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Wage Growth Did Not Plummet In February Print
Saturday, 07 March 2015 08:42

You may have heard reports on Friday's jobs numbers saying that wage growth slowed sharply from January. It did not.

As I point out each time this becomes an issue, the data on hourly wage growth are highly erratic. This means the change from one month to the next is largely driven by errors in the data. Since errors do not tend to repeat in the same direction, a sharp uptick is likely to be followed by a sharp downtick and vice-versa. This pattern should be familiar to any economist or economic reporter who deals with the topic regularly.


For this reason, I largely ignore the monthly changes. I take the average wage for the last three months and compare to the average for the prior three months. If we do this with the February data we get an annualized rate of wage growth of 1.8 percent. That's down slightly from the 2.0 percent rate over the last year. I wouldn't make much of the slowdown, but there certainly is no case for an acceleration of wage growth, nor was there in November, December, or January.

Krugman Nails It on NAIRU Print
Friday, 06 March 2015 11:06

I generally agree with Paul Krugman in his arguments on macro policy, but sometimes it is worth emphasizing a point of agreement. Krugman really nails the issue today in discussing the Fed's approach to tightening.

The question is at what point should the Fed start raising interest rates to keep the unemployment rate from falling further. The concern is that if unemployment gets too low, the inflation rate would start to accelerate. Krugman points out that we really don't know the level of unemployment that is low enough to trigger accelerating inflation, although many people have put it in the 5.3-5.5 percent range. If the Fed acted on this view then it would be raising interest rates very soon to keep the unemployment rate from falling below this level.

But there was a widely held view in the 1990s, backed up by a considerable amount of evidence, that the magic number was close to 6.0 percent. Alan Greenspan had the good sense to ignore this view and allowed the unemployment rate to continue to fall, eventually bottoming out at 3.8 percent in some months in 2000. The result was that millions of people had jobs who would not otherwise have been able to, and tens of millions saw pay increases. And, we had trillions of dollars in additional output.

The gains from lower unemployment contrasted with the risks of higher inflation seem so asymmetric that it is difficult to see why the Fed should move to dampen growth until there is real evidence of higher wage growth and accelerating inflation. There clearly is none now, so why shouldn't the Fed be prepared to take the Greenspan gamble?

Mark Cuban Does the Bubble Beat Print
Thursday, 05 March 2015 19:29

Mark Cuban should know something about bubbles. After all, he became a billionaire in the 1990s stock bubble selling his start-up to Yahoo for what almost certainly was a grossly inflated price. But just as winning the lottery doesn't make someone an expert on probabilities and statistics, hitting the jackpot once doesn't mean someone knows much about bubbles.

Cuban demonstrated this point in a blogpost headlined, "Why This Tech Bubble is Worse than the Tech Bubble of 2000." The gist of his argument is that the inflated stock prices of 2000 were in publicly traded companies. By contrast, many of the most inflated prices in the tech sector today are in companies that are still private. His remedy is for the Securities and Exchange Commission to make it easier for people to buy into these companies. It's not clear which part is worse, Cuban's diagnosis of the problem or the proposed solution.

On the former point, he misses the fact that the size of the bubbles are nowhere comparable. At its peak in 2000 the value of corporate stock was more than 30 times trend earnings, today it is closer to 20. The bubble was clearly moving the economy both by sending investment to its highest share of GDP since the 1970s and by causing a consumption boom through the wealth effect.

Neither story is close to being true today. If over-valued tech companies were to lose 95 percent of their value tomorrow, few people outside of Silicon Valley would notice.

This issue about these companies being privately traded makes between little and no sense. If Mark Zuckerberg paid $19 billion too much for Whatsapp, who cares? It's a form of redistribution from the incredibly rich to the new superrich. That's hardly a publicly policy problem.

Cuban's real concern seems to be the small time operations being hawked through equity crowd funding. He's worried that small time types will lose the $5,000 they put up to buy into hare-brained schemes that only make sense to those infected with ignorant greed. Cuban's solution is to relax the restrictions imposed by the Security and Exchange Commission so that it will be easier to resell these shares to other suckers.

As a way for dealing with the problem of a bubble, this would be like relaxing margin requirements in 2000 so that it would be easier for investors to buy Internet stocks on credit. Cuban should have saved this one for the first of the month.


The WaPo Inadvertently Tells Readers Why the Government Never Takes Action Against an Over-valued Dollar Print
Thursday, 05 March 2015 07:58

Regular readers of BTP know that the over-valuation of the dollar is one of my pet themes. There are two big issues with the over-valuation.

The first is macro economic. An over-valued dollar makes U.S. goods and services less competitive internationally. If the dollar is over-valued by 20 percent against other currencies then it has the same impact as if we were to impose a 20 percent tariff on all our exports and give a 20 percent subsidy on imported goods. Needless to say, this leads to a much larger trade deficit than would be the case if the currency were not over-valued.

The trade deficit creates a gap in demand. The deficit is currently around 3.0 percent of GDP or $540 billion a year. This is money creating demand in other countries, not in the United States. There is no easy way to make up this shortfall in demand. Investment and consumption will not conveniently rise to fill the gap. We could in principle fill the gap with larger budget deficits, but given religious views about balanced budgets among people in power, that is not going to happen.

This means that an over-valued dollar is likely to lead to major shortfalls in demand and unemployment. Or, to use the term currently popular among econ policy wonks, it leads to "secular stagnation."

The other issue is distributional. An over-valued dollar hurts the workers who are subject to international competition to the benefit of workers who are largely protected from international competition. Textile workers and autoworkers take it on the chin, while doctors and lawyers, who ensure that trade agreements don't subject them to international competition end up benefiting. They get lower cost imports, without experiencing any downward pressure on their wages. (Businesses like Walmart and GE, who import much of what they sell in the U.S., are also big beneficiaries.)

The WaPo chimed in with those beneficiaries in a Wonkblog piece telling readers which countries are best to visit to take advantage of the over-valued dollar. Needless to say, there will probably not be many manufacturing workers who will take advantage of the information in this piece. However, there will be many doctors, lawyers, and congressional staffers (including those of progressive representatives) who will find this useful information.

And you wonder why no one ever does anything to make the dollar more competitive.



I will give a quick response to the argument by Yanis Varoufakis raised in the comments. I think Varoufakis is mistaken. They are no secret conspiracies here, everything is pretty much right on the table. There are segments of the elites that stand to gain from an over-valued dollar. This includes businesses that are outsourcing to get cheap labor and retailers like Walmart who undercut competitors by setting up low cost supply chains in the developing world. Finance also tends to be happier with a dollar that goes farther overseas and less inflationary pressure at home.

The economy as a whole does not in any way need an over-valued dollar, nor does the U.S. uniquely "benefit" from some special privilege as the world's reserve currency. On the first point, if the dollar had been lower in the years from 1997 (when we first began running large trade deficits) to 2008, we simply would have seen a smaller trade deficit and more employment. That may not have been true at the peak of the 1990s cycle, when the Fed may have tightened up enough to choke off any employment gains, but it would almost certainly have been true for much of the rest of the period. If there is a basis for some crisis in that story, it's hard to see what it is.

On the second point, the euro is also used as a reserve currency, albeit to a much smaller extent than the dollar. Nonetheless, this is not a zero/one story. The euro and its predecessor currencies also rose in value against the currencies of the developing world following the East Asian financial crisis, although the timing was different. The euro peaked in the year before the financial crisis at close to 1.6 dollars. If we enjoyed some special privilege then the euro zone countries enjoyed a super special privilege.

In reality the over-valuation of the euro was contributing to the enormous imbalances that were the basis of its economic collapse. That's not a privilege anyone should want to seek. 


NYT Misses the Story on the Fed and African American Unemployment Print
Tuesday, 03 March 2015 19:03

The NYT examined the impact the Fed has on unemployment among African Americans and came up with the bizarre conclusion that the Fed can't do much:

"The Fed has a hammer, and, as the saying goes, not all problems are nails."

This conclusion is bizarre, because the data are very clear; efforts to reduce the overall unemployment rate disproportionately help African Americans and Hispanics. As a rule of thumb, the African American unemployment rate is roughly twice the unemployment rate and the unemployment rate for African American teens is roughly six times the white unemployment rates. (The unemployment rate for Hispanics is generally 1.5 times the white unemployment rate.)

In keeping with this rule of thumb, the unemployment rate for whites in January was 4.9 percent. It was 10.3 percent for African Americans and 29.7 percent for African American teens. Here's what the longer term picture looks like.


If we could get back to 2000 levels of unemployment, when the unemployment rate for whites bottomed out at 3.4 percent, we might see something like the 7.0 percent unemployment rate for blacks overall and 20.0 percent we saw for black teens back in April of 2000.

Alternatively, to flip it over and talk about employment rates, the percentage of black teens that was employed peaked at 31.7 percent in 2000, more than 50 percent higher than the 19.6 percent figure for last month. Does anyone really want to say that increasing the probability that black teens will have a job by 50 percent doesn't make a difference?

There is a separate issue as to whether it would be possible to get down to 4.0 percent unemployment without triggering spiraling inflation. This is an arguable point. But it is worth noting that those who say it is not possible to have 4.0 percent unemployment today also said that it was not possible back in 2000.


Note: This is a corrected version, the original graph had data that were not seasonally adjusted.

Addendum: The story has been corrected.

What Happened to the Great American Boom? Print
Tuesday, 03 March 2015 15:38

With a string of strong jobs reports (the most recent coming with good hourly wage growth) the business section has been filled with reports of America once again being a booming economy, which contrasted with weak growth elsewhere in the world. With a bit more data, it's not clear that reporters will still be writing these stories.

First, the fourth quarter growth rate was revised down to 2.2 percent, giving a 2.4 percent growth rate over the prior year. This is almost exactly the same as the average of the last two years. Not much of a case for an acceleration of growth there.

Furthermore, the data that have come in for the first quarter don't look very promising. Construction spending fell by 1.1 percent from December to January. Retail sales fell 0.8 percent in January compared to December. Car sales were relatively weak in February. This was undoubtedly in part due to unusually severe weather, but it nonetheless virtually guarantees weak growth in consumption for the quarter. Equipment investment is up modestly, but January shipments were only slightly above the October level. In short, we are not seeing any investment boom.

With weak consumption and lackluster investment, there will be little to counter the impact of a rising trade deficit resulting largely from the increase in the value of the dollar. Look for first quarter growth under 2.0 percent and possibly a fair bit under 2.0 percent. (Insofar as the weakness is weather-related, there will be a rebound in the second and third quarters, as happened last year.) 

Meanwhile, the rest of the world is looking brighter. Japan had 2.2 percent GDP growth in the fourth quarter, which puts it about a percentage point ahead of the United States on a per capita basis. The euro zone economies are now showing modest growth, but the best news may be coming from Germany. IG. Metall, the country's largest trade union, signed a pact increasing wages by 3.4 percent. IG Metall's contracts often provide a basis for other contracts and even wages among non-union workers.

This could be a sign that wages and consumption will grow more rapidly in Germany. This also could lead to somewhat higher inflation in Germany, which will be a huge help to the peripheral countries in the euro that are trying to regain competitiveness. In short, this is really good news for German workers and the euro zone as a whole. 

Robert Samuelson Complains that the Good Fortune of Government Bond Holders Is Partially Paid by the Taxes of Struggling Millennials Print
Monday, 02 March 2015 05:43

Okay, Robert Samuelson would never see any injustice in rich people like Pete Peterson getting the interest on their government bonds. If that means that "struggling millennials" have to pay more taxes, so be it. The rich are entitled to the interest on the bonds they purchased.

No, Robert Samuelson is upset that workers are getting the Social Security and Medicare benefits they paid for. As an analysis from the Urban Institute shows, middle income baby boomers will get somewhat less back in benefits than they paid in taxes. The cost of their Medicare benefits will exceed what they pay in taxes, but this is because we pay our doctors, drug companies, and medical equipment companies roughly twice as much as they would get in other wealthy countries. If there is a complaint about someone doing well at the expense of struggling millennials, it should be directed at these groups.

Of course the other obvious issue is why are millennials struggling? If we had an economy aimed at achieving full employment, instead of having the Fed raise interest rates to slow job creation, if we had a trade policy designed to help ordinary workers instead of doctors, lawyers, and drug companies, and if we had a labor relations policy that was more balanced between workers and capital, then millennials would not be struggling. For that matter, their baby boomer parents might then have something other than Social Security to support them in retirement.

Anyhow, it's Monday morning and Robert Samuelson is unhappy that workers may be able to enjoy a comfortable retirement. In other words, it's another week in Washington. 

Greek Austerity Does Not Protect Europe's Taxpayers Print
Sunday, 01 March 2015 10:21

The NYT described Germany's insistence that Greece adhere to an austerity plan as being derived from a desire to protect taxpayers. It's not clear that this is the case. Most of the debt is owed to official lenders who have no need to make demands on Germany's taxpayers to get funding. (The European Central Bank prints its money.)

Furthermore, more rapid growth in the euro zone will both allow Greece to repay a larger portion of its debt and also improve Germany's budget situation as well. For this reason, it is hard to see how German taxpayers will derive any benefit from austerity in Greece.

"Holdouts" On Argentine Bonds, Did Not Own the Bonds at Time of Default Print
Friday, 27 February 2015 05:55

A NYT piece on the ongoing legal battle between hedge funds that own a portion of Argentina's debt and the Argentine government likely misled many readers. It referred to the hedge funds as "holdouts," saying that they had refused to accept the terms offered by Argentina to bondholders at the time the country defaulted in 2001.

In fact, these funds did not hold Argentine debt at the time of the default. They bought the debt up after the default at a small fraction of its face value. Their hope was that they could use their political connections and their legal expertise to force the Argentine government to pay substantially more on its debt than it offered to other creditors.

Conservative Economics Has Not Produced Rapid Growth Print
Thursday, 26 February 2015 08:33

The Post had an interesting piece on the debate within the Republican party over economic policy. At one point the piece notes the stagnation in middle class incomes and then tells readers:

"There is a growing sense among many conservative economists that faster growth by itself will not suffice to lift those incomes at the rate middle-class workers came to expect a generation ago ."

This comment may mislead readers into believing that conservative policies of tax cuts and deregulation have been associated with faster growth. They haven't.

The table below shows the average growth rate under the last six presidents (measured as first quarter of their term to first quarter of the next adminstration.)

Carter -- 3.4%

Reagan -- 3.4%

Bush I -- 2.0%

Clinton --3.7%

Bush II -- 1.6%

Obama -- 2.2%

This record shows that tax cutting Republicans have done worse in promoting growth during their administrations than tax and spend Democrats. While Republican policies may not have been successful in producing gains for the middle class, they have also not done very well in promoting growth. 

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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.