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Life in Central California After the Housing Crash Print
Tuesday, 08 February 2011 06:53
USA Today has a good piece on the devastation in central California following the collapse of its housing bubble. Meanwhile, Alan "who could have known" Greenspan was giving the keynote address at the Brookings Institution at a conference on restructuring the system of mortgage financing.
 
The Washington Post Is Badly Confused About International Trade: Blames Bernanke for Higher Food Prices Print
Tuesday, 08 February 2011 05:26

We have been treated to articles in the Post and elsewhere about how employers can't find qualified workers even though the unemployment rate remains near double-digit levels. The Washington Post editorial page gave us new evidence for this claim in an editorial that said there was at least some truth to claims that the Fed's quantitative easing policy was responsible for higher food prices in Egypt and elsewhere.

The editorial tells readers:

"International commodity prices are set in dollars, so QEII means more dollars chasing the same supply of goods. The Food and Agricultural Organization calls the dollar's post-September 2010 weakening a "leading factor" in commodity inflation."

Both parts of this are wrong. Yes, food commodities, like other commodities, are typically traded in dollars, but this means absolutely zero in terms of food price inflation in other countries unless their governments have made a decision to link their currency to the dollar.

This one is easy to see. Suppose that the Fed's action reduces the value of the dollar by 10 percent so that the price of wheat goes from $5.00 to $5.50 a bushel. That might sound like a 10 percent increase in the price of food. However, if the value of the dollar has fallen by 10 percent measured in wheat, it should also fall by 10 percent measured in Chinese yuan, Indian rupees, and Egyptian pounds. This means that there is no change in the price of wheat for people in these countries. (This is not true if the country has linked its currency to the dollar, but then the blame for higher food prices lies in this decision to link the currency, not the Fed's actions.)

Of course, some food is sold under long-term contracts, which will usually be written in dollar terms. In this case, the people of Egypt or other countries will get cheaper food as a result of a weakening of the dollar.

The second part of  the Post's story is also wrong since there is little evidence of any decline in the dollar associated with QEII. The Fed's data show the dollar falling a bit less than 3.0 percent in the months since QEII was announced. That is about the same decline as we saw the prior four months, so there does not seem to be much case of a plunge in the dollar due to QEII.

In short, the fact that food is priced in dollars does not affect the cost of food in Egypt and the dollar did not fall because of QEII, so there is not much of a case here. In fairness, the Post recognized that QEII was not the main cause of higher food prices, but it was wrong to treat it as any part of the cause, except insofar as it boosted growth in the U.S. In that way, the Fed would be as much to blame for higher food prices as Microsoft and Facebook if they announced a huge new investment plan.

 
Bringing Us to Edge of a Second Great Depression Might Have Hurt the Standing of Central Bankers Also Print
Monday, 07 February 2011 05:36

The NYT had an article warning that the reputation of Mervyn King, the head of the Bank of England, is being damaged by the increase in inflation there. It says that the status of other central bankers are suffering for the same reason.

While the modest increase in the inflation rate in many countries may have some negative impact on the standing of central bankers, their failure to stem the housing bubbles that brought on the worst downturn since the Great Depression would be a more obvious explanation for their loss of status. According to the claims of many, including central bankers like Federal Reserve Board Chairman Ben Bernanke, their mismanagement actually brought many economies to the edge of a second Great Depression. While this claim is not true, it is widely believed. Most people would consider a second Great Depression to be a considerably more serious issue than 3.5 percent inflation. 

 
Robert Samuelson Thinks You Can Have Your Oil and Burn it Too Print
Monday, 07 February 2011 05:17

Robert Samuelson wants the United States to increase domestic oil production to insulate itself from political unrest in the Middle East and other oil producing regions. There is a fundamental flaw in this logic. If the United States increases its production of oil at a time when it is still readily available from elsewhere in the world, then it would not be available if the United States was subsequently cut off from foreign sources of oil.

For example, the Energy Information Agency estimated that it would take 5-10 years to bring the Arctic Wildlife refuge to peak production of 1 million barrels a day. It could sustain this rate of output for roughly 10 years and then phase down to zero over the next 10-20 years. This means that if we had begun producing oil from the area in the early 90s, as many had advocated, the flow of oil from the region would already be passed its peak and on the way down.

The same logic applies to any domestic drilling. If anyone wants to increase U.S. energy independence in the event of a sudden cutoff of oil, they should be urging less domestic production, not more.

 
Jacob Lew's Scary Oped Print
Sunday, 06 February 2011 23:08

Jacob Lew, the head of President Obama's Office of Management and Budget, had a column in the New York Times that should really scare the American people. While the purpose of the column was ostensibly to tell the American people that there are few easy budget cuts left, the scary part is that Mr. Lew seems to have little understanding of the economy.

Lew boasts about the huge budget surplus at the end of the Clinton administration. He shows no understanding of the fact that these surpluses were largely the result of a stock bubble, which was inevitably going to burst. The story of the economy's growth at that point was that the $10 trillion stock bubble fueled a consumption boom, which led to strong economic growth.

Of course the bubble was not sustainable, when it burst, the consumption it supported also disappeared. We only recovered from the recession when the housing bubble created enough demand to replace the demand lost from the collapse of the stock bubble.

The underlying problem was the over-valued dollar. This was a conscious policy of the Treasury Secretary Robert Rubin, who actively pushed a "strong dollar" policy. This policy effectively gave a large subsidy to imports and imposed a large tax on U.S. exports. The result was a huge U.S. trade deficit.

Given a large trade deficit, the economy needs either large government deficits or very low private savings to sustain high levels of employment. This is not a partisan issue; it is an accounting identity.

Mr. Lew shows no understanding of this basic point. Either this top Obama official is ignorant of basic economics or he is not being honest with the American people. Either way, it is an incredibly scary column.

 
The NYT Doesn't Like Argentina's Economic Policy Print
Saturday, 05 February 2011 22:03

That is what readers of an article on inflation in Argentina would likely conclude. The article tells readers that Argentina's government: "has tried to quell concerns about mounting inflation by continuing to keep the economy growing at China-like rates."

The implication is that having China-like growth rates is a silly distraction from inflation. In fact, China-like growth rates create the possibility of enormous improvements in living standards. Most countries would be delighted to have growth rates half as fast as China has been able to maintain over the last three decades or that Argentina has sustained since 2002. The problem of even relatively high rates of inflation seem small by comparison. In fact, the reason why economists view inflation as a problem is that it can lead to slower growth.

This article is also somewhat confused in trying to describe the problem that inflation is causing in Argentina. It claims that wages are not keeping up with food prices, but that is not the relevant issue. The question is whether wages have kept pace with inflation. The article does not address this issue.

The article includes a quote from Domingo Cavallo that is highly critical of the government. Cavallo is identified only as "a former economy minister." It would have been worth pointing out to readers that Mr. Cavallo was the minister who designed the policies that led to Argentina's crisis in 2001-2002. The Kirchners' government broke sharply with Mr. Cavallo's policies setting Argentina on a path of solid growth. Without this information, readers might think that Cavallo was a disinterested commentator on the economic situation.

 
The NYT Can't Find Anyone In Germany Who Is Not an Employer Print
Saturday, 05 February 2011 21:06

The NYT told readers that:

"While a jobless rate in single digits would be cause for celebration in many countries, in Germany it is the sign of a critical lack of workers."

Actually, for the vast majority of people in Germany a low unemployment rate is cause for celebration because most of them work for a living. A low unemployment rate both means that they are likely to be able to find work and that they will be in a position to get pay increases through time.

This 2-page article actually presents zero evidence for its claim that Germany is faced with a "critical lack of workers." It reports that:

"employers in many sectors of the German economy are facing labor shortages, under the dual pressures of an aging population and inflation-fighting measures that have kept wages low in comparison with its neighbors."

This is evidence of not very competent employers. If they need workers and can't get them, then the answer is to raise wages. People who run businesses should understand this logic. (It's not clear why "inflation-fighting measures" would keep a business from paying its workers the market wage.)

Some businesses will not be able to pass on higher wages in higher prices. This will squeeze profit margins and might force them out of business. This is the way a market economy works. Workers move from low productivity sectors to high productivity sectors. It is not clear why anyone would think of this as a crisis, although the employers who go out of business are probably not happy.

The article also goes on to complain about worker shortages due to low birth rates and limited immigration. If there are fewer workers this just means that the least productive jobs go unfilled. There will be fewer people working as store clerks in convenience stores, housekeepers in hotels, or as parking lot attendants. There is no obvious economic problem associated with workers moving into more productive occupations.

 
The Non-Mystery of the January Employment Report Print
Saturday, 05 February 2011 08:39

Most of the news reports on the January employment report expressed confusion over the seeming contradiction between the 0.4 percentage point plunge in the unemployment rate shown by the survey of households and the weak 36,000 job growth reported by the establishment survey. The drop in unemployment in the household survey was the result of a reported increase in employment of 589,000, after adjusting for changes in population controls. This difference is actually not very confusing to people familiar with the data.

The household survey is always erratic. It effectively is measuring the level of total employment in the economy. Even if it is off by just 0.2 percent, this implies an error of almost 300,000. If it errors by this much on the high side one month and then by an equal amount on the low side the following month, it would imply a drop in employment of 600,000 in a context where there was no actual change in employment. Looking back over the last two decades it is easy to find months with large changes in employment that did not coincide with any obvious upturns or downturns in the economy.

For example, in April of 2007 the survey showed a drop in employment of 724,000 at a time when the economy was still showing healthy growth. In May of 2000, also a period of healthy growth, the survey showed a fall in employment of  640,000.

For some reason, probably associated with the difficulty of seasonal adjustments, January is especially prone to show such out of line numbers. In January of 1992, 1994, and 1997, the household survey showed gains in employment (not counting any population control effects) of 512,000, 502,000, and 438,000, respectively. The economy was growing in each of these months, but certainly not at a pace that would be consistent with the creation of 5-6 million jobs a year. In January of 2000, the employment gain (adjusted for the change in controls) was 784,000, which would imply an annual rate of job creation of more than 9 million.

This is why economists familiar with the two surveys tend to rely much more on the establishment survey. This survey is benchmarked every year to the state unemployment insurance data, which is a virtual census since it covers nearly all employers in the country. The establishment survey effectively measures changes rather than levels. There are reasons that it can be inaccurate as well (most importantly in picking up jobs in newly created firms), but the error is likely to be measured in the tens of thousands, not hundreds of thousands.

Those desiring a third source of data on labor market could have looked to the data on unemployment insurance filings. The 4-week average stands at 430,000. The economy did not start generating jobs on a consistent basis following the last recession until claims fell below 400,000. A weekly average of 430,000 new claims is certainly inconsistent with the sort of extraordinary job growth implied by the household data. 

National Public Radio deserves special blame for misleading its audience on this one. It told listeners that the economy was actually generating jobs quite rapidly, except for the jobs that involve outdoor work where growth was constrained by the weather. The data don't support this picture. While construction (an outdoor occupation) did lose 32,000 jobs, finance lost 10,000 and information services loss 1,000. Even health care showed very weak growth, adding just 10,600 jobs, less than half the average increase over the last year. 

NPR ironically chose to focus on the courier industry as an especially affected outdoor industry, since it reportedly lost 44,800 jobs in January. However, the reporter apparently missed the fact that the number of jobs in this industry had jumped by an anomalous 46,100 in December. This means the job loss shown in January was most likely just reversing some unusual circumstances that led to a surge the prior month and had little to do with January's weather.

 
Doesn't Anyone Talk About Unemployment Claims Anymore? Print
Friday, 04 February 2011 06:32

It doesn't seem that the business press is paying any attention to the data on unemployment claims put out by the Labor Department each week. These reports used to generally earn a small story or mention in a larger story on the release of other economic data.

The weekly data are erratic, but they do give a good current snapshot of the state of the labor market. The Labor Department reported 415,000 new claims last week, partly reversing a big jump to 457,000 claims the prior week. The 4-week average edged by 1,000 to 430,000. The economy did not start creating jobs regularly after the last recession, until claims had fallen below 400,000 in the fall of 2003.

 
Doesn't Bernanke Know That Temporary Employment Is Down? Print
Friday, 04 February 2011 06:00

That might have been an appropriate headline for an article reporting on a press conference by Federal Reserve Board Chairman Ben Bernanke in which he reportedly said that employers are hiring temporary workers because they are uncertain about the future strength of the economy. In fact, in spite of recent hiring temporary employment is still down almost 15 percent from its pre-recession level.

The article also includes the comment that "critics" of Bernanke's policy of quantitative easing say that it "devalues the dollar." This is what supporters of the policy would say too. The United States has a large trade deficit. In an economy with floating exchange rates the way in which a deficit is reversed is through a decline in the value of the currency. That is why people to see this imbalance corrected, and see the United States borrow less from abroad, want to see the value of the dollar fall.

The implication of the view attributed to "critics" is that they want to see the United States continue to run large trade deficits and to borrow large amounts of money from abroad.

 
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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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