote from Sylvestor Scheiber, one of the pension analysts advocating cuts in public pensions:

"By the time the typical private-sector worker has retired, the teachers, the highway patrolmen and these folks have already gotten $200,000, $300,000, $400,000 in pensions.”

The comment refers to the fact that many state workers can receive full pension benefits while still in their 50s. The immediate point of reference is Wisconsin, where it tells us that police and firefighters can retire at age 53 if they have 25 years of service, while other workers can retire at age 57 if they have 30 years of service.

The article does not tell us what percent of state employees actually retire at these ages. It is likely that most state employees don't have 30 years of service by the time they reach age 57, so they would have to work longer to receive their full pension benefit. However, even if we do assume that an employee other than a police officer or a firefighter (i.e. the "teachers and these folks") retires at a relatively early age, they will not get the $200,000, $300,000, $400,000 in pension benefits that Mr. Scheiber touts.

According to the article, the average pension for public employees in Wisconsin is $26,000. (Many public employees do not get Social Security, so their pension is likely to be the vast majority of their retirement income.) Most workers start taking their Social Security benefits before they reach age 63, which creates a gap of less than 6 years between the lowest age at which most Wisconsin public employees can draw their benefits and the age at which most private sector workers have retired.

If we multiple 6 times the average annual pension of $26,000 we get $156,000, as the amount of benefits that public sector workers can receive before private sector workers typically retire. This is considerably less than the $200,000, $300,000,  $400,000 numbers tossed out by Mr. Scheiber. And this would only apply to a worker who had 30 years of employment with the state by the time they reached age 57. A worker that first started working for the government at age 30 would have to wait until age 60 to retire with a full pension in Wisconsin, giving them less than three years of additional benefits.

It is also important to note that public sector workers pay for these benefits with lower wages than their private sector counterparts. Including all benefits, public sector workers still receive slightly lower compensation than their private sector counterparts after controlling for education and experience. This picture would be little changed even if the calculations of public sector compensation were adjusted upward by increasing the pension contribution 20-25 percent to account for the current underfunding of pensions.

 
The Washington Post Claims that Multinational Drug Companies Tried to Use Their Market Power to Pressure India to Change Its Patent Policy Print
Saturday, 12 March 2011 08:37
According to the Washington Post, multinational drug companies retaliated against India for having weak patent protections by pulling out of the country in the 1970s. The Post seems to imply that this decision could have been motivated by economics. That is not true. If a drug company is engaged in reverse engineering it gains no particular advantage from having the manufacturing facilities located within India. If drug companies left India because of its patent policy, as the Post claims, then the motivation was political -- to pressure India to change the policy -- not economic. 
 
The Economist Wants to Scare You Into Supporting Cuts to Social Security Print
Friday, 11 March 2011 17:46

That's why they show a scary looking graph that shows "entitlement" spending (Medicare, Medicaid, and Social Security) going through the roof. They do this even though everyone who has looked at the issue knows that the real problem is health care spending. The U.S. spends more than twice as much per person as other wealthy countries.

The problem is our broken health care system. Here is the graph that honest people use.

 
FactCheck.org Does Not Have Access to the Internet Print
Friday, 11 March 2011 11:42

That is what this project of the Annenburg Public Policy School told readers today when  it backed up its earlier piece claiming that Social Security does contribute to the budget deficit. If did have access to the Internet, FactCheck.org could have easily discovered references to the "on-budget" budget in any budget document it chose to examine (e.g. here and here). The political figures who FactCheck.org criticized in its initial post were obviously referring to this measure of the budget deficit, as was pointed out in a previous note.

An organization engaged in fact checking statements by public figures should probably invest in an Internet subscription so that it can more accurately do its work.

 
Charles Krauthammer Doesn't Understand How Bonds Work Print
Friday, 11 March 2011 08:15

Charles Krauthammer is very upset that Jack Lew, President Obama's budget director, is saying true things about Social Security and the budget. Krauthammer is troubled by the fact that Lew said that Social Security does not add to the deficit.

Lew based his claim on the law governing Social Security's operations, it can only spend money that has in its trust fund. This money comes either from the designated Social Security tax or from the bonds and interest on the bonds that were bought using the surplus from prior years. No money can come from general revenue.

This seems pretty simple, but not to Krauthammer:

"When your FICA tax is taken out of your paycheck, it does not get squirreled away in some lockbox in West Virginia where it's kept until you and your contemporaries retire. Most goes out immediately to pay current retirees, and the rest (say, $100) goes to the U.S. Treasury - and is spent. On roads, bridges, national defense, public television, whatever - spent, gone.

In return for that $100, the Treasury sends the Social Security Administration a piece of paper that says: IOU $100. There are countless such pieces of paper in the lockbox. They are called "special issue" bonds.

Special they are: They are worthless."

It's nice that Mr. Krauthammer thinks that government bonds are worthless. (I have a standing request that he, or anyone else, pass along any government bonds that he considers worthless. We will use them to support CEPR.) While he is welcome to believe anything he wants, the bonds held by the Social Security trust fund are backed by the full faith and credit of the U.S. government. Krauthammer may want to default on bonds that belong to the nation's workers, but his desires are not the same as reality.

Selling these bonds to fund Social Security no more raises the deficit than the decision of a rich person to sell bonds to finance their consumption raises the deficit. The deficit was incurred when the money was lent to the Social Security trust fund in the first place. 

The size of the deficit, including the money borrowed from Social Security -- the on-budget deficit -- is reported in every budget document put out by the government (e.g. here and here). Krauthammer might try to learning a bit about how the budget works before he goes off ranting about Jack Lew and Social Security [Corrected -- thanks WTF].

He also might do a little homework about his proposed fixes for Social Security. Two of his fixes, changing the indexing formula and raising the retirement age would hit elderly people who are barely scraping by as it stands. However, his third idea -- taking away benefits for rich people like Warren Buffett -- would not even save the program any money.

While Krauthammer may know lots of rich people like Buffett, in reality they comprise a tiny portion of the population and the benefits they receive are a trivial share of what Social Security pays out each year. As a result, a means test that was designed to take away benefits from the country's Warren Buffetts would likely cost more to administer than it would save the program in benefit payments.

In reality, the projected shortfall in the program is relatively distant and minor. The country has far more urgent concerns, like putting 25 million unemployed or under-employed people back to work. This should be the focus of our political leaders right now.

 
Power Breakfast: Lose It! Print
Friday, 11 March 2011 05:37

Yes, this horrible segment on my local NPR affiliate WAMU repeated the same nonsense as yesterday. It told listeners that the key policy choice facing the country is whether we will just let the Martians take over the planet, as advocated by President Obama, or stand up and fight, as demanded by the Republicans.

Okay, that was not quite how the segment ran, but it is pretty damn close. The segment told us that the main energy choice facing the country is whether we focus on producing oil and gas in the United States or we focus on switching over to alternative energy.

This is not true. There is no option to make the country independent of foreign energy by increasing domestic production of oil and gas. Let me repeat that so that even a top reporter at  a major news outlet can understand it.

There is no option to make the country independent of foreign energy by increasing domestic production of oil and gas.

The reason is simple, the United States does not have enough oil and gas to replace the amount that it imports even if we drilled every last barrel out of every environmentally sensitive region in the country. Just as the city of Tokyo does not have enough oil to be energy self-sufficient, neither does the United States have this option.

There are zero, nada, no projections that show that oil and gas reserves in the United States are large enough to allow the country to replace the fossil fuels that it imports. It currently imports about 11.5 million barrels a day, down from its pre-recession level of 13 million. Its domestic production is about 5.6 million barrels a day, and dropping. (It had been around 10 million a day thirty years ago.)

Projections from the Energy Information Agency show that if we drill everything in sight, we may be able to increase domestic production by 1-2 million barrels a day (it would take a decade to get this gain). That would mean that we would be very lucky to reduce dependence of foreign oil by even 20 percent.

Given the reality, the correct response of a real reporter to a politician who wants us to have "red, white, and blue" energy by drilling everywhere is to ask him if he has any idea what he is talking about or whether he is deliberately saying things that are not true.

A real reporter does not pass along an untrue statement to listeners and compare it to a true statement and make it a "he said/she said" for listeners. Reporters have the time to evaluate the truth of statements by public officials -- that is their job -- listeners do not.

 
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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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