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Robert Samuelson Looks to the Stock Market to Get Guidance About the Direction of the Economy Print
Monday, 16 June 2014 08:36

Robert Samuelson agreed to be a punching bag again this morning. His column expressed his concern that the stock market and bond market are going in opposite directions. While the stock market has been rising, which in his view is supposed to mean a stronger economy, interest rates in the bond market have been falling which is supposed to mean a weaker economy.

There are two major flaws in Samuelson's conundrum story. The first is that the stock market is a horrible indicator of the future. Remember when the market plunged back in 2006 giving us advance warning of the economic disaster that would follow from the collapse of the housing bubble? Oh right, the market rose through 2007 and hit a new nominal high in late October of that year, just over a month before the beginning of the recession.

And of course there was the crash in 1987 that foretold of the ensuing recession that didn't happen, or at least not for another two and a half years (after the market had fully recovered). Given the weak relationship between the market's performance and the future state of the economy, it is difficult to believe that anyone would look to the former as predictor of the latter.

The other point is that even in theory the stock market is not supposed to be a predictor of the economy. The stock market is supposed to represent the present value of future profits. In recent years the profit share of output has been extraordinarily high. A likely reason for the surge in profit shares is the weakness of the labor market. If the economy were to get stronger the unemployment rate would fall to more normal levels. This would increase workers' bargaining power and likely lead to a drop in profit shares. This means that if traders in stock anticipated stronger growth, it could be associated with a drop in stock prices since the decline in profit shares would more than offset the higher profits associated with higher GDP.

In short there is no reason, either based on past evidence or in economic theory, that higher stock prices should be taken as implying stronger economic growth. This is another great non-conundrum to keep economic policy types in Washington employed.

 

 

 
Does the Right Hold the Economy Hostage to Advance Its Militarist Agenda? Print
Saturday, 14 June 2014 06:35

That's one way to read Tyler Cowen's NYT column noting that wars have often been associated with major economic advances which carries the headline "the lack of major wars may be hurting economic growth." Tyler lays out his central argument:

"It may seem repugnant to find a positive side to war in this regard, but a look at American history suggests we cannot dismiss the idea so easily. Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today’s entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth."

This is all quite true, but a moment's reflection may give a bit different spin to the story. There has always been substantial support among liberals for the sort of government sponsored research that he describes here. The opposition has largely come from the right. However the right has been willing to go along with such spending in the context of meeting national defense needs. Its support made these accomplishments possible.

This brings up the suggestion Paul Krugman made a while back (jokingly) that maybe we need to convince the public that we face a threat from an attack from Mars. Krugman suggested this as a way to prompt traditional Keynesian stimulus, but perhaps we can also use the threat to promote an ambitious public investment agenda to bring us the next major set of technological breakthroughs.

 
Why Do Calls for Immigrants Never Include Doctors? Print
Friday, 13 June 2014 05:22

The Washington Post had a pitch for allowing more high-skilled immigrants into the country, arguing that by allowing more foreign software engineers into the country we would create more jobs. While there may be some possible gains here, it is worth noting that the wages of stem workers have been flat since the late 1990s. (Also, it would be easier to be sympathetic to the demands of the tech industry if they had not conspired to hold down their workers' wages.)

However it is striking that with all the efforts to bring in more immigrants to work in tech jobs no one ever talks about bringing in more immigrant doctors. The potential gains to the economy are enormous since our doctors receive far higher compensation than their counterparts in other wealthy countries. (The linked comparison understates the actual difference in physician compensation since more than 70 percent of our doctors are specialists, whereas the share in other countries is closer to 30 percent. The greater use of specialists has little obvious benefit in outcomes, it more likely indicates rent-seeking as specialists can enforce rules requiring their services for procedures for which primary care physicians are fully qualified.) 

The fact that we see so much discussion of easing immigration to bring in more software engineers as immigrants and none on doctors presumably reflects the power of the tech sector in getting items on the national agenda and the power of the physicians' lobbies in keeping items off the national agenda.

 
Greece's Progress in Putting the Economy Back on Track? Print
Friday, 13 June 2014 04:48

Many people reading a NYT article on a series of Greek court decisions rejecting government austerity measures were probably surprised to see the comment that:

"According to analysts, the decisions could upend Mr. Samaras’s progress in putting the economy back on track."

It's not clear what progress these analysts have in mind. The Greek economy shrank at a 1.1 percent annual rate in the most recent quarter. While it is projected to show modest (0.6 percent) growth for the year as a whole, the most recent projections from the I.M.F. show the economy will still be 10 percent smaller than its pre-recession level in 2019, the last year covered. These projections don't show the unemployment rate falling below 20 percent until 2017. It is worth noting that I.M.F. projections for Greece have consistently proven to be overly optimistic.

 
How Does WSJ Know That Obama Administration Wants Eased Mortgage Standards In Order to Help Buyers As Opposed to Increase Industry Profits? Print
Friday, 13 June 2014 04:25

That's the question millions are asking after reading this article on the decision of the Securities  and Exchange Commission to go along with more lax standards. Under these standards issuers of mortgage backed securities (MBS) would not be required to keep any stake in a mortgage even if it has less than a 5 percent down-payment. This reversed efforts to ensure that issuers did not deliberately put questionable mortgages into MBS, which was a major problem in the run-up of the bubble. (The original standard required a 20 percent down-payment in order avoid keeping a stake.)

The piece told readers:

"The Obama administration has begun trying to relax some of the postcrisis efforts to tighten mortgage-lending standards over concerns that the housing sector, traditionally an engine of economic recovery, is struggling to shift into higher gear."

While the Obama administration may be concerned about the housing sector and the economic recovery it is also plausible that it is at least as concerned about the profits of the financial industry. Securitizing bad mortgages has been very profitable in the past and many investment banks would like to be able to do so again in the future. The Obama administration has close ties to investment banks with many top officials coming from the sector. It also was an important source of campaign contribution.

At one point the piece notes the opposition to the down-payment requirement:

"The original proposal three years ago sparked a backlash among housing-industry, affordable-housing and civil-rights groups, who banded together over shared concerns that a 20% down-payment requirement would end the dream of homeownership for many Americans."

It would have been worth pointing out that the 20 percent down-payment requirement was not a condition of getting a mortgage. People who put down less than 20 percent would have been required to have mortgage insurance to have their loan placed in a pool. This would raise the cost of the mortgage somewhat. The higher mortgage cost would reflect the much greater risk of default. (Mortgages with just 5 percent down default at roughly four times the rate as mortgages with at least 20 percent down.)

In the current interest rate environment, homebuyers paying this risk premium would still be able to get mortgages at far lower interest rates than they would have paid without a risk premium in prior decades. Given this fact, it is absurd to say that the stricter rule rejected by the SEC, with the support of the Obama administration, "would end the dream of homeownership for many Americans."

 
Are We Suffering from Too Many or Too Few Workers? Print
Thursday, 12 June 2014 04:37

Binyamin Appelbaum had an interesting piece in the NYT more or less summarizing views of economists on the economy's near and long-term problems. The piece reflected the incredible confusion among economists. This raises the obvious question, if economists really have no clue about the economy, why do we waste good money on them?

Anyhow, we find that we are suffering from too many workers (high unemployment) and likely to continue to experience high rates of unemployment for the indefinite future due to a lack of demand in the economy. A big part of the problem from this view is that with the inflation rate near zero, the real interest rate (the nominal interest rate minus the inflation rate) can't fall low enough to bring the economy back to full employment since the nominal interest rate can't be negative (or at least not with conventional policy).

At the same time that the economy is suffering from too many workers we are supposed to also be troubled by the prospect of too few workers. Hence it is bad news that immigration has slowed, and for the longer term future, the birth rate has dropped. It's a bit hard to see this one. There could be an argument that shortages of workers with specific skills are holding up the recovery, but believers in markets know that shortages manifest themselves in rising prices, or in this case wages. There are no major areas of the economy (by occupation or location -- sorry North Dakota ain't major) with rapidly rising wages. So it's hard to see how getting more workers would provide a big boost to the economy. (More foreign doctors could drive their wages down to the averages for other wealthy countries, but I wouldn't consider this a big macro effect and I doubt these are the immigrants other economists are envisioning.)  

Remarkably, trade does not appear anywhere in this discussion. In the old days, econ textbooks told students that relatively wealthy countries, like the United States, are supposed to be exporters of capital to relatively poor countries, like China. This was part of the story of comparative advantage, capital is relatively plentiful in rich countries and relatively scarce in poor countries.

Exporting capital means running trade surpluses. In fact we have been running trade deficits, and in the years since the East Asian financial crisis in 1997 (which sent the value of the dollar soaring) we have been running very large deficits. In the most recent quarter's data our deficit was just over $500 billion, or 2.9 percent of GDP. This creates a gap in demand that we have to fill from either more consumption, investment, or government spending.(That's definitional -- if you don't like it, that's too bad, it is an inescapable truth.)

Read more...

 

 
The Continuing Attack on Disability Beneficiaries Print
Wednesday, 11 June 2014 04:23

The media have spent a great deal of time in the last few years highlighting the money paid out to people on Social Security disability. Associated Press was on the job again yesterday with an article that highlighted four administrative judges employed by the Social Security Administration who approve almost all the cases that are brought to them. There are many important facts that are left out of this piece.

First, these judges were deliberately selected by the House Oversight Committee because they were outliers who approve a high percentage of the cases brought to them. The Social Security Administration has almost 1400 administrative judges. Undoubtedly many are also outliers on the other side, denying most of the cases brought to them. A serious news story would have pointed out that these judges are atypical.

The piece was also misleading in telling readers:

"Lifetime benefits average about $300,000, according to the report, so Krafsur's [one of the four judges] cases will lead to nearly $1.8 billion in benefits."

The average disability benefit is roughly $1,150 a month. If the average period for collecting benefits is 15 years (almost certainly an overstatement, since most beneficiaries first become eligible in their 50s), this would imply benefits of $207,000. It is possible that the $300,000 includes Medicare payments. (Disability beneficiaries are eligible for Medicare after two years.)

If so, counting these benefits is seriously misleading for several reasons. First, Medicare is paid out of a separate fund so its does not affect the solvency of the Disability program. Also, most of these people would have low incomes and therefore be eligible for Medicaid, even if they were turned down for disability. This means there is little or no net cost to taxpayers from having them receive Medicare. Finally, most people would likely see this number and think beneficiaries are seeing $300,000 in cash.

It would have been worth pointing out that just over one-third of applicants for disability get approved. The people who appeal their initial denial to a disability judge likely exclude most of the marginal cases, (it takes time and generally lawyers' fees to file an appeal), so it would not be surprising that a high percentage will be approved. A recent study by the University of Michigan examined the work experience of marginal applicants who were denied disability by administrative judges. Of this group, which comprised 25 percent of all applicants, it found that only 28 percent of these people were employed two years after being turned down. Even among this group (7 percent of all applicants)average earnings was only half of what it had been before they had applied for disability. That suggests that the vast majority of this marginal group really are experiencing difficulty in working.

While the piece notes the sharp rise in the share of the workforce on disability it would have been useful to point out that the main reason is the aging of the baby boom cohort into the prime years for receiving disability and the increase in the age for receiving full Social Security benefits from 65 to 66. It would also have been worth noting that the United States ranks near the bottom of wealthy countries in the share of GDP going to disability benefits. Disability benefits comes to 0.9 percent of GDP in the United States, by comparison Germany pays out 1.7 percent of GDP ($290 billion a year in the U.S.) for disability benefits.

 

 

 
Loss of Good Paying Jobs Could Just Be Due to High Unemployment Policy Print
Wednesday, 11 June 2014 04:08

Thomas Edsall had a piece noting the deterioration of job quality since 2000 that many of us have been writing about in recent years. He discusses various possibilities going forward, but ignores an obvious one.

For most of the period since the 2001 recession the economy has been below full employment by almost anyone's definition. In such situations, it should not be surprising that there would be a deterioration in job quality as workers have to slide down the skills ladder in order to find employment. This is the sort of story that Jared Bernstein and I highlight in our book, Getting Back to Full Employment (free download available).

If Jared and I are correct then the problem is simply the government's high unemployment policy. This could be reversed by either larger government deficits (i.e. increased spending and/or tax cuts to people who will spend them), a lower trade deficit from a lower valued dollar, or a reduction in the length of the average work year through policies like work sharing. This would suggest that the deterioration of job quality is a problem that we know how to solve, even if there may not be the political will to do it.

 
Correcting Vox on Cramdown Print
Tuesday, 10 June 2014 08:14

Matt Yglesias has a piece in Vox explaining the politics of cramdown in which it tells readers that there was no way the Obama administration could have gotten cramdown through Congress. While Yglesias correctly points out that the Obama administration never really tried, he misrepresented the nature of the problem.

One of the great things about cramdown was that the proposal could have been sliced and diced in almost an infinite number of ways. While Yglesias is undoubtedly correct in saying that a wholesale revision to the bankruptcy code, that would have allowed all mortgages to be rewritten in bankruptcy, never would have gotten through Congress, that doesn't mean Obama could not have gotten a more limited version passed.

For example, the dates at which mortgages were issued could have been narrowly restricted (e.g. 2004-2008). The size of the mortgages could have also been restricted. Does Yglesias know that Evan Bayh never would have agreed to cramdown for mortgages of less than $300,000 issued in a narrow time window, coupled with some huge government contract for a firm he could subsequently work for as a lobbyist in his post-Senate career? 

That is the way presidents get bills passed that they actually want passed. (Look at what Obama will do to get fast-track authority when he wants to get the Trans-Pacific Partnership approved by Congress.) Anyhow, cramdown was almost certainly passable in some form if President Obama wanted to go that route. He didn't, end of story.

 

 
Counterfeits and Unauthorized Copies Print
Tuesday, 10 June 2014 07:03

For some reason the NYT continues to have problems distinguishing between the concept of a counterfeit item and an unauthorized copy. The confusion appears in a column by Yu Hua which uses the term "counterfeit" and "pirated" interchangeably.

The distinction between the two terms is simple and important. A counterfeit item is one where the seller misrepresented its origins to the consumer. In this case the consumer has been ripped off by the seller. By contrast, an unauthorized copy may violate a company's trademark or other intellectual property claim, but it doesn't involve a rip-off of the consumer.

This matters because consumers will presumably assist in cracking down on counterfeits, they are the victims in such cases. On the other hand they benefit from getting unauthorized copies. They are able to buy products at prices that are substantially less than the ones produced by the company's whose intellectual property claims are being violated.

Since this column does not distinguish clearly between the two, it's not possible to understand its complaint. It's not clear whether its common for people in China to order goods on the Internet and not receive the product they are expecting (if this is the case, presumably they would stop buying products on the Internet) or whether goods are being sold that violate intellectual property claims of various companies.

 

Note: Correction made, thanks Andrew and Robert.

 
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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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