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Lower Inflation Due to Lower Oil Prices Does Not Raise Real Interest Rates for Businesses Print
Friday, 13 March 2015 04:26

That would be unless the business in the oil industry. A NYT piece on the drop in inflation across Asia seems confused on this point. It notes the sharp decline in the inflation rate across the region, which is mostly due to lower oil prices, and raises the concern that this may discourage businesses from investing.

This logic doesn't work insofar as the lower inflation is simply due to lower oil prices. From the standpoint of a business considering a new investment what matters is the price of the product it sells, not prices in general. If the price of cars is expected to rise by 2 percent a year, then businesses will take this projected rate of inflation into account in planning their investment. The fact that lower oil prices will reduce the overall rate of inflation should not affect its decision, except insofar as lower oil prices could mean that consumers have more money to spend on cars.

The basic story here is straightforward, lower oil prices are good for promoting growth except in countries that are large producers of oil. They are of course awful from the standpoint of the environment. (In addition to increasing oil consumption and greenhouse gas emissions directly, lower oil prices will also discourage investment in clean energy.)

The Drop in the Value of the Euro Would Have the Same Impact on Oil Prices in Europe If Oil Was Priced in Euros Print
Wednesday, 11 March 2015 20:07

The silly things you read in the NYT! It really doesn't matter what units oil is priced in. We get a market price that is determined by supply and demand. This will be higher measured in euros any time the euro falls in value simply because at the same price measured in other currencies, oil will cost more euros.

It would only matter if the price were in dollars if there were long-term contracts that are specified in dollars. In some cases, companies will have long-term contracts, but not all of these are in dollars. Countries and companies can contract for oil in any terms they want. They can do it yen, pounds, even peanut butter.

Fun With Brad DeLong on TPP Print
Wednesday, 11 March 2015 15:27

Brad thinks he has a winner policy with TPP, taking issue with Paul Krugman who says the deal is not worth doing. Brad argues that even if the deal is worth half of the 0.5 percent of GDP figure that is widely cited, we are still talking about 0.25 percent of GDP, or $75 billion a year for the region as a whole and $45 billion for the U.S.

He acknowledges that these gains may not be spread evenly, but wants to see evidence that the losses to workers would be larger than their share of this $75 billion. He also notes Krugman's complaint about increased protection for intellectual property, especially drug patents, and wants to see evidence that these losses will be large enough to offset the $75 billion in annual gains. Okay, let's take the DeLong challenge.

First, one of the issues raised by many TPP opponents is that it will almost certainly have nothing on currency. This mean that it will not make it any easier, and could well make it more difficult, for the United States to address the trade deficit that results from having an over-valued dollar. Whether or not that ends up being the case is of course speculative, but this could be a very big deal.

As some folks have argued, the United States has faced a serious problem of secular stagnation, meaning it does not have enough demand to bring the economy to full employment. In principle this problem can be easily addressed by a big government stimulus program. But we don't live in principle, we live in Washington, where no one in a position of power is prepared to talk about big increases in the government deficit. Hence, secular stagnation is a real live problem.



The New York Times Gets Confused in Spain: It Doesn't Realize that Taxes Pay for Spending Print
Wednesday, 11 March 2015 04:31

It seems the paper is having more than a few problems with logic these days. (See yesterday's concern that inflation in the euro zone will drop from a small positive to a small negative.) An article on the rise of Podemos, a left populist party in Spain, discussed Podemos' program:

"The program also calls for new taxes on the wealthy and on financial transactions. It promises higher pensions and salaries, as well as a rise in spending on health care, education and other social services — without, however, elaborating on how those plans would be paid for."

Presumably a main reason for new taxes on the wealthy and on financial transactions is to pay for the spending on health care, education, and other social services. It is also worth noting that the program calls for a shortening of the workweek (mentioned in the previous paragraph) which should help spread the work that is available. This wiill reduce Spain's unemployment rate (currently close to 24 percent) thereby reducing the need for some public transfer payments like unemployment benefits.

At one point the piece tells readers about the boast of Mariano Rajoy, Spain's current prime minister, that the country had the fastest growth in the euro zone last year at 1.4 percent. The piece did not tell readers that even with this growth Spain is still projected to have a per capita GDP in 2019 that is more than one percent lower than it was in 2007 before the recession. This would imply a far worse and more prolonged downturn than the United States experienced in the Great Depression. The I.M.F. projects the unemployment rate in 2019 will be 18.5 percent.

The piece also neglected to tell readers that Spain had been running budget surpluses before the recession. Unlike Greece, Spain did not have a problem with a profligate public sector. Its problem was a huge housing bubble and construction boom financed in large part by irresponsible German banks.

The article also at one point notes that a part of Podemos program is:

"revising the statutes of the European Central Bank to make full employment one of its goals."

It would have been worth pointing out that this change would make the goals of the European Central Bank (ECB) the same as the goals of the Federal Reserve Board. The Fed has a dual mandate of price stability and high employment. Currently the ECB's only mandate is to keep the inflation rate below 2.0 percent. As a result, its first president, Jean Claude Trichet, patted himself on the back when he left his post in 2011. Even though the euro zone's economy was in shambles, he could boast that the bank had met its inflation target.

The Problem is not the Specter of Deflation, the Problem is the Inflation Rate Is Too Low Print
Tuesday, 10 March 2015 07:28

Okay, this is no longer amusing. Can we stop the nonsense about deflation? It doesn't make a f***ing bit of difference whether prices are rising at a small positive rate or whether they are falling at a slow rate, except for the fact that the inflation rate is lower.

This really should not be hard to understand. The inflation rate is a composite of millions of price changes. When the inflation rate is very low, as it is now in the euro zone, a large portion of these price changes are already negative. Since the overall inflation rate is positive, it means that the increases are either somewhat more numerous or larger in absolute size than the decreases. 

However, suppose the ratio shifts, from say 55 percent increases against 45 percent decreases, to the reverse. How can this shake the economy? Many businesses were already looking at falling prices, now a few more are looking falling prices, so what?

The point should be simple, the problem in the euro zone is an inflation rate that is too low, which means the real interest is higher than would be desirable given the weakness of the economy. Having the inflation fall further makes matters worse, but crossing zero does not matter. Crossing zero does not matter. Someone please tell the NYT's editors and reporters. It should not be hard to get this one straight. (Here's the I.M.F. on the topic for those who care more about authority than evidence and logic.)

David Brooks' Moral Revival and the Federal Reserve Board Print
Tuesday, 10 March 2015 04:27

David Brooks' used his column today to bemoan the fact that the vast majority of children of parents with just high school degrees grow up in single parent families. By contrast, the vast majority of children with college educated parents grow up in two parent families. Following Robert Putnam's new book, he refers to a long list of disadvantages faced by children of non college-educated parents compared with children raised by college-educated parents. His column then turns to the need to have a moral revival to break the spiral whereby disadvantaged children have disadvantaged children.

"Next it will require holding everybody responsible. America is obviously not a country in which the less educated are behaving irresponsibly and the more educated are beacons of virtue. America is a country in which privileged people suffer from their own characteristic forms of self-indulgence: the tendency to self-segregate, the comprehensive failures of leadership in government and industry. Social norms need repair up and down the scale, universally, together and all at once."

This is an interesting appeal for restoring social norms and responsibility, but apparently Brooks doesn't intend for it to mean things like locking up, or even criminally prosecuting, bankers who violate the law. But that aside, there are some things that can be done to improve the plight of the disadvantaged other than lecture them on values. Of course better education and child care would be a great place to start. Also, more family-friendly work places would be a good idea, since that might give some single parents more time to spend with their kids, one of the problems cited by Brooks. And then there is the question of letting their parents have jobs.

This is where the Federal Reserve Board comes in. If the Fed starts to raise interest rates over the course of this year, the point will be to keep workers from getting jobs. This is the logic of higher interest rates. They discourage people from buying cars and homes, they discourage businesses from investing, and they discourage state and local government from borrowing for infrastructure and other purposes. With less demand in the economy, there will be fewer jobs and therefore less upward pressure on wages.

The people who are most likely to face job loss and to have their bargaining power undermined are less-educated workers; you know, the ones who David Brooks wants to see have a moral revival. (Yeah, I know he wants that for everyone.) So here we have a story of the advantaged (in fact very advantaged since almost all of the people calling the shots at the Fed are in the one percent) acting to undermine the economic and social condition of poor and working class people.

And folks wonder why the disadvantaged won't listen to the moral appeals of folks like David Brooks.


Wall Street Journal Soon to Run Piece on Improper Denials of Disability Claims Print
Monday, 09 March 2015 12:22

That's inevitable, since any fair-minded newspaper that ran a column on improper approvals would surely want to balance it out. For those who missed it, the Wall Street Journal had a column by George Mason economist Mark Warshawsky and his grad student Ross Marchand complaining about a limited number of administrative-law judges who approve disability appeals at a very high rate.

The piece referred back to data from 2008, which showed that 9 percent of Social Security administrative law judges had approval rates of more than 90 percent in a year when the overall approval rate was 70 percent. They conclude that these judges cost the disability program more than $23 billion due to wrongly approved claims.

Clearly there are judges who are too lenient and accept claims that probably should be denied, however there are also judges who are too harsh and reject claims that should probably be approved. In these cases, workers are being denied the insurance benefits for which they have paid.

The Social Security Administration (SSA) analyzed the approval patterns of 12 low-allowance judges over the period from 2010-2013. It found their approval rate increased from 21 to 24 percent over this four year period. During this period the overall approval rate had fallen from 67 to 56 percent, implying gaps of between 32 percentage points and 56 percentage points. Note that the gaps between the overall approval rate and the approval rate of the low-allowance judges is considerably larger than the gap between overall approval rate and the approval rate of the high-allowance judges highlighted in the Wall Street Journal column.

The takeaway is that there are clearly judges who error on the reject side as well as the approval side. It appears that SSA has taken steps to limit unwarranted approvals. It is not clear that measures have been taken to address the problem of judges wrongly denying appeals. We should not want to waste money on undeserving claims, but we also should not want to see workers who are genuinely disabled being denied the benefits for which they have paid. It is far from clear that at present the program errors more in awarding undeserving claims than in denying deserving ones.


Larry Summers Gets It Largely Right on Trade Print
Monday, 09 March 2015 04:46

In a Washington Post column on the Trans-Pacific Partnership (TPP) Summers raises the right cautions. He argues that a trade deal should have rules that prevent countries from gaining a competitive advantage by deliberately lowering the value of their currency. He also argues that a deal should not be about special privileges for corporations. And, he says that a trade deal should not jeopardize public health by raising drug prices.

Nonetheless it looks like Summers is likely still going to come down for the TPP. His rationale is that a deal has large potential gains for the United States by making East Asian markets more open to the United States.

This is hard to see. Most of these markets are already largely open, so there will not be much gain from removing whatever barriers still exist to exporting to countries like Australia. Some of the other countries, most notably Vietnam, still have substantial barriers, but it's difficult to see large gains given their limited size.

In the case of Vietnam, our current exports are around $35 billion a year. Suppose this increases by 30 percent as a result of the TPP. (This would be a large increase; remember barriers to its imports from other countries are falling as well.) This would translate into a bit more than $10 billion a year in additional exports to Vietnam. If we assume that we get 20 percent more from selling these exports to Vietnam than they would otherwise fetch (a quite large premium) that would translate into $2 billion a year. That is equal to 0.01 percent of GDP.

Of course there will be gains from openings with other countries but the total is not likely to be very impressive. A study published by the Peterson Institute for International Economics put the gains from the TPP at $77 billion a year. This is equal to about 0.4 percent of GDP. That's not trivial, but not exactly a sea change in terms of American prosperity. (It's equal to about 2 months of normal growth.) And remember, the projection is that we don't see this full gain for a decade or more. Also, this says nothing about the distribution of the gains, which may go disproportionately to those at the top. (The model assumes full employment.)

Furthermore, this estimate took no account of measures that will almost surely slow growth, most notably higher drug prices due to stronger patent protections and higher prices for other goods due to stronger copyright protection. These increased protections have the same impact as imposing large excise taxes on the items covered. (The impact of patents on drug prices is comparable to taxes in the range of 1,000-10,000 percent.)

There is an argument that these measures will provide more incentive to innovate and do creative work, but don't hold your breath on that one. When we retroactively increased the length of copyright protection from 75 to 95 years, did we give a lot of incentive to people in 1920 to do more creative work?

Anyhow, it is likely that the actual deal will have bad provisions on drugs, will include large corporate giveaways on the regulatory front, and have nothing on currency. For this reason, the TPP looks like lots of downside with not much upside.


David Brooks' Name-Calling Print
Sunday, 08 March 2015 21:45

It's too bad the NYT can't find a conservative columnist who doesn't have to resort to name-calling to make his arguments. Apparently he is upset that some of the economists close to Hillary Clinton now believe that the upward redistribution of the last three decades is a problem and that education is not the answer. He describes these people as "redistributionist" and insists that redistribution cannot do much to help the poor and middle class.

In fact, there is nothing inherent in the "redistributionist" agenda that should slow growth. Apparently, Brooks only wants people to think about tax and transfer policy, but that is not what Brooks' "redistributionists" are talking about. Suppose, for example, that corporate directors were not all friends of the CEOs who get payoffs to turn the other way as the CEOs ripoff shareholders. We could have a corporate governance structure where the directors lose their generous stipends if they overpay the CEO (as determined for example by losing a "say on pay vote"). That would likely help to bring CEO pay down to earth while increasing efficiency.

Similarly if the government stopped subsidizing non-profits that are so inept that they can only get competent people by paying high six figure or seven figure salaries. This would also be a market oriented reform that would reduce inequality. And we can take away the tax breaks that make folks like Mitt Romney and Jeff Bezos incredibly rich. Again, this would increase efficiency and reduce inequality.

We can have more open trade for doctors to give these one percenters the benefit of international competition. And we can have a Wall Street sales tax to subject the financial sector to the same sorts of taxes as other sectors.

None of these are tax and transfer policies. These are all policies that make the economy more efficient while reducing inequality. Brooks wants to pretend such policies don't exist, but ignorance is not much of an argument.


Note: Link and typos corrected, thank ltr and Robert Salzberg.

Data Refuses to Cooperate with Mainstream Education Story Print
Sunday, 08 March 2015 07:52

We all know that robots are making it impossible for people without a college degree to get jobs. That's a basic fact about the economy known to all right-thinking people. And, just like most of the other "facts" about the economy known by right-thinking people, it happens not to be true.

The figure below shows the change in the employment to population ratio (EPOP) for people over 25 from before the recession to the present. (It compares the average for the last four months with the year-round average for 2006.)

Epops be education 24951 image001

                            Source: Bureau of Labor Statistics and author's calculations.

As can be seen the drop in the EPOP for college grads, at 4.0 percentage points, is somewhat smaller than the 6.1 percentage point drop for those with some college and the 5.9 percentage point drop for those with just a high school degree. But before anyone jumps on this as evidence of the education bias in today's economy, note that the EPOP for people without high school degrees is only 1.2 percentage points. The data sure make it look like the recovery has disproportionately benefited the least educated.

In fact, these comparisons actually tilt the case against the less-educated. We all know the demographic story in which we are not supposed to be concerned about the decline in EPOPs from pre-recession levels because it's the result of baby boomers retiring. For the most part this is not true (the drop in EPOPs among workers 25-54 is almost as large as for the adult population as a whole), but insofar as retirement is an issue, it would disproportionately affect less-educated workers.

The people who have crossed into their sixties since 2006 are much less educated on average than the people turning age 25 during this nine year period. This means that the percentage of people with a high school degree or less who have decided to retiree would have risen much more than the percentage of college grads. An age-adjusted measure of EPOPs would surely show a much worse story for college grads than this chart.

Don't expect these cheap statistics to affect the public debate about technology, education, and the labor market (that depends on what important people say, not data), but folks should know it ain't true.

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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.