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Evan Soltas and the Inflation Hawks Print
Wednesday, 12 March 2014 04:31

Evan Soltas has responded to me and others who don't quite see us as bumping up against full employment and capacity constraints any time soon. Fortunately, he clearly lays out his argument so it is easy to see the error in his ways. He notes the unemployment rate has fallen by 0.8 percentage points annually the last three years and assumes that we will continue on this path.

That one doesn't seem very likely unless Evan is either way more optimistic about growth than almost anyone else or way more pessimistic about productivity. The basic story is that unemployment has fallen more than most economists (including me) expected in the last three years. The reason is that productivity growth has slowed to a crawl. The average rate of productivity growth over this period has been less than 0.9 percent.

There is considerable debate about what sort of rate of productivity growth we should see going forward, but you won't find many estimates under 1.5 percent, and most would be around 2.0 percent. The average from 1995 to 2007 was 2.7 percent. If we use a 2.0 percent productivity number and assume 0.4 percent annual growth in the labor force (600,000 jobs a year), that gets 2.4 percent growth in potential GDP.

Most forecasts put GDP growth at the next three years around 3.0 percent. If we get productivity growth rebounding to its normal pace then we would be exceeding potential GDP growth by around 0.6 percentage points. Using historic relationships, this translates into a drop in the unemployment rate of roughly 0.3 percentage points a year. If our target is 5.0 percent unemployment (I'd shoot for lower, remembering the good old days of 2000 and 4.0 percent unemployment), we would get there in 2019.

This is why I and others are not anxious to see the Fed slam on the brakes any time soon. For what it's worth, any movement toward tightening any time soon would be seriously out of line with what the Fed did following the last downturn. It left the federal funds rate at 1.0 percent until the summer of 2004 when the unemployment rate was 5.6 percent and the economy was growing at almost a 4.0 percent annual rate. (Yes, they deserve to be strung up for allowing the housing bubble to grow to such dangerous levels, but that was a question of regulatory policy and targeting the bubble, not interest rates that were too low.)

Getting to Full Employment By Lowering the Goalpost Print
Tuesday, 11 March 2014 19:10

The folks controlling economic policy are apparently getting frustrated with their inability to restore the economy to full employment. So it seems that their answer is to redefine full employment to make the task easier, or so Evan Soltas tells us in a Bloomberg View piece today.

Soltas notes that the quit rate is not obviously out of line with the unemployment rate, which he adds is "close to most estimates of unemployment's natural level." It's worth noting that the quit rate used to be much higher in the years before the recession, and that was not a period associated with accelerating inflation, the normal indicator for an unemployment rate that is lower than can be sustained.

quit rates

                                            Source: Bureau of Labor Statistics.

In fact, at no point in the 2001 recession or subsequent period of weak employment growth did the quit rate ever fall as low as it is now. So it would take some heavy duty re-defintion to get us to be near full employment with the current labor market situation. 


NYT Seems Confused About the Purposes of Japan's Pro-Inflation Policy Print
Tuesday, 11 March 2014 05:32

The NYT ran a piece that implied that Japan's policy of deliberately trying to raise the rate of inflation is not working when in fact most of the evidence cited in the piece showed the opposite. For example, at one point it tells readers;

"Rather than start an economic revival, this “cost-push” inflation, as economists call it, could become a rising threat to Japanese stuck in a deflationary mind-set. Such people could see their hard-earned savings eroded by rising prices, warned Yukio Sakurai, a housing analyst based in Tokyo."

The point of the policy is to give businesses and individuals more incentive to spend now, since inflation will reduce the value of pools of idle savings. (The notion of "cost-push inflation" is ill-defined, since someone must be ending up with the money that represent higher costs.) Contrary to what is implied in the piece, the policy has led to a turnaround in prices, with core inflation at 0.7 percent over the last year according to the OECD. In prior years prices had been falling at roughly this pace.


Real House Prices Still Down: WaPo Has Not Heard of Inflation Print
Monday, 10 March 2014 05:24

The Washington Post had a piece explaining the seeming anomaly that cash-out refinancing is still well below bubble levels even though house prices have recovered much of their ground. The piece explains this gap by the fact that homeowners are a wealthier group on average than they were in the bubble years and therefore less likely to tap equity for spending.

While this is in part true, the more obvious explanation that is that inflation adjusted house prices are still almost 30 percent below the peak of the bubble, which is a good thing. It is also likely that homeowners do not expect continually rising house prices as they did in the bubble years which would make them less likely to withdraw equity from their homes.

As a practical matter, it is not plausible that the decline in moderate income homeowners could explain much of the $200 billion drop in annual cash-out refinancing between the bubble peaks and 2013. The homeownership rate has fallen by a bit less than 4 percentage points from its bubble peaks, translating into roughly 4 million fewer homeowners. For a $200 billion drop in annual cash-out financing to be explained by this loss of moderate income homeowners, we would have to believe that these moderate income homeowners had been cashing out $50,000 a year on average from their homes.

Given that this group would have had limited equity in their homes and their homes would have been lower priced than the average, it is implausible that on average they would have been cashing out even one-fifth of this amount. But hey, why mess up a good story with arithmetic?

The State of Manufacturing Employment in the United States Print
Monday, 10 March 2014 05:12

Lydia DePillis has a good piece in the WaPo on the increasing use of contract labor in manufacturing, focusing on the Nissan plant in Smyna, Tennessee. The piece points out that contract workers get lower pay and benefits and lack the security of workers employed directly by the company.

Shorting Herbalife Could be a Public Service Print
Monday, 10 March 2014 03:43

The NYT has a lengthy article on the decision by hedge fund billionaire William Ackman to do a large short of Herbalife, a nutritional supplement company,and then use political influence to undermine the company. While Ackman's efforts to manipulate the Securities and Exchange Commission are at least improper, if not actually illegal, they are not qualitatively different from the actions companies take all the time to advance their cause.

There seems to be a view that shorting a company, implying that its market price is over-valued, is somehow less legitimate than buying into a company. This is not true. There are many companies whose stock price is grossly over-valued.

For example, in the late 1990s many Internet companies had stock prices that had no basis in reality. In the last decade, the banks pushing bad loans in the housing bubble had grossly over-valued stock prices. In both cases, people shorting the companies would be a public service. It would make it more difficult for them to raise capital to use for counter-productive purposes.

In effect, shorting is comparable to exposing the existence of counterfeit money. Until it is exposed, people are prepared to assign the counterfeit currency real value. By calling attention to the false value, capital can instead be directed to more productive purposes.

This doesn't mean Ackman is correct in his assessment of Herbalife (I haven't a clue) or that it's good that rich people can manipulate government agencies. The point is that what he's doing is not different from what major companies and rich people do all the time to advance their companies.

Growth and Inequality: The United States and France Print
Sunday, 09 March 2014 11:19

Paul Krugman takes up the new paper from the IMF showing that redistributive measures do not appear to negatively impact growth. He offers a qualified maybe, noting that growth in the U.S. has outpaced growth in France in the last three decades. Krugman correctly points out that most of the gap is due to differences in hours worked, which he attributes to regulations in France. This one is probably worth a few more sentences.

In the United States, hours worked have been inflated by the fact that for many people the only way to get affordable health care insurance was to work at full-time job. There are millions of people who will likely opt to retire or work fewer hours now that they have the option of getting affordable health care insurance on the exchanges. Hours worked are always determined in part by regulations and social conventions. No one keeps the factory open an extra hour for the individual worker who wants to put in overtime. The rules and conventions in France tend to push toward less work, in the U.S. toward more work. Economists do not have a basis for saying that one is preferable to the other.

In terms of productivity (output per hour of work), Krugman points out that France is very close to the United States. (France looks a bit worse in more recent data, with productivity in 2012 at 92.8 percent of the U.S. level.) However there is another factor worth mentioning in this context. The United States is the world champion in greenhouse emissions per capita. While we have a bit less than five times the population of France we have over 16 times the carbon emissions. In effect we are imposing a cost on the rest of the world to maintain our standard of living.

Arguably, we should treat this differential cost as a negative that should be subtracted from GDP. In GDP, the gap between our CO2 output and what it would be if we had France's per capita levels was 3,703 million tons. At a price of $50 a ton this would imply a reduction in U.S. GDP of 1 percent, closing roughly 15 percent of the gap in productivity. At $100 a ton the implied reduction in output is over 2 percent of GDP closing almost 30 percent of the gap in productivity.

In short, while the gap in productivity between the United States and France is small by any measure, a more comprehensive accounting makes it even smaller. 

Does the Effort to Prevent Global Warming Distract Us From Helping the Poor? Print
Sunday, 09 March 2014 06:40

There doesn't seem any obvious reason that preventing the destruction of the planet would obstruct efforts to help the poor, but I wonder if Harvard economist Sendhill Mullainathan has such fears. He writes today in the NYT that he worries that a focus on the extreme wealth and income of the one percent is blocking efforts to aid the bottom 20 percent. If that is the case, then presumably focusing attention on global warming would raise even greater fears.

Of course it's harder to see the concern for the focus on the one percent since many of the measures that would reduce the income of the one percent would directly benefit the bottom 20 percent. For example reducing the protections that make it difficult for foreign doctors from entering the country would directly lower the price of health care for the bottom 20 percent, effectively raising their income. The same would be true of ending patent protection for prescription drugs and adopting a more efficient mechanism for financing future research. With drugs costs around 10 percent of their current price, many of the poor would be able to afford them without government assistance. Applying regulation to near monopolies like cable and Internet providers would also benefit the poor while reducing the income of the one percent.

There are areas where ending special treatment for the one percent may provide less direct benefits for the poor, such as making Internet retailers like Jeff Bezos collect sales tax like everyone else or taxing the financial sector like other sectors, but it's hard to understand Mr. Mullainathan's concern that this distracts from helping the poor. By this logic, dealing with the situation in the Crimea or the debate over legalizing marijuana also distract from helping the poor. There doesn't seem any obvious reason that we can't both look to help the poor and try to alter the rules that have made the one percent ridiculously rich.

In the Real World the Trade Deficit Is More Important Than the Budget Deficit Print
Saturday, 08 March 2014 08:24

Washington politicians like to hyperventilate about the budget deficit. However changes in the budget deficit are overwhelmingly a response to economic conditions rather than the result of deliberate policy. In other words, politicians didn't have much to do with the changes. Furthermore, since the budget is responding to economic changes, it is not giving us new information about the economy.

On the other hand the trade deficit is a direct measure of the amount of demand that is going overseas rather than being spent here. This represents income generated in the United States that is not creating demand in the United States. By definition, this lost demand must be made up by other borrowing, either by the public sector (i.e. budget deficits) or the private sector. Currently the trade deficit is running at an annual rate of around $480 billion (@ 3.0 percent of GDP), which means that the sum of net borrowing in the public and private sector must be equal to $480 billion.

The impact of the trade deficit in reducing demand swamps any plausible impact from changing consumption patterns due to debt or even the upward redistribution of income that we have seen over the last three years (a trend that has been furthered by the trade deficit). Given its enormous importance for the economy it is bizarre that the media largely ignore trade figures.

Yesterday the Commerce Department reported that the trade deficit was $39.1 billion in January, about $2 billion higher than the consensus forecast from economists. The figure for December was also revised up from $38.7 billion to $39.0 billion. If this was reported by the NYT it was not easy to find. This news was a small brief in the Washington Post business section.

Politicians tend not to like to talk about the trade deficit because the leadership of both parties supports the policies that have led to large trade deficits. But serious news outlets are not supposed to report only the news that the politicians want them to report. The trade deficit matters hugely to the economy and to ordinary workers, there is no excuse for not giving it a substantial amount of coverage. 


Note: share of GDP added later -- Convert correctly pointed out my failure to provide context.

Will There Be a Recession in the Next Decade? Print
Friday, 07 March 2014 13:42

Annie Lowrey's Economix blogpost on President Obama's budget concludes by telling readers:

"But it is worth noting that perhaps the single most important factor when it comes to deficits is largely out of the White House’s hands: economic growth. Mr. Obama’s budget assumes that there will be no recession for the next decade – indeed, he sees a moderate but strengthening recovery. History suggests those might be the most unrealistic numbers in the document."

Actually the lessons of history on this point are less clear than this comment implies. Historically we have gotten recessions for two reasons, either the Fed raises interest rates to slow the economy in response to a rise in the inflation rate, or a bubble bursts throwing the economy into a tailspin. While both scenarios are in fact possible (if the Fed lets another bubble grow, can we exile these doofusses for the rest of their lives?), at the very least they would imply more rapid growth in the period leading up to the recession.

In other words, if we get a recession it is likely to be preceded by a period of faster than projected growth. The net effect on the deficit, compared to the Obama administration's projections cannot be known in advance. Anyhow, it is remarkable how much time ostensibly intelligent people spend speculating about events 6-10 years in the future when all the historical evidence shows we don't have a clue.

Take a look at the CBO projections of budget surpluses for 2014 from back in 2008 or the projections of large budget deficits in 2000 from back in 1996. I'm fine with make work jobs in a weak economy, but let's not imagine these projections for are worth anything more than the cyberspace they are printed on. 

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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.