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More on the Continuing Weakness of the Labor Market Print
Saturday, 06 December 2014 09:05

The November jobs numbers were unambiguously good news. The economy is moving in the right direction and at a faster pace than we had seen in years. But we have to realize how far the labor market has to go before it makes up the ground lost in the recession.

The simplest and best measure is the employment to population ratio (EPOP), which gives the percentage of the adult population which is employed. This stood at 59.2 percent in November (unchanged from October). This is 1.0 percentage points above the low of 58.2 percent last hit in the summer of 2011, but it is still more than four full percentage points below the pre-recession peaks and more than five full percentage points below the all-time highs hit in 2000.

Many people have dismissed these comparisons by pointing to demographic changes, specifically the aging of the baby boomers. With much of the baby boom cohort now in their sixties, we would expect to see more people retiring, but if we look at prime age workers (ages 25-54) we get a similar story. The OECD reports that the EPOP for this group was 76.8 percent in the third quarter of this year, compared to 79.9 percent in 2007 and 81.5 percent in 2000. People in their thirties and forties have not just suddenly decided that they want to retire. This drop in employment is almost certainly due to the weakness of demand in the labor market.

Some other measures of slack are also useful to note. Some reports have noted the upturn in quit rates as reported in the Job Opening and Labor Turnover Survey. The most recent data puts the quit rate at 2.0 percent compared to a low of 1.3 percent at the trough of the recession. This means that more people are prepared to quit a job with which they are unhappy. But this figure is still down from 2.2 percent as a year-round average in 2006. (We should remember that even in the pre-recession period, the labor market was just getting tight enough to see some wage growth.) The quit rate at the end of 2000 and start of 2001, when the survey began, was as high as 2.6 percent. (When considering these numbers it is important to realize that the shift in employment over this period from low quit sectors like manufacturing to high quit sectors like restaurants would have added at least 0.1-0.2 percentage points to the quit rate.)

Read more...

 

 
Economics for Economic Reporters Lesson 34,721: Monthly Wage Data Are Erratic Print
Saturday, 06 December 2014 07:49

Okay boys and girls, today we learn about the erratic pattern of wage data. Ideally the Bureau of Labor Statistics (BLS) would tell us exactly how much hourly wages rose each month. Unfortunately, BLS doesn't have that ability. It has a very good survey of establishments that gives a reasonably close estimates of current hourly and weekly wages, but these numbers are not exact. And, since each month's wage estimate includes a component of error, the changes from one month can contain a very large component of error.

To see the logic, imagine that the 95% confidence interval is +/- 0.1 percent. (I haven't checked this, but 0.1 percent would be pretty good.) Suppose that one month it underestimates the average wage by 0.1 percent. Suppose the next month it overestimates the average wage by 0.1 percent. This would lead to a wage growth number from one month to the next that was 0.2 percentage points above the true number. In a context where monthly wage growth has been averaging less than 0.2 percent, this would be a very large error. That is why it is always advisable to take a longer period than a single month to assess wage growth. (My preferred measure is taking the rate of change for the most recent three months compared with the prior three months.)

Many foolish comments about the November employment report could have been avoided if reporters recognized the erratic nature of the monthly data. The 9 cent gain (0.4 percent) reported in the average hourly wage for November was widely touted. Unfortunately, reporters did not bother to note that BLS reported a gain of just 0.1 percent in October and 0.0 percent in September. As a result of the weak wage growth the prior two months, the average wage for these three months grew at just a 1.8 percent annual rate compared with the average of the prior three months. That is somewhat below the 2.1 percent increase over the last year.

When we look at these numbers we have two choices. One is to take the monthly data at face value, as almost all the reports on the November report did, and believe that wage growth virtually stopped in September and October and then surged in November. Alternatively, we can believe that the slowdown in September and October and the surge in November were both driven by measurement error.

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It's Not a Free Trade Deal and Michael Froman Wants to Take Food Choices Away from Individuals Print
Friday, 05 December 2014 06:59

It looks like individual choice is not supposed to get in the way of corporate profits in the world of Michael Froman and U.S. trade policy. In a Washington Post article on the Trans-Atlantic Trade and Investment Pact (TTIP), U.S. Trade Representative Michael Froman is quoted as saying:

"We’re not trying to force anybody to eat anything ... we do feel like the decision as to what is safe should be made by science."

While it is not entirely clear what Froman means by this comment, most people would probably think that individuals have the right to determine for themselves what is safe, since "science" or scientists sometimes makes mistakes, just like economists. This would mean that food should be clearly labeled, so that people can know what chemicals it contains and how it was produced. Froman's comment could be interpreted as objecting to this position.

It is also worth noting that the TTIP is not a "free trade" agreement as asserted in the article. The increased protections in the pact, in the form of stronger patent and copyright protections, are likely to do more to raise prices and block trade than any tariff reductions that are included. the pact is mostly about putting in place a set of regulations that are likely to be very friendly to the corporate interests involved in negotiating the deal, but which would face difficulty if put to a vote of democratically elected parliaments individually.

 

 
Marketplace Radio Tells Us the National Debt is a Really Big Number Print
Friday, 05 December 2014 05:59

I have complained at length about news stories that give us really big numbers with no context, which they should know are absolutely meaningless to almost all their listeners. Marketplace Radio did exactly this early in the week when it told listeners in a short segment:

"Here's a big number: $18 trillion. 

"That's the national debt of the United States of America. Yesterday, we surpassed the $18 trillion mark for the first time.

"Partisan and or political inferences will not be entertained."

There you go. Do you feel informed now?

It's hard to see what information anyone could get from this comment other than the U.S. debt is a really big number and presumably someone at Marketplace radio thinks its too big. (The latter information is ordinary reserved for designated commentaries and opinion pieces.)

Last year, the NYT committed itself to trying to put numbers like this in some context that would make them meaningful to their audience. David Leonhardt, who was then the Washington bureau chief, even joked about how the sort of reporting in this Marketplace segment is the same as telling their audience "really big number."

It would not have been difficult to put the $18 trillion figure in a context that would be more meaningful. Economists usually measure debt relative to GDP. That's a pretty simple calculation. If it wanted to give us the economic impact of the debt, it could have told us that the interest rate on long-term debt is a bit over 2.2 percent, well below normal levels. If it wanted to report on the burden to taxpayers, it could have told us that interest payments are equal to roughly 1.3 percent of GDP, less than half the burden in the early 1990s.

This information, all of which can be obtained in seconds from the Congressional Budget Office, would have allowed listeners to better understand the importance of the $18 trillion debt figure.

 
The Retirement Situation: It's Worse Than You Read In the NYT Print
Friday, 05 December 2014 05:29

Floyd Norris (who unfortunately has accepted a buyout and will be leaving the paper) had an interesting piece on the disappearance of traditional defined benefit pensions. He notes that millions of workers in multi-employer plans are at risk of sharp reductions in benefits. Detroit city workers and retirees have already seen sharp declines in benefits.

After pointing out that few workers now have secure pensions, he then refers to a new book by Alicia Munnell, Charles D. Ellis and Andrew D. Eschtruth, which he cites as saying that the typical household near retirement has only $110,000 in a 401(k). Actually this figure refers to the roughly half of near retirees that have a 401(k). The median near retirement household has considerably less money in a retirement account.

According to our recent analysis of the Fed's 2013 Survey of Consumer Finance, the average net worth outside of housing wealth for families in the middle quintile of households between the age of 55-64 was just $89,300. This figure includes all assets in 401(k)s, plus any money held in checking and saving accounts and any non-housing tangible assets, like a car or boat. it would subtract non-mortgage debt like credit cards, car loans, and student loans.

The average home equity stake for households in the middle quintile in this age cohort was $76,400, this accounted for 54.6 percent of the home's value. In 1989, households in the middle quintile in this age group had more than 81 percent of their home paid off on average.

 
Chris Rock, Ezra Klein, and the Second Great Depression Myth Print
Thursday, 04 December 2014 08:12

I have to take some issue with Ezra Klein in his criticisms of Chris Rock. Ezra is upset with Rock's suggestion that Obama would have been best off letting the financial industry and the auto companies collapse, and then picking up the pieces. Rock argued that Obama would have gotten more credit from this path than he is getting now for having bailed out firms and effectively muddled along.

Ezra responds that Rock's plan is:

"morally odious: it would have meant putting millions of Americans through harrowing pain in order to help Obama out politically."

He then argues that it would have given us a second Great Depression.

On the first point, I completely agree that putting millions of people out of work for political ends is morally odious. However, if we flip this over for a moment and make the question one of putting millions of people temporarily out of work for the ostensible longer term benefit of the economy, it would be much more difficult to call the choice morally odious. At least if we did, then we would have to say that most of the central bankers in the last century and the politicians who appointed them were morally odious.

It is central banking 101 that you raise interest rates to slow the economy and throw millions of people out of work in order to head off inflation. Paul Volcker is a hero in elite Washington circles precisely because he raised interest rates and threw millions of people out of work in order to bring an end to the inflation of the 1970s. To his admirers (which do not include me), the longer term benefits to the economy were worth the pain suffered by the millions of unemployed and their families. So the idea of throwing millions out of work to advance important economic ends is widely accepted in policy circles, even if most of us may agree that it is unacceptable to deliberately throw large numbers of people out of work as a campaign strategy.

Read more...

 

 
Obama Claims that Economic Reality Will Make It Hard to Get Political Support for His Trade Deals Print
Thursday, 04 December 2014 07:55

A Washington Post article on President Obama's efforts to secure fast-track trade authority in order to pass the Trans-Pacific Partnership (TPP) included an incredible comment from Obama:

"'It is somewhat challenging because of . . . Americans feeling as if their wages and incomes have stagnated' because of increasing global competition, Obama said. 'There’s a narrative there that makes for some tough politics.'"

Of course President Obama is correct that this "narrative," which most economists would say corresponds to the reality, makes it difficult to pass more trade deals that will further disadvantage workers in the United States. It's not clear why President Obama would be surprised that most of the public opposes trade deals that are likely to redistribute more income upward.

According to the article, the administration also inaccurately characterized the nature of the TPP.

"The administration has argued that the trade deals will boost U.S. exports and lower tariffs for American goods in the fast-growing Asia-Pacific region, where the United States has faced increasing economic competition from China."

The deal will have little impact on tariffs in most of the countries that are parties to the TPP, since they are already low. Furthermore, the deal includes a large amount of protectionism in the form of stronger patent and copyright protection. Higher licensing fees and royalties will make the drug and entertainment industry richer, but are likely to crowd out other exports.

It is also worth noting that jobs depend on net exports (exports minus imports), not exports. (If we increase exports, but imports rise by a larger amount, then we on net lose jobs.) If the administration doesn't understand that it is net exports that affect employment, and not just exports, then the media should be doing intense ridicule. This would be like Sarah Palin saying she could see Russia from her house, but much more serious. 

 
The Meaning of Slow Growth in China Print
Wednesday, 03 December 2014 08:32

Eduardo Porter ends an interesting piece on declining income inequality in Latin America with a warning that the decline may not continue, insofar as exports of commodities was a major cause. The argument is that China's growth is slowing, and since China was a major market for exports, this means that growth in demand in the future might be much slower than growth in demand in the last decade.

The problem with this view, which is frequently repeated in the media, is that it ignores the fact that China is much larger now than it was a decade ago. China's economy has more than doubled in size over the last decade. This means from the standpoint of the world economy, 7.0 percent growth in China today has far more impact than 10.0 percent did a decade ago. It may well be the case that demand for commodities exported from Latin America is weakening, but if we are comparing the impact of growth in China on this demand, it is undoubtedly a larger factor in 2014 than it was in 2004.

 
Edsall and Obamacare: More Confusion Print
Wednesday, 03 December 2014 05:26

Thomas Edsall used his column today to agree with Charles Schumer that the Democrats made a mistake by pushing through Obamacare and should have instead focused on the economy. As I've noted previously, this is wrong on both sides.

On the economy side, what does Schumer think the Democrats would have accomplished if they had never said a word about health care? Would they have gotten another $20 billion a year in stimulus spending, $30 billion, $40 billion? Plug in your number, but it doesn't have to get too high before it doesn't pass the laugh test. Of course any additional spending would have been good both for creating jobs and the longer term benefits, but if Schumer is claiming that barring a whole different political world (i.e. doing a lot more than skipping health care reform) we would have seen enough stimulus to make a qualitative difference in the state of economy, and the public's view of the economy, then he's been smoking something strong.

There is a plausible alternative economic story, but it has nothing to do with Obamacare. Instead of using Big Government to protect the Wall Street gang from their own greed and incompetence, Obama could have let the market work its magic and put most of the Wall Streeters out of business. (Left to the market, Goldman Sachs, Morgan Stanley, Bank of America and Citigroup certainly would have gone bankrupt.) He could have used the Justice Department to put the Wall Street felons behind bars. (Knowingly putting fraudulent loans in a mortgage backed security is fraud. Selling an investment grade rating for a mortgage backed security is fraud.)  And, he could have tapped into populist sentiment to impose a Wall Street sales tax that would tax financial speculation. Even the I.M.F. has recommended increasing taxes on the financial industry, recognizing it as an undertaxed sector. 

In short, there is a populist economic path that Obama could have pursued that would have put the economy and the Democrats in a very different position. But nothing about the Affordable Care Act (ACA) prevented them from going this route. Furthermore, it's unlikely that Senator Schumer has any interest in following this path, unless the NYT neglected to cover his endorsement of a financial transaction tax and the jailing of Wall Street bankers.

Read more...

 

 
Bankers Who Commit Fraud, Like Murderers, Are Supposed to Go to Jail Print
Tuesday, 02 December 2014 09:45

Wow, some things are really hard for elite media types to understand. In his column in the Washington Post, Richard Cohen struggles with how we should punish bankers who commit crimes like manipulating foreign exchange rates (or Libor rates, or pass on fraudulent mortgages in mortgage backed securities, or don't follow the law in foreclosing on homes etc.). 

Cohen calmly tells readers that criminal prosecutions of public companies are not the answer, pointing out that the prosecution of Arthur Andersen over its role in perpetuating the Enron left 30,000 people on the street, most of whom had nothing to do with Enron. Cohen's understanding of economics is a bit weak (most of these people quickly found other jobs), but more importantly he is utterly clueless about the issue at hand.

Individuals are profiting by breaking the law. The point is make sure that these individuals pay a steep personal price. This is especially important for this sort of white collar crime because it is so difficult to detect and prosecute. For every case of price manipulation that gets exposed, there are almost certainly dozens that go undetected.

This means that when you get the goods on a perp, you go for the gold -- or the jail cell. We want bankers to know that if they break the law to make themselves even richer than they would otherwise be, they will spend lots of time behind bars if they get caught. This would be a real deterrent, unlike the risk that their employer might face some sort of penalty.

Why is it so hard for elite types to understand putting bankers in jail?

 
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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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