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Robert Samuelson Hypes the Views of Always Wrong Economists to Tell Us to Get Used to Being Poor Print
Monday, 31 March 2014 04:47

Economics is a great profession for people who are not very good at their work. Messing up all the time does not affect at all your ability to maintain a high-paying job and get people to take your views seriously. 

Hence we have Robert Samuelson warning us that we might have to just accept that we will be faced with continuing slow growth and high unemployment. First off, it is important to sort out two different issues which Samuelson mushes together.

The first one is the extent to which we should expect the unemployment rate to fall as the economy returns to full employment or something like it. The second issue is the rate of productivity growth that the economy can sustain going forward. These are very different issues that are at most tangentially related.

The first one is about a level of output and employment. We saw a plunge in demand when the housing bubble burst. Those of us familiar with intro economics were not surprised by the downturn nor the weak recovery, since there is no source of private sector demand to replace the demand that had been generated by the bubble. We saw more than a trillion dollars of annual demand disappear when the construction driven by the bubble disappeared along with the consumption driven by $8 trillion in housing bubble generated equity that vanished with the crash.

The public sector could replace the demand, but people like Robert Samuelson and his buddies in the Washington elite like low budget deficits more than they care about seeing people have jobs. In short, there is no mystery about the economy not returning back to potential GDP and continuing high unemployment. It is exactly what the textbook economics would predict.

Read more...

 

 
NYT Decides to Abandon Distinction Between News and Opinion Print
Saturday, 29 March 2014 22:11

The NYT, even more than other newspapers, tried to maintain a clear separation between its news and opinion sections. It apparently abandoned this distinction in an article today that could have been a press release from the California farmers' association.

The article tells readers:

"A work force that arrived in the 1990s is aging out of heavy labor, Americans do not want the jobs, and tightened security at the border is discouraging new immigrants from arriving, they say, leaving them to struggle amid the paralysis on immigration policy."

The piece never tells readers how much farmers look to pay their workers, but it does give us the bad news:

"Last year, the diminished supply of workers led average farm wages in the region to increase by roughly $1 an hour."

If these workers were getting the median wage then it would imply a pay increase of 5 percent, which hardly seems especially lavish. if the workers were getting much less than the median, then it says a great deal about the NYT's assertion that "Americans do not want the jobs."

In a market economy, when there is a labor shortage wages are supposed to rise. Apparently the NYT doesn't want wages to rise for farmworkers. Newspapers usually try to restrict such editorializing to the opinion page,

 
Why Is MSNBC's Heiress Unwilling to Talk About the Most Important Economic Issues Facing Her Generation Print
Saturday, 29 March 2014 21:47

Abby Huntsman, the daughter of Jon Huntsman, a millionaire and unsuccessful presidential candidate, seems determined to press the idea of cutting Social Security and Medicare, apparently unaware that people from her class have been doing the same for decades.

As I wrote in response to her previous diatribe, there is no way that paying for Social Security will have a major effect on the standard of living of people of Huntsman's age. Even if we resolved the projected shortfalls entirely by raising the payroll tax, as opposed to raising the cap on income subject to the tax, apply revenue from other sources, or any reductions in benefits, the necessary tax increase would be less than 10 percent of projected average wage growth over the next three decades.

The far greater risk to the living standards to the people of Huntsman's generation is the risk that we will continue to see the upward redistribution of income over the next three decades that we have seen over the last three decades. As a result of this upward redistribution of income, people like Ms. Huntsman's father have benefited enormously, while most workers have seen little or none of the gains from economic growth. If this pattern continues then most people in Ms. Huntsman's cohort will not fare well financially even if we eliminated their Social Security taxes altogether.

Huntsman points out that the burden from Medicare is far worse. This is due to the fact that health care costs per person in the United States are more than twice as high as the average for other wealthy countries, with nothing to show for it in terms of outcomes. This is why serious people focus on trying to bring our costs more in line with costs elsewhere in the world. This would likely come at the expense of doctors (who comprise one sixth of the richest one percent), drug companies, insurers, and other powerful interest groups who benefits from the waste in the health care system. (One simple method to reducing waste is to open up the sector to more trade.) The issue here is whether we look to reduce the quality of care received by seniors or whether we look to reduce the waste in the system that further enriches the rich.

Finally, anyone concerned about the plight of young people should be asking about global warming. Current trends in greenhouse gas emissions imply a world that will be suffering massive damage from global warming in two or three decades. Hundreds of millions of people will be facing risks to their livelihood and survival due to extreme weather, floods, and droughts. This will lead to large-scale social unrest in much of the world. That is likely to matter much more to most people of Abby Huntsman's generation than the possibility that their Social Security tax rate may increase by one or two percentage points.

 
Uwe Reinhardt on the Cost of an Extra Year of Life Print
Saturday, 29 March 2014 16:02

Uwe Reinhardt picked up on an earlier blogpost in which he asked how much should we be willing to pay for an extra year of life. I had objected to his framing since the high cost in the matter he raised was associated with the patent protected price for the drug in question, not actual resources from society.

The point is that the (possibly considerable) resources involved in developing the drug had already been used. The marginal resources in the form or producing additional units of the drug and administering the treatment would be fairly small. That would make the issues in this particular case trivial. It would not require much deliberation to say that it is worth $1,000 or $2,000 to extend a person's life by a year.

In this post Reinhardt acknowledges the point, and concedes that there could be better ways than patent monopolies to finance research into prescription drugs but adds:

"The alternatives to pricing new medical technology proposed by Mr. Baker and others whom he cites face huge political hurdles not likely to be overcome soon, if ever."

He certainly is right about the huge political obstacles, but given how much is at stake it certainly seems worth trying to press the discussion. After all, the idea of having large numbers of people needlessly denied medical care that could extend their life is a pretty big deal.

 
The Quit Rate, the Fed, and Braindead Employers Print
Saturday, 29 March 2014 10:35

The raise-interest-rates crew has lately been getting excited over a slight rise in the quit rate, the percentage of workers who voluntarily leave their jobs. The claim is that the labor market is now getting so tight that workers are able to get wage gains, which will be passed along in higher prices, which will soon mean accelerating inflation.

It's a bit hard to see much of a case here. While the quit rate is above the troughs seen in 2009-2010 it is still lower than at any point in the 2001 recession and aftermath. Wages by most measures are pretty much rising at the same pace as they have been over the last three years, and inflation seems to be slowing rather than rising. But hey, if you want to slow the economy and throw people out of work, you can always find something.

Anyhow, there are two sides to any quit decision. On the one hand, there is an unhappy worker. On the other hand there is an employer who has made this worker unhappy. This is worth thinking about.

The business press has been full of stories of employers complaining that they can't find qualified workers. I and others have ridiculed these claims, since the obvious way to get qualified workers is to offer higher wages. This does not seem to be happening on any large scale, suggesting that employers really are not having trouble finding workers.

But perhaps there is more to our ridicule than we imagined. Maybe employers really don't understand that if they offered higher wages they would get more workers applying for jobs. After all, no one gives you a test in basic economics to become a boss. If that is the case, we would expect the failure to raise wages would lead to more unhappy workers and more quits. This would be true even if the labor market is weak.

So maybe the answer to the riddle of a higher than expected quit rate is a change in behavior among employers rather than a change in the labor force. It's at least as good as the other theories out there.

 

Note: Hyphens added, thanks Fred.

 
Great Expectations and the Consumer Confidence Con Game Print
Saturday, 29 March 2014 08:35

Floyd Norris has an interesting discussion of the Conference Board's consumer confidence index in his "Off the Charts" column. The main takeaway is that the current conditions index has been on a consistent upward path since the trough of the recession while six-month expectations index has gyrated erratically with little clear trend.

It is worth adding a bit more to this analysis. The current conditions index does actually tend to track current consumption reasonably closely. On the other hand, the six-month expectations index doesn't really tell us much about what consumers are doing. Even purchases of big-ticket items like cars and houses have little correlation with the expectations index.

As  a practical matter, the expectations index tends to follow news reporting of economy. This makes sense since not many people are sitting around with their economic models making predictions about inflation, unemployment, and growth over the next six months. Rather than being a meaningful measure of consumer confidence, this expectations index is telling us whether the media is highlighting positive or negative news about the economy. That might be worth knowing, but it is has little to do with consumer behavior. 

 

Note: Typo corrected.

 
The Job Apocalypse That Is Hiding From The Bureau of Labor Statistics Print
Thursday, 27 March 2014 05:51

There is a growing industry in the United States of people promoting stories about how robots and other technological innovations are going to make us all unemployed. Unfortunately Harold Meyerson seems to have taken these people seriously.

Meyerson cites a study showing that technology is likely to slash employment in large sectors of the economy and then tells readers:

"Eventually, however, as computers pick up more and more skills, we will have to embrace the necessity of redistributing wealth and income from the shrinking number of Americans who have sizable incomes from their investments or their work to the growing number of Americans who want work but can’t find it. That may or may not be socialism; certainly, it’s survival."

The problem with this story is that it is 180 degrees at odds with the data. Robots and computers seem to fascinate people as something new and different, but actually they are just forms of productivity growth. The issue is simply one of how fast we might expect these new technologies to increase productivity and displace workers. The answer we have been getting to date from the Bureau of Labor Statistics (BLS) is not very fast.

Here's what the picture looks like from the latest data.

Productivity 32674 image001

                                   Source: Bureau of Labor Statistics.

As can be seen, the overall rate of productivity growth in the years since the speedup began in 1995 has been less than 2.4 percent annually. This compares to a rate of 3.2 percent in the years 1947-73, when unemployment was low and wage growth was strong. (Due to measurement issues such as the difference between gross and net output and differences in price indices, "usable" annual productivity growth was about 0.3 percentage points higher in the years 1947-73 relative to the official numbers.) In the more recent years since the downturn, productivity growth has fallen off to less than 1.7 percent annually.

If we look to manufacturing alone, there is a bit more of a story, but still not much. Productivity growth in the years since 1995 has averaged 3.4 percent, this is slightly higher than 3.2 percent overall rate of productivity growth in the 1947-1973. That can't be enough to tell a qualitatively different story, especially since manufacturing now accounts for less than 10 percent of total employment. Furthermore manufacturing productivity growth was almost certainly stronger than overall productivity growth in the years 1947-73 golden age also (BLS does not give that series), so that would likely mean that it was faster than the rate we have seen in manufacturing since 1995. As with overall productivity, manufacturing productivity growth has also slowed sharply since 2007.

So why should we think that productivity growth will lead to a problem of too few jobs, as opposed to providing a basis for rising wages and living standards? if there is some huge productivity boom facing us in the near future, it is hiding pretty well from the folks gathering the data at BLS.

This is an important point because socialism or large-scale redistribution are big deals. We don't expect that our politicians in Washington will be likely to embrace either concept any time soon. But much smaller and simpler policies can ensure that workers have jobs and share in the gains of economic growth. If we get the value of the dollar down against other currencies, we will reduce the trade deficit and create millions of jobs. President Obama could negotiate a decline in the value of the dollar against the currencies of our major trading partners as President Reagan did in the mid-1980s. We could also boost demand with increased stimulus and we could give more workers jobs through work sharing policies. (Read the book, it's free.)

Anyhow, the point is that we are not in a brave new world where the basics of economics and technology are destined to screw the vast majority of workers absent major changes in public policy. We are in the vicious old world where the bad guys are actively manipulating public policy in ways that are screwing workers now. If we are going to make any headway in reversing this process we have to keep our eye on the ball.

 

 
What Is the Fed's Credibility as Inflation Fighting Central Bank Worth? Print
Wednesday, 26 March 2014 08:37

That's the question that readers of Fivethirtyeight Economics are asking after reading a discussion of the choices facing the Federal Reserve Board. The piece told readers that the Fed could push unemployment rate down to levels where inflation began to accelerate (overshooting):

"Overshooting is risky. The Fed would risk its credibility as an inflation-fighting central bank."

The cost of keeping the unemployment rate up is that the government (through the Fed) is denying millions of people the opportunity to get jobs. The government is also putting downward pressure on the wages of the bottom half of the workforce, since their wages are especially sensitive to the unemployment rate. And the economy is losing hundreds of billions of dollars a year in lost output, since these workers could be productively employed. 

Obviously Fivethirtyeight attaches great value to the Fed's credibility as an inflation-fighting central bank since it thinks that we might think this value exceeds the costs of keeping the unemployment rate high. It would be helpful to readers if it explained how high this value is and how it came to this assessment.

 
Louisiana Governor Bobby Jindal Claims Ads Promoting Obamacare Interfere With His Government Guaranteed Monopoly Print
Wednesday, 26 March 2014 01:59

I'm not kidding on this. If you wanted proof that Republicans have zero interest in a free market and that most reporters are too thick to notice you couldn't ask for a better example than Louisiana Governor Bobby Jindal's lawsuit against Moveon.org over billboards criticizing his decision not to extend Medicaid coverage in the state. As written up in a column by Katrina vanden Heuvel, the suit claims the billboards, which play off the state's tourism slogan, "Pick Your Passion," are causing damage to the state's tourism promotion efforts by reducing the value of its copyrighted slogan.

Could someone who believes in a free market really want the U.S. government to prevent someone from taking out billboards because of the damages they impose on business? Obviously Jindal doesn't give a damn about free markets, just like a person who runs a dog fighting ring doesn't care about animal rights. Fortunately for Jindal, he lives in a country where the media's definition of impartiality means that they cannot point out that a Republican who profits from dog fighting may not be committed to animal rights.

 
Krugman and DeLong on Avoiding Secular Stagnation Print
Tuesday, 25 March 2014 08:20

Brad DeLong and Paul Krugman are having some back and forth on the problem of secular stagnation and what it would have taken to avoid a prolonged period of high unemployment. I thought I would weigh in quickly since I have a better track record on this stuff than either of them. 

The basic story going into the crash was that we had an economy that was being driven by the housing bubble. This was both directly through residential construction and indirectly through the consumption that followed from $8 trillion of bubble generated housing equity. Residential construction expanded to a record high of more than 6 percent of GDP at a time when demographics would have implied its share would be shrinking. This led to enormous overbuilding, which is why construction hit record lows following the crash. (There was a smaller bubble in non-residential real estate that also burst in the crash.) 

Consumption also predictably plummeted. This is known as the housing wealth effect. (I learned about this in grad school, didn't anyone else?) Anyhow, when people saw their homes soar in value many spent in part based on this wealth. This might have meant doing cash out refinancing, a story that obsessed Alan Greenspan during the bubble years. It might mean a home equity loan, or it might just mean not putting money into a retirement account because your house is saving for you.

In any case, when the $8 trillion in bubble generated equity disappeared so did the consumption that it was driving. You can't borrow against equity that isn't there. This cost the economy between $400 billion and $600 billion (@ 3-4 percent of GDP) in annual consumption expenditures. Between the lost construction and lost consumption, it was necessary to replace close to 8 percent of GDP. The effect of lost tax revenue in forcing cutbacks at the state and local level raised the demand loss by another percentage point or so.

Some of this gap would be filled as excess inventory of housing gradually faded and the vacancy rates came back to more normal levels. We're getting there, but still have some way to go. Some would be filled by a drop in the trade deficit, which now sits at around 3 percent of GDP, compared to a level of almost 6 percent of GDP before the crisis.

The government could fill the remaining gap with additional spending, but our cult of low-deficit politicians is insisting that they would rather keep people from getting jobs, so this ain't going to happen. Low interest rates are of course a good route to spark demand, and if we could lower real rates further with a higher inflation rate, that would be good news. But that one also doesn't seem very promising.

The other part of the demand story would be to make more progress on the trade deficit. This one is not rocket science, a lower dollar means a lower trade deficit (more econ 101). The issue of lowering the dollar is often posed as a matter of getting tough with the Chinese and force them to stop "manipulating" their currency.

We actually don't have to hide in the dark and wait to catch China in the act and then bring them to justice. China very openly maintains its currency at a level that is well below the market rate. They set a target for their exchange rate and they maintain it by buying up massive amount of foreign assets, such as U.S. government bonds. We don't have to catch them in the act, all of this is completely open and involves trillions of dollars of asset purchases.

It is also not a matter of bringing China to justice over the issue. China has found maintaining an under-valued currency to be a useful development strategy, but they also find other policies to be useful to their development strategy, like not enforcing foreign patent and copyrights or not opening their financial markets to companies like Goldman Sachs.

This suggests an obvious path for getting China to allow the dollar to fall against its currency. We simply tell them that we don't care if they enforce Pfizer and Merck's patents or Microsoft's copyrights. We also tell them they don't have to open up their financial markets to Goldman Sachs, J.P. Morgan and the other Wall Street behemoths, we just want them to raise the value of their currency.

Again, this path may not be politically viable either because of the relative power of the drug companies and banks as opposed to tens of millions of unemployed and under-employed workers, but let's at least get the cards on the table. As fans of national income accounting everywhere know, we will not be able to get to potential GDP without large budget deficits as long as we have large trade deficits (assuming no more bubbles).

There is one other item that must be on the full employment agenda especially as we approach the big March 31 deadline for Obamacare. If we reduce the supply of labor we can also get to full employment. Obamacare will be a useful step in this direction since it will give millions of workers the option not to work or to work fewer hours since they will not have to get health insurance through their jobs. This means that parents of young children will be able to spend more time with their kids, people suffering from illnesses or disabilities will be able to rest more and work less, and many older workers will be able to retire early.

There are other ways we can go to accommodate people's needs and thereby reduce the labor supply. For example more paid sick days would be good news, as would be paid family and medical leave. Many state and local governments are leading the way in these areas. Also, some paid vacation would be nice. Four weeks has been the norm in Europe for decades with some countries guaranteeing as much as six weeks of paid vacation. (Yep, it's all in the good book.)

Anyhow, there are always things that can be done. The key point is to first understand where we are. And the most important take away is that millions are suffering now not because we are too poor, but we are too rich. We don't need all the workers we have. This provides enormous opportunities for making people's lives better, if we just had the political will.

 

 
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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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