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The Money Wall Street is Making Off Rhode Island's Pension Funds Is Also an Issue Print
Monday, 08 September 2014 04:58

The NYT gave readers only part of the story in an article on the Democratic primary race for governor of Rhode Island. It notes that state Treasurer Gina M. Raimondo is currently the frontrunner.

It then told readers in reference to Raimondo:

"The 'tough choice' was her overhaul of the state’s pension system in 2011. She marshaled the state’s Democratic political establishment to increase the retirement age, cut benefits and suspend annual cost-of-living adjustments for state employees until the finances of the underfunded system improved. The move was meant to save $4 billion over two decades and slow state property tax increases. ...

"The pension overhaul is now at the center of a primary race for governor that has become one of the most divisive in the country."

Raimondo did not just cut benefits. She also invested a large portion of the state pension fund with hedge funds and private equity companies under terms that were not disclosed to the public. (Raimondo formerly worked with a hedge fund.) The state's major newspaper has sued (unsuccessfully) to force disclosure of this information.

However the issue is not just cuts to the benefits promised public sector workers. There is also a question of whether the state's pension funds are being used to enrich Wall Street.

 

 
Would History Have Judged Us Harshly If We Hadn't Invaded Iraq in 2003? Print
Monday, 08 September 2014 04:16

Robert Samuelson apparently believes it would have based on his column today calling for more military spending. There are a few points worth noting about this piece.

First Samuelson compares current spending at 3.4 percent to the post-World War II average of 5.5 percent of GDP. For most of the post-war period we were engaged in a military build-up to counter a rival super-power (the Soviet Union). The average also includes long periods of actual war (Korea, Vietnam, Iraq I and II, and Afghanistan). It should not be surprising that at a time when the country is not nearly as engaged in armed conflicts, and faces no major foe, it would spend less on its military.

Samuelson apparently wants the money for the military to come at least in part from spending on seniors, commenting at the end: "Democrats who will cut almost anything except retirement spending."

The cuts to retirement spending that Samuelson wants are problematic. Social Security taxes are designated for Social Security. Samuelson might not have a problem taxing people for Social Security and then using the money for the military, but the public might have a problem with that idea, as would the people who depend on their votes.

There are substantial potential savings in Medicare, but this is because the United States pays more than twice as much per person for its health care as other wealthy countries. However getting savings would require cutting the incomes of doctors, drug companies, and medical equipment suppliers. These are all very powerful lobbies which Congress is reluctant to challenge. While Samuelson implies that the issue is seniors getting benefits that are too generous, the cost issue to the government is that we pay too much for the same benefits that people get in all wealthy countries.

 
Does the Average Hiker Spend $4,000 a Year on Equipment and Hiking? Print
Sunday, 07 September 2014 04:21

I'm a big fan of nature and hiking, but that number doesn't sound quite right to me. The Washington Post had an article on the recreation business in which it told readers that the country spends $646 billion a year on outdoor recreation and related spending. This figures comes to a bit more than $2,000 per person. If we assume that half of the public doesn't really do anything that fits the bill, then this means the other half spend $4,000 per person per year on outdoor recreation. That comes to $16,000 per year for a family of four.

Let's see, you can a pretty nice tent for a few hundred dollars, hiking boots can cost $150-$200, a good sleeping bag in the same range. That could get us to $700, but of course you don't buy these things every year. If you assume they last an average of 3-4 years, these items will only get you about $200 per year, less than one twentieth of the way to our $4,000 target.

According to the article, the $646 billion figure came from an industry group. The link does not go to a report that could explain how they got the number, but rather a map showing a state by state breakdown. It's not clear how the industry group came up with its number, but it's virtually certain they included many items that most of us would not consider spending on outdoor recreation. The Post should be a bit more careful in uncritically accepting numbers from industry groups.

 

Correction:

Robert Salzberg points me to a link later in the piece that goes to the study itself. The study shows that the bulk of its $646 billion in spending is based on food, entertainment, lodging, and travel related expenses. This presumably means that if someone flies across country to visit family members and also goes to a national park then the study would count the air fare and the money spent on lodging throughout their trip. The study does not describe the methodology in full, but it does give a non-working URL as the location of a technical report.

 
Economists Who Understand Economics Didn't See the August Jobs Report as an Outlier Print
Saturday, 06 September 2014 07:51

The Washington Post article on the August job report, which showed the economy adding 142,000 jobs in August, told readers:

"Economists, however, were quick to caution that the weak jobs number is an outlier at a time of several other stronger measures of economic activity, including auto sales — which soared in August — and exports. Markets were little-changed on the news and ended the day in positive territory.

'I don’t believe the numbers,' said Tim Hopper, chief economist at TIAA-CREF. 'Not only are they very weak, they just don’t match anything else that’s in the market right now.'"

Actually, the numbers match the market very well. The economy grew at a 1.1 percent annual rate in the first half of the year. Faster growth in the second half of the year might bring the rate for the whole year to 2.0 percent. If we assume that productivity growth is 1.5 percent, this would imply an increase in the demand for labor of 0.5 percent. That translates into 700,000 jobs for the year or roughly 60,000 a month.

Even if we assume productivity growth of just 1.0 percent (this is well below the rate we saw even in the slowdown years from 1973-1995), the implied rate of job creation would just be 1.4 million a year, or 120,000 a month.

The article gives no explanation of why any economist would expect a much faster rate of job growth when the economy is growing so slowly.

 
The Pent-Up Wage Growth Story: Why Does Janet Yellen Say These Things? Print
Friday, 05 September 2014 09:45

Federal Reserve Board Chair Janet Yellen is a serious scholar of economics. That means that she wants to hear a range of arguments and consider them carefully. Unfortunately we don't live in a political world where such concern with the truth is the norm. 

For this reason it is unfortunate that Yellen speculated in her Jackson Hole speech last month that one reason for weak wage growth could be pent-up real wage declines. The argument is that if we think that firms would have lowered real wages, but could not because they did not want to impose nominal wage cuts, then there should be a number of workers whose real wages are higher than is justified by their productivity.

The implication of this story is that when labor markets tighten, these workers will initially see no nominal increase in wages since it will take some time for their real wages to fall to a level in line with productivity. But then we get a story where we end this pent-up wage decline and then these workers would again see nominal wage growth. This is then presented as a kicker to inflation.

It's reasonable for Yellen to consider such issues, but naturally the inflation hawks are seeing this story as yet another argument for slamming  down brakes on the economy and job growth. Most of us would believe as a fairly simple story that in a tighter labor market there is more upward pressure on wages and therefore somewhat more risk of inflation. But how is this changed by the pent-up wage decline story?

What percent of the workforce do we think can be in this boat, 5 percent, 10 percent, 20 percent? It seems hard to imagine it would be much over 10 percent of the workforce that could conceivably be in this situation, especially when we consider that 4 million workers, roughly 3 percent of the workforce, leave their jobs every month.

But let's say that we have 10 percent of the workforce who have some degree of pent-up wage declines. The issue is what happens when this ends? The first thing we have to remember is that the pent-up declines won't end all at once. Workers would have different degrees of pent-up wage declines.

Let's say that the pent-up declines end over 3 years. This means that in each of those three years, if we start from our 10 percent number, 3.3 percent of the workforce suddenly goes from seing zero nominal wage increases to seeing 2.0 percent pay hikes in order to have their wages keep pace with inflation. And this raises the overall rate of inflation by 0.07 percentage points. Get out the wheelbarrows of money, hyperinflation is just around the corner.

 
The Mythical Downward Spiral of Deflation Print
Friday, 05 September 2014 05:08

A useful NYT article on the latest moves by the European Central Bank's to try to prop up the euro zone economy included a comment near the end:

"Thursday’s moves signaled that at least one European institution is doing all it can to avert the threat of deflation — the pernicious downward spiral of prices that often leads to high unemployment."

Actually there is no basis for the fears of this sort of downward spiral. As the piece correctly points out, the euro zone economy is already suffering from very low inflation. With many long-term loans contracted with the expectation of much higher rates of inflation, the current near zero rate of inflation is imposing serious burdens on debtors. The low rate of inflation also means a higher real interest rate for firms considering investments for the future.

Crossing zero from low rates of inflation to low rates of deflation doesn't change this story. Having a lower rate of inflation makes matters worse, but there is no particular importance to crossing zero. (At low rates of inflation, the prices of many goods and services are already falling.)

There could be a problem if there was a downward spiral with deflation leading to more unemployment, leading to more deflation, but we have not seen anything like this in a wealthy country since the Great Depression. Even Japan never really saw anything along these lines. It's inflation rate fell to -1.0 percent in 1999, was -0.7 percent in 2000, and peaked at -1.5 percent in 2001. It became positive again in 2004 and remained positive, with the exception of 2005 until the economic crisis in 2009.

There was no tendency for the rate of deflation to continue to get more rapid during this period. In other words, there is zero reason to think that anything qualitatively different happens to an economy if the inflation rate turns negative, except that in a weak economy a lower inflation rate is worse than a higher one.

 
Is Any High-Speed Rail Project "Ambitious?" Print
Friday, 05 September 2014 04:48

That's the question millions are asking after seeing the NYT article on the debate between California governor Jerry Brown and Neel T. Kaskari. The piece told readers:

"Again and again, Mr. Kashkari criticized the ambitious high-speed rail project from San Francisco to Los Angeles that Mr. Brown has pushed even as it has lost popularity with voters and some lawmakers, and even as Republicans in Washington have said they would refuse to fund it."

Other than giving us the NYT's assessment of the project it is not clear what information the word "ambitious" provides to readers.

 
NPR Gets Putin and Russian Economic Growth and Corruption Backwards Print
Friday, 05 September 2014 04:29

An interview on Morning Edition with Edward Lucas, senior editor at The Economist and author of The New Cold War, likely mislead listeners about the path of the Russian economy and corruption under President Putin's period in power. Lucas implied that Russians are likely to be very unhappy about the current state of the economy and public services and angered over the extent of corruption in the country.

While undoubtedly there is much corruption in Russia under Putin, corruption did not begin with Putin. According to the World Bank (Table 4.3A), Russia got $8.3 billion for all the assets it privatized in the 1990s. This was a period in which it sold off the vast majority of the industry built up during the Soviet years, as well as much of its oil and natural resources. By comparison, Snapchat currently has a market value of $10 billion. During this period well-connected people were able to become billionaires by buying assets at prices far below the market level.

This was also a period in which Russia's economy collapsed. According to data from the International Monetary Fund, Russia's economy shrank by almost 30 percent during President Yeltsin's tenure. (This is about six times the drop in GDP the U.S. saw in the Great Recession.) Since Putin came to power in 1999 it has more than doubled in size. This economic performance likely explains much of the support shown for Putin in public opinion polls.

Book1 24542 image002

                                       Source: International Monetary Fund.

 

Note: Name of president corrected -- the decline took place under Yeltsin, not Putin. Thanks Daniel. Also, Putin came to power in 1999, not 1998 as previously written.

 
Fast Food Prices Could Go Up Print
Thursday, 04 September 2014 04:46

The Washington Post thinks it has found a fatal flaw in the argument that fast food workers should have higher wages:

"The problem: Fast food is a low-profit margin business. How low? According to Yahoo Finance, 2.4 percent. Just look at the headline: 'Fast-Food Chains Aren’t as Rich as Protesters Think.'"

It is likely that most of the people organizing the push for higher wages in the industry are fully aware of "the problem." If workers got higher wages they would presumably be offset to some extent by lower profits, lower pay for top management, increases in productivity, but there would also be some increase in higher prices.

This would reverse a process whereby fast food prices would have dropped relative to the price of other goods as the wages of workers in the industry fell relative to the economy-wide average. There is no obvious "problem" with this reversal. It essentially means that those on the bottom would enjoy higher real wages and living standards, while those on top would see a relative decline in their living standards. It would only be a relative decline, except for those at the very top, since if the economy is growing normally, higher paid workers could still get a share of productivity gains. 

 
Good Story in U.S. Job Market Depends Largely on Ignoring People Who Drop Out of the Labor Force Print
Wednesday, 03 September 2014 14:45

Wonkblog had a post telling readers that the U.S. labor market is doing better in the recovery than the labor market in most other wealthy countries.  While this is true if we look at unemployment rates, is far less clear if the focus is employment rates (EPOP), the percentage of the population who is working.

This is true even we control for demographics. The EPOP for prime age men (ages 25-54) in the United States is still down 3.7 percentage points from its pre-recession level. By comparison, in Japan the EPOP for prime age men is up by 2.0 percentage points and in Germany it's up by 3.3 percentage points. 

France has seen a drop in its EPOP from pre-recession levels, but only 0.7 percentage points -- still much better than the U.S. In fact, with a drop of in its EPOP for prime age men of 2.7 percentage points, the euro zone as a whole is doing better than the United States, in spite of the inclusion of crisis countries like Spain and Greece with double-digit drops in EPOPS.

In short, the case that the U.S. labor market has fared better than the labor markets in most other wealthy countries is much weaker than this piece indicates.

 

Thanks to Seth Ackerman for calling this one to my attention.

 
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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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