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257,000 Jobs Are Great, but Those Wall Street Boys Are Really Smart Print
Friday, 06 February 2015 18:21

The celebrations over the economy's strong performance are really getting out of hand. That makes it incumbent on those of us who have access to government data and know arithmetic to work harder to set the record straight.

The basic point is a simple one. The economy is recovering, and at least recently, at a relatively rapid pace. I say "relatively" because if we saw the same job growth rates as we did after steep recessions in prior decades we would be seeing 500,000 to 600,000 jobs a month, but hey 257,000 is better than we had been seeing until 2014.

So this is good news. The problem is that the Wall Street boys (e.g. Robert Rubin, Alan Greenspan, etc.) created a really really deep hole. So things are getting better, but we have a very long way to go to get back to anything we can consider a normal labor market and economy.

There are many different measures that can be cited to make this point. The employment to population ratio for prime age workers (between the ages 25-54) is almost three full percentage points below its pre-recession level. (This gets around the claim that the problem is baby boomers retiring. These people are not leaving the labor force to retire.) The number of people who report working part-time involuntarily is still close to 2 million (@50 percent) above pre-recession levels.

But my favorite measure is the quit rate, the percentage of unemployment due to people who voluntarily quit their jobs. This is very useful because it is a real measure of people voting with their feet. The quit rate is telling us the extent to which workers have enough confidence in their job prospects to tell their asshole boss to get lost and then walk out the door.

In a good labor market people are willing to do this. In a bad labor market the risk is just too great. Workers are worried that it may be months, or longer, before they get a new job. So what do the data say?

Well, the quit rate is up a great deal from the troughs of the Great Recession. It had been as low as 5.6 percent in the middle of 2009 just after the economy had shed almost 8 million jobs. In the January data it was up to 9.5 percent. But this only looks good by comparison. The quit rate had been hovering just under 12.0 percent in the two years prior to the recession.

And for those old enough to remember, that was not exactly a great job market. Wages were at best inching ahead of inflation. if we go back to the late 1990s, which really was a good job market, the quit rate was over 13.0 percent and even got as high as 15.2 percent in April of 2000 Here's the picture.

                        Voluntary Job Leavers as a Percent of the Unemployed


                                          Source: Bureau of Labor Statistics.

So the moral of this story is that yes, things are definitely getting better, but no things are not good. And we know this, not because some overpaid economist or pundit says so, but because workers are voting with their feet.

So it's your call. You can believe the expert (who couldn't see an $8 trillion housing bubble) on your favorite news outlet, or you can believe the people who actually have their jobs on the line.

The Unfairness of a $3.4 Million Cap on IRAs Print
Friday, 06 February 2015 07:59

Allan Sloan is a reasonable conservative, which means that he usually makes reasonable arguments, even if some of us to his left may disagree with them. Today's piece criticizing President Obama's proposal to cap the amount in a tax sheltered IRA at $3.4 million isn't up to the usual standards.

The gist of Sloan's argument is that $3.4 million would not be enough to generate the same retirement income in annuity as President Obama will get in his pension when he retirees. By Sloan's calculation, the $3.4 million will allow a couple to get a dual-life annuity of roughly $100,000 a year, half the size of President Obama's pension of $200,000 a year. He considers this unfair.

I'm a bit at a loss at seeing the unfairness. President Obama gets paid $400,000 a year. This puts him well into the top 1 percent of wage earners. Is that unfair? Of course his paycheck is less than one-twentieth the average for CEOs of Fortune 500 companies, many of whom probably lack the skills needed to operate a lemonade stand.

It's not clear exactly what sort of yardstick President Obama's is supposed to provide. He is obviously at the top of his field, so is it surprising that he would get paid relatively well and also enjoy a comfortable retirement?

Just to be clear, no one is preventing people from accumulating more than $3.4 million to support their retirement. They just won't enjoy a taxpayers' subsidy for the amount in excess of $3.4 million. To those of us who will never have anything close to $3.4 million in a retirement account, the unfairness works in the opposite direction.

If most of us want to have an income of $100,000 plus in our late sixties and seventies then we will have to get the bulk of it by working. This means we will be paying income taxes of 15 to 25 percent, in addition to a payroll tax of 15.35 percent. The person who has accumulated $3.4 million tax free in a Roth IRA and then able to get $100,000 a year in tax free income in an annuity looks like they are doing pretty well. President Obama and his wife may be doing better, but it's hard to have too much sympathy.  

Higher Interest Rates Will Quickly Alleviate That Debt Burden Print
Thursday, 05 February 2015 15:37

There has been concern expressed in some circles about the growing ratio of debt to GDP in countries around the world. Neil Irwin has a piece on this issue in today's Upshot section of the NYT.

Such concerns are seriously misplaced for a simple reason: the market value of debt is inversely related to the interest rate. The point here is a simple one. Imagine an infinitely lived bond that pays $50 a year in interest. If the prevailing interest in the market for long-term debt is 5 percent, the price of this this bond will be $1,000. However if the interest rate were to rise to 10 percent, the price of the bond would be just $500.

At present, interest rates worldwide are very low by historical standards. This has created a situation in which the market value of debt is very high. However if interest rates were to rise, then the market value of this debt would plummet.

Consider the case of Japan, which can now issue 10-year bonds paying just 0.3 percent interest. If the interest rate on 10-year debt rose to 3.0 percent (still a very low level) the market value of this debt would fall by close to one-third (the exact decline would depend on the timing of the increase). The decline in the market value of longer term debt would be even greater.

The same story applies to private debt. if interest rates were to rise and companies were troubled by the amount of debt they had outstanding they could just issue new bonds and buy up the existing debt at large discounts, thereby reducing their debt burden.

If we want to take a serious look at the extent to which debt is imposing a constraint on economies around the world we should look at the ratio of interest to GDP. That doesn't look very frightening in the U.S. and I suspect there is a similar story in most other countries around the world.



I should also point out that high debt burdens are actually in part a direct outcome of low interest rates. Low interest rates mean it's cheap to borrow, therefore governments, businesses, and households will borrow more. That is actually what we should want to see in a downturn, it means more demand in the economy.

Ideally, governments would take advantage of low interest rates to invest in infrastructure, research and development, and education. Businesses are taking advantage of low interest rates in part to invest and in part to buy other companies. It's cheap, why shouldn't they borrow to buy up shares? Households aren't borrowing against home equity like they did in the bubble years, but undoubtedly many are taking advantage of low interest rates to pay their kids' education or other spending.

Anyhow, we can look to arithmetic and logic to see the impact and cause of higher debt to GDP ratios. Alternatively, we can ignore arithmetic and logic and yell about the debt and the sky falling. It's your choice.

Quick, Another Story on the U.S. Economic Boom, Before December Trade Data Gets Around Print
Thursday, 05 February 2015 08:40

Economists and economic reporters are fortunate they don't work in an occupation like dishwashing or truck driving where job security and promotion depend on performance. If they did, most of the folks currently employed would be on the street after missing little things like an $8 trillion housing bubble.

But no reason to recount old history. Remember all those stories of the booming U.S. economy? Well, they are likely to be just memories. The December trade data was released today. It showed a monthly deficit of $46.6 billion, up from an originally reported $39.0 billion in November (revised up to $38.8 billion in this report).

This will likely push the revised 4th quarter GDP growth to below 2.0 percent. Weak durable good shipments for December reported yesterday will also lower 4th quarter GDP. In short, it don't look like much of a boom.

For fans of national income accounting (i.e. people who live in the real world), the rise in the trade deficit is very troubling. This is the core cause of secular stagnation. This is U.S. generated demand that is creating demand elsewhere. There is no easy mechanism to replace it. We could have larger budget deficits, but that goes against the fashions in Washington policy circles. That means, in the absence of another bubble, we can look to an underemployed economy persisting for some time.

AP Is Upset that the Housing Bubble Has not Returned Print
Thursday, 05 February 2015 08:06

That is the logical conclusion that would be drawn from an article headlined that "U.S. home price gains weakened in December on slower sales."

The piece begins:

"U.S. home values rose at a modest pace in December, a sign there are too few potential buyers to bid up prices.

"Real estate data provider CoreLogic says home prices rose 5 percent in December from 12 months earlier. That is down from the 5.5 percent price gain recorded in November. It’s much lower than the double-digit gains that occurred last year."

Actually, since U.S. house prices are already above their trend level, this is a sign that the market is stabilizing, as one might expect following a sharp tumble and a rapid upswing in prices. Over the long-term house prices have risen roughly in step with the overall rate of inflation. Since inflation was around 1.0 percent in 2014, house prices are still rising considerably more rapidly that would be expected based on their long-term trend. This is the opposite of the story conveyed in this article. 

Debt Forgiveness in Greece: It's Easier Than the NYT Leads Readers to Believe Print
Thursday, 05 February 2015 07:53

The NYT led readers to believe that meeting Greece's demand for changing the terms of its debt is far more difficult than is actually the case. It told readers:

"Writing down government debts, or stretching out when they need to repaid, causes losses for the institutions and individuals that hold the securities. Banks hold billions of euros in government bonds and, to make sure the banks remain stable, money would need to be found to replenish the big losses that the banks would suffer. Richer countries would have to agree to provide such funds. Taxpayers there may object, adding support to political parties that oppose much of what the European Union stands for and wants to achieve."

In fact, well over 80 percent of Greece's debt is held by the I.M.F., European Central Bank, and other official institutions. Concessions made by these entities could hugely reduce Greece's debt burden while leaving private debt holders unaffected. These concessions need not cost taxpayers a euro, since the European Central Bank knows how to print euros, which it can and is doing.

If taxpayers are upset it is because they have not learned basic economics which speaks to the quality of the European educational system, not Greece's debts. It is also worth pointing out that in lending Greece money, the official institutions effectively bailed out incompetent bankers who made bad loans to Greece.

The Franken Amendment to Eliminate Rating Agencies' Conflict of Interest, Passed the Senate with 65 Votes Print
Wednesday, 04 February 2015 05:03

The Washington Post might have misled readers with its discussion of efforts to end the conflict of interest inherent in the current system where banks issuing mortgage backed securities hire the agencies that rate their debt. It told readers:

"Congress debated that idea when it put together the sweeping financial overhaul law in response to the 2008 crisis. But lawmakers pushing the idea were unable to include it into the final legislation."

The Senate actually overwhelmingly approved (65 votes) an amendment from Senator Al Franken that would have had the Securities and Exchange Commission pick the rating agency assigned to assess newly issued debt. The provision was stripped out in the conference committee, apparently with the support of then Secretary of the Treasury, Timothy Geithner.

The main substantive argument against the Franken amendment was that the SEC may send over an auditor who was not qualified to rate a new issue. This raises the obvious question of why an investment bank would be trying to market a bond issue that a professional auditor at a major credit rating agency could not understand.

Republicans Vote to Repeal Affordable Care Act Because the Earth is Flat Print
Wednesday, 04 February 2015 04:45

When politicians make assertions that are clearly not true, it would be useful if reporters pointed this fact out to readers. Reporters have time to verify claims by politicians, their readers do not.

For this reason, the NYT failed its readers when it reported on the Republican House vote to repeal the Affordable Care Act (ACA) because:

"Republicans said the law was driving up insurance premiums, burdening consumers with high out-of-pocket costs and leading some employers to cut back workers’ hours so that employers would not have to pay for their coverage."

All the evidence in fact points in the opposite direction. Insurance premiums have been rising less rapidly, the rate of growth of out-of-pocket costs has also slowed, and there is no evidence that employers are cutting back workers hours because of the ACA, although there is evidence that workers are voluntarily choosing to work less because they no longer need to work full-time to get insurance through an employer.

Many readers may not realize that the Republicans' claims were not true. The NYT should have made this fact clear.

How Many Germans Are Over One Hundred Years Old? Print
Tuesday, 03 February 2015 18:18

That's one question that readers of Eduardo Porter's insightful column on the prospects of the euro must be asking. Porter commented on the concerns expressed by Germany about inflation in a context where the inflation rate has been drifting lower for years and is now near zero. He argued that:

"conditioned by memories of hyperinflation after World War I, they still fear higher inflation."

Hmmm, "memories of hyperinflation?" Let's see, we're talking about a burst of hyper-inflation that took place in the early 1920s. If we say that someone had to be roughly 10 or so at the time to have a clear memory, then those with memories of this hyper-inflation would have to be over 100 years old today.

This point is worth noting, because hyperinflation is not something that any sizable number of Germans alive today actually experienced. For the most part, even their parents didn't experience it. The Germans' concern about hyperinflation is based on national myth, not their own experience. They are making the rest of the eurozone pay an enormous price for this myth.

It Ain't a Boom: Taking Matt O'Brien to the Woodshed Print
Tuesday, 03 February 2015 08:45

Matt O'Brien usually has interesting stuff on the economy is his Wonkblog pieces, but his post on the "economic boom" is not up to the usual standards. First, and most importantly, the idea of grading on a curve -- because things are better here than elsewhere we have a boom -- is rather dubious. Some countries were hit less hard by the depression than others. Would we want to say that they were experiencing a "boom?" 

Even if we accept grading on a curve it's not clear we have much of a story. The widely touted "recession" in Japan is seriously misleading. The Japanese proponents of austerity wanted to show that they could do as much damage as their counterparts in the U.K., euro zone, and U.S.. They insisted on a 5 percentage point increase in the sales tax in April. This led to a sharp drop in output in the second quarter. Output also fell in the third quarter, but this was entirely due to inventory fluctuations, final demand grew.

It is a safe bet that GDP will grow in the fourth quarter and will continue growing at a moderate pace in 2015. In terms of how life is on the ground, unemployment fell from 3.5 percent to 3.4 percent in December, with 1.15 jobs for every applicant, the highest ratio since 1992. It's true that Japan is likely to experience slower growth than the U.S., but this is largely due to it having a slowly shrinking population rather than a population growing at a rate of 0.7 percent. There is likely to be little difference in the rate of per capita GDP growth, which is economists' standard measure of income.

Much is often made of slower or negative population growth. There is no reason that anyone except the "it's hard to find good help" crowd should be concerned about such things. If an economy is experiencing healthy rates of per capita GDP growth, then the slower population growth simply means less strain on infrastructure and the environment.



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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.