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WaPo Touts the Expansion of Oil Supply, Apparently Unable to Get Projections from Energy Information Agency Print
Wednesday, 29 October 2014 04:42

As I've often noticed in the past, the WaPo apparently has difficulty getting access to government data at its location in downtown Washington, DC. If it did, it probably would not have run a Wonkblog piece by Steven Mufson touting the expansion of oil supply as the reason that oil prices have fallen sharply this year.

As I pointed out last week, the 2007 World Energy Outlook (the last projections from the Energy Information Agency before the economic collapse) projected output in 2015 of 98.5 million barrels per day (Table 1.3). The most recent projections put production at 92.7 million barrels per day, 5.8 million fewer barrels than had been projected before the slump. This means production has actually grown less rapidly than projected.

It may well be the case that potential production has grown due to large new investments, as Mufson claims, but the key story here is that demand is well below projected levels. This is due both to weaker than expected economic growth and to a lesser extent conservation measures. This drop in demand would be holding prices down even if there had not been any great breakthroughs on the supply side.

The Blame Teachers Game: Has Anyone Heard of the South? Print
Tuesday, 28 October 2014 21:50

Frank Bruni's column complaining about teachers and teachers unions undoubtedly has millions asking, "is our pundits learning?" The proximate cause is a soon to be published book by Joel Klein, the former New York City school chancellor.

It seems that the book repeats most of the old complaints of school "reformers." The big problem with our schools is that we have bad teachers and that unions won't let us get rid of them. Bruni tells readers:

"I was most struck, though, by what he observes about teachers and teaching.

"Because of union contracts and tenure protections in place when he began the job, it was 'virtually impossible to remove a teacher charged with incompetence,' he writes. Firing a teacher 'took an average of almost two and a half years and cost the city over $300,000.'

"And the city, like the rest of the country, wasn’t (and still isn’t) managing to lure enough of the best and brightest college graduates into classrooms. 'In the 1990s, college graduates who became elementary-school teachers in America averaged below 1,000 points, out of a total of 1,600, on the math and verbal Scholastic Aptitude Tests,” he writes. In New York, he notes, “the citywide average for all teachers was about 970.'"

So the problem with NYC's schools is that unions make it "virtually impossible" to fire bad teachers? If this is the big problem with our schools then we should expect places like Mississippi, Arkansas, and Texas to be the models of good education since teachers unions are relatively rare and certainly much less powerful than in New York City. Perhaps Klein has a chapter touting the success of public education in union-free areas, but I doubt he has much data to support such claims.

Of course if we look internationally, the best education outcomes on standardized tests are typically found in countries like Finland, where unionization of teachers is close to universal. One of the factors that might explain their success in education relative to the United States is that teachers are paid more relative to other professions. The ratio between the average pay of a  doctor and a teacher in these countries is something closer to 2 to 1 rather than the 5 to 1 in the United States. And, they don't have a bloated financial sector where good performers can easily make 10-20 times the pay of an average teacher.



Stop Pretending Population Doesn't Matter for the Environment Print
Tuesday, 28 October 2014 04:51

The Washington Post seems to have jumped the shark by running a Wonkblog piece that demands readers, "stop pretending we can fix the environment by curbing population growth." The gist of the argument is that plausible changes in population growth will not be sufficient to prevent environmental catastrophe without other changes.

If there were people who thought that slower population growth would be sufficient to prevent global warming, then this piece would be a useful corrective. However if the point of this piece is that slower population growth should not be an important part of a strategy to limit global warming, then it needs to read the research more closely.

The world population in 2100 in the high fertility scenario shown in the piece is more than twice as high as in the low fertility scenario. This implies that we would need to have less than half as much greenhouse gas emissions per person in the high fertility scenario to have the same impact on global warming as in the low fertility scenario. It would be quite expensive to reduce per person emissions by an additional 50 percent against the reductions that would be needed even in the low fertility scenario. For this reason, it would make a great deal of sense for population control (in the form of access to birth control and empowerment of women) to be an important part of an environmental agenda.

No Room for Unemployment In NYT Debate on Fed Policy and Inequality Print
Tuesday, 28 October 2014 04:21

The NYT had a Room for Debate segment on whether the Fed should be concerned about inequality. While many good points were raised in the exchange, none of the participants made the point that lower rates of unemployment are associated with faster real wage growth for those at the middle and bottom of the wage distribution.

This is the main point of the classic book, Getting Back to Full Employment: A Better Bargain for Working People, that Jared Bernstein and I wrote last year. We showed that workers at the middle and bottom of the wage distribution only saw wage growth when the unemployment rate was at low levels. This is an essential condition for these workers to share in the gains of economic growth.

The Fed may not always be able to boost growth and reduce unemployment by as much as it might like, but it certainly can keep the unemployment rate from falling. This is the point of raising interest rates. The idea is that higher rates will slow the economy and the rate of job creation, thereby keeping the unemployment rate higher than it otherwise would be.

If the Fed keeps the unemployment rate higher than necessary, then it is preventing most workers from sharing in the gains of growth, thereby worsening income inequality. This was very much an issue back in the 1990s when most economists thought the Fed should have kept the unemployment rate from falling much below 6.0 percent.

Fortunately, Federal Reserve Board Chair Alan Greenspan did not share this view. He allowed the unemployment rate to fall far below this level, reaching 4.0 percent as a year-round average in 2000. As a result, there was strong wage growth for workers at the middle and bottom of the wage distribution. These workers also had the opportunity to work more hours, further increasing their income gains. And, because unemployment disproportionately hits those at the bottom of the income ladder, these people disproportionately benefited from the jobs created in these years.

These fundamental points should have been included in the debate on the Fed and inequality.

Germany Leaves the Euro Zone, and the Problem Is? Print
Monday, 27 October 2014 07:42

Matt O'Brien gave readers a thoughtful discussion on how the euro zone's stagnation is likely to persist for the indefinite future, primarily because Germany is acting to obstruct any serious efforts at stimulus. However at one point the logic gets a bit weak. 

In laying out the various options for promoting stronger growth O'Brien suggests that Mario Draghi, the head of the European Central Bank could try to push ahead with quantitative easing even without the support of Germany. He says this could prompt Germany to take legal action and it "might even threaten to leave the euro zone over it."

If Germany left the euro zone, the problems of the other countries would be largely over. The euro would presumably fall in value against the new deutschemark, allowing the countries of southern Europe to quickly regain their competitiveness against Germany. The resulting reduction in their trade deficit would be a major boost to growth and employment. And this could be done without the financial disruptions that would be caused by the southern European countries leaving the euro.

So the question is, if Germany threatened to leave the euro zone, why wouldn't the other countries just say "please do?"

Robert Samuelson and the Family Deficit Print
Monday, 27 October 2014 04:43

We can finally declare the budget deficit crisis over; Robert Samuelson has moved on to the talking about the "family deficit." Actually, many of the points he makes are reasonable, the question is the policy implications.

People in committed relationships, generally involving marriage, do much better on average than do single adults on a variety of social and economic indicators. Perhaps more importantly, their children do much better as well. The data show that marriage is increasingly a middle class and upper class story, with those in the bottom half, and especially bottom quintile of the income distribution much less likely to be married and their children much less likely to be raised by a married couple. And in the United States, children raised by single parents generally don't do well in life.

It would be nice if the government could so something to ensure that all these single people, and especially single parents, were in happy committed relationships. But governments tend not to be good as matchmakers. Many relationships are seriously abusive. Someone married to a spouse who has serious problems with drugs or alcohol, or who can't control their temper, is not necessarily doing themselves or their children a favor by remaining in the marriage. And the government would not be doing anyone a service in this situation by preventing a divorce or separation.

Pro-marriage policy (e.g. tax incentives) may sound nice, but only until we give them a bit of thought. A marriage subsidy implicitly penalizes single adults. Recognizing the benefits that marriage offers, do we want to further penalize those not in a happy marriage and their children?

We can pursue policies that will make peoples' lives more secure and in that way likely increase the frequency of happy marriages. Legalizing marijuana and decriminalizing drug use in general would likely be a big step in the right direction. Men in jail generally are not good husbands and fathers.

Greater employment security and higher wages would also be a big step forward. Frequent job changes and moves are a disruption in anyone's lives. And the stress of constantly struggling to find the money for the rent or mortgage could make any relationship difficult. And safe and affordable child care would benefit both children and parents, whether they are single or married.

These items are all part of a general economic agenda for full-employment and greater economic security. It would be great if the advocates of marriage would join in for this effort.


Note: Typos corrected, thanks to Robert Salzberg.



In Case You Wondered Why CEOs in the United States Make So Much Money Print
Sunday, 26 October 2014 07:59

Okay, there are a few hundred people who believe that the tens and hundreds of millions of dollars pocketed by CEOs reflect their worth in the market. (And most of those people write for newspapers or teach in business schools.) The rest understand that CEOs get incredibly rich by being able to rip off the companies that they supposedly work for. This is because the rules are rigged to give them effective control over the company. 

Gretchen Morgenson has a good piece explaining one way in which CEOs and other top management rig the deck. Her column today talks about a Delaware court ruling that allows companies to write by-laws that make shareholders pay the company's legal cost if they lose a case filed against the company. For example, this could mean that if shareholders sued a company because it rewrote the strike price on options given to an incompetent CEO, and then lost the case, then the shareholders would have to pay the company's legal expenses.(Most U.S. companies are chartered in Delaware, so this ruling makes a big difference.)

Since companies that overpay incompetent CEOs tend to have hugely overpaid lawyers, this is likely to be a very serious expense. This would be a major disincentive to shareholder suits, making it easier for CEOs to rip off the companies for which they work.

It is worth noting that courts always had the authority to require losers to pay the winners' legal fees in frivolous cases. The Delaware ruling means that losers would always be required to pay the company's legal fees, even if the loss was due to a technical issue, such as a missed filing deadline.  

Krugman on Quantitative Easing and Inequality Print
Saturday, 25 October 2014 10:16

Paul Krugman is on the mark in his comments on quantitative easing and inequality. The policy has helped boost the economy and create jobs, it is almost certainly a net gainer from the standpoint of distribution. I would make three additional points, all going in the same direction.

First, when comparing the real value of the stock market to prior levels which we should expect an upward trend. The economy grows through time, as do profits, just assuming that profit share remains constant. The profit share has of course grown in recent years. This means that if the price to earnings ratio remains constant, then the value of the market should grow at roughly the same rate as the economy.

If we assume a 2.4 percent trend growth rate between 2007 and the present, the market should be roughly 17 percent higher in real terms today than in 2007, assuming no increase in trend profit shares. In other words, the market is pretty much in line with where we would expect it to be if there were no extraordinary monetary policy in place and the economy had followed it trend path. Crediting or blaming the Fed for the market's bounceback from the 2008-2009 lows is just silly.

The second point is that the impoverished masses with large interest incomes (that's a joke) also would benefit from the increase in asset prices, if they held any longer term bonds. When the interest rates on 10-year and 30-year bonds plummeted, the price of these bonds soared. This would have increased the wealth of middle income people who held these bonds. It's possible that they don't want to sell the bonds (after all, they can't get a high interest rate if they re-invest the money elsewhere), but this the same story for rich people who hold lots of stock. The high stock price doesn't do them any good unless they sell some stock.

Anyhow, the point is that in order for our middle income people to be hurt on net by the fall in interest rates, not only would it be necessary that all their money was in interest bearing assets (as opposed to stock), but it would have to be in short-term assets like savings accounts or certificates of deposits. This is a very small group of people. (I know everyone has an aunt who has $50k in a savings account -- sorry, someone is lying in that story.)

Finally, normal middle income people tend to be big net payers of interest because of something called a "mortgage." They may also have student loan debt. Lower interest rates have allowed tens of millions of people to have substantially lower mortgage and student loan payments. This is a huge plus on the distributional side. That doesn't mean that mortgage and student loan payments are not a major burden in many cases, but they would be a much bigger burden if the interest payments were 1-2 percentage points higher.

In short, the distributional effects of QE were almost certainly a net positive, in spite of the fact that everyone's aunt got hurt.


The Ebola Vaccine: How Drugs Can Be Developed Without Patents Print
Friday, 24 October 2014 07:03

For those who find it difficult to understand how drugs can be developed without patent protection, the Canadian government has an answer. It paid for the development of an Ebola vaccine. While the vaccine was reportedly 100 percent effective in tests with lab animals, the government did not pay for the testing in humans that would be necessary to market the drugs.

This provides a good example where a government agency was able to finance effective research. (There are many others.)  Unless we think that the government somehow cannot pay for useful clinical tests (apparently the argument is the tests are too expensive for the government, it can only afford to pay exorbitant prices for the drugs themselves), it is difficult to understand an argument against publicly funded research for drugs which would allow them all to be sold at generic prices. This would end the absurdity of people facing life threatening diseases who can't get needed drugs because patent monopolies make them unaffordable. 


The Banking Industry Wins On Risk Retention With Mortgages Print
Friday, 24 October 2014 05:29

It's too bad that so many people in public life aren't old enough to remember all the way back to 2008. That is the only explanation for the rush to remove down payment minimums for a risk retention requirement on mortgages placed in mortgage backed securities.

This is the topic of an excellent column by Floyd Norris on how the banking and housing industry, with the support of some consumer groups, managed to remove any down payment requirements. The idea was that banks would have to keep a portion of the risk on all but the safest loans, thereby increasing the likelihood that they would not issue bad loans.

However the rules in the Dodd-Frank bill have been watered down so that even loans with no down payment could be put into mortgage pools even though they have more than four times the default risk of loans with 20 percent down payments. It is also worth pointing out that the cost of requiring that banks retain risk on low down payment loans did not mean that people could not get loans without large down payments as often claimed.

In fact, the only issue was whether they would pay somewhat higher interest rates in the form of mortgage insurance. This would add roughly 0.6-0.7 percentage points to the cost of a typical loan, reflecting the higher default risk. This issue has been hugely misrepresented by the banking industry and its allies so that they can freely return to the practices of the bubble years. 


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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.