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More Debt Fetishism at the Washington Post Print
Wednesday, 28 January 2015 05:49

We're still down close to five million jobs from our trend employment path. Or, to put this in generational terms, millions of kids are being raised by parents who can't find work. We have endless needs for infrastructure, health care, child care, and education, and reducing greenhouse gas emissions which are not being met because of concerns over budget deficits. Given this situation, Ruth Marcus would naturally use her column in the Washington Post to warn about the government debt.

She bemoans the fact that President Obama barely even mentioned the debt in his State of the Union address:

"Oh, the debt. Yawn. How passe. How 2009.

"Once, President Obama held a summit on fiscal responsibility (2009). Once, he gave an entire speech devoted to the subject (2011). Once, his State of the Union addresses (2010, 2011, 2013) were studded with double-digit references to the problem of sky-high deficits and lingering mountains of debt.

"Now, the topic receives just a glancing mention, a clause ('shrinking deficits') in a series of presidential back-pats and a refutation of warnings of Apocalypse Soon."

While Marcus is clearly terrified by the deficit and debt, the column gives no reason why we should be more concerned about debts and deficits (yes, big numbers) than the number of trees in the United States (a number I do not know offhand, but I'm sure it's also big).

The best we get is a quote from an earlier State of the Union that is both wrong and arguably appealing to racist sentiments:

"Even after our economy recovers, our government will still be on track to spend more money than it takes in throughout this decade and beyond. That means we’ll have to keep borrowing more from countries like China. That means more of your tax dollars each year will go toward paying off the interest on all the loans that we keep taking out."

The budget deficit actually does not mean that we have to borrow from countries like China. We have to borrow from countries like China because we run a trade deficit. This in turn is the result of an over-valued dollar. The over-valuation of the dollar is the result of countries like China buying up large amounts of U.S. assets, including U.S. government debt. (This is how they "manipulate" their currency.)

If countries like China stopped buying U.S. debt and other dollar denominated assets then the value of the dollar would fall and we would move towards balanced trade. This would increase employment and also, by the way, reduce our budget deficit.

Marcus later tells readers, quoting in part from the Congressional Budget Office:

"Another is that, unlike at the start of the financial crisis, when debt amounted to just (!) 43 percent of GDP, the overhang of already huge debt could 'restrict policymakers’ ability to use tax and spending policies to respond [exclamation mark in original].'"



NYT Says Greek Election Sets Up a Conflict With Northern Europeans Who Don't Believe in Economics Print
Tuesday, 27 January 2015 05:55

That is not exactly what the NYT said. Instead its article on the dispute between the new Greek government and Germany and other northern European countries chose to use bias in the opposite direction telling readers:

"But beneath the arguments over austerity is a deeper conflict of democratic wills, between the verdict of voters in Greece, who are desperate for some relief, and those in Germany, Finland and the Netherlands, who do not want their taxes used to underwrite a blank check for countries that get into financial trouble."

Really? The voters in Germany, Finland, and Netherlands are just concerned about issuing blank checks? Have they noticed that Greece cut its budget by 27 percent since 2008? This would be equivalent of a cut in annual spending in the United States of almost $1 trillion in its impact on the budget and close to $2 trillion in its impact on the economy.

These cutbacks, coupled with the austerity that the European Union has imposed on much of the rest of the euro zone, has had the predictable effect of throwing Greece's economy into a downturn that makes the U.S. depression look like an economic boom. Are voters in Germany, Finland, and the Netherlands really so ignorant of economics that they do not understand this fact?

At another point the article tells readers:

"Jeroen Dijsselbloem, the head of the group of finance ministers from countries using the euro, said he did 'not believe in this north-south divide,' noting that 'there are a lot of countries in the north, think of the Baltics; in the south, think of Spain; and Ireland' in the west, and they 'have done major reforms, and they are all back on the growth track.'"

It would have been worth pointing out that on Mr. Dijsselbloem's "growth track" Spain's economy is projected to first exceed its 2008 GDP in 2019. Ireland is projected to first pass its 2007 peak in 2016. By comparison, in the Great Depression, U.S. GDP was 6.0 percent larger in 1937 than it had been at the onset of the depression eight years earlier in 1929.

It also would be worth pointing out that many of the crisis countries' problems did not stem from a lack of "budget discipline." Several were running modest deficits and Spain and Ireland actually had large budget surpluses before the crash. Their economic problems stemmed from the fact that bankers in places like Germany, Finland, and the Netherlands were not very competent and thought that the housing bubbles in these countries could keep growing forever. Therefore they funneled hundreds of billions of dollars in loans that further inflated the bubbles and distorted the crisis countries' economies.

Today's Seniors Do Not Have Better Retirement Benefits Than Prior Generations Print
Monday, 26 January 2015 05:43

A NYT article on the dwindling size of the middle class noted that seniors are more likely to be middle class than in the past. It told readers:

"Today’s seniors have better retirement benefits than previous generations. Also, older Americans are increasingly working past traditional retirement age."

In fact, seniors on average almost certainly have worse retirement benefits. The increase in the normal retirement age from 65 to 66 is equiavlent to a 6 percent cut in Social Security benefits. In addition, changes in the methodology used for calculating the consumer price index reduced the size of the annual cost-of-living (COLA) adjustment by 0.3-0.5 percentage points compared to the increases in the early and mid-1990s. (This means that for the same actual rate of inflation, seniors would see a COLA that is 0.3-0.5 percentage points less than what they would have received in the early and mid-1990s.)

In addition, today's seniors are less likely to have a defined benefit pension, as these are dwindling rapidly. Defined contribution pensions have not come close to making up the loss. Seniors also are far less likely to have retiree health insurance to cover non-Medicare expenses. Medicare has also become less generous in many respects, although the addition of the Medicare drug benefits (Part D) has been a big help to seniors.

The main reason seniors have more income is that they are working later in life. This is a positive insofar as it is the result of the voluntary decision of people in good health who enjoy their work. However in many cases, this is almost certainly not true. Many older workers are staying in the workforce because they have no other way to make ends meet.

The Wall Street Journal Goes Fox News, With "Some People Say" Print
Sunday, 25 January 2015 21:53

It's not quite that bad, but pretty close. An article on the victory of Syriza in Greece told readers:

"International economists say the eurozone needs a judicious mix of all of the above: monetary stimulus to avoid deflation, deficit-cutting by debtor countries, higher spending by creditor countries, and broad economic overhauls in many nations to lift long-term prospects."

Really? Do all international economists say this? Did these international economists predict the economic collapse in 2008? If not, when did these international economists stop being wrong about the economy? Do these international economists know that the OECD says that Germany has stricter employment protection regulations than either Italy or France?

Later we are told:

"Ms. Merkel’s economic medicine, with its focus on Europe’s long-term prospects in a fast-changing global economy, could show benefits eventually, economists say. The problem, they add, is that meanwhile, Europe is staring at a lost decade."

It's not clear who these economists are or what they can possibly be thinking. There is a large and growing body of evidence that high rates of long-term unemployment permanently lower a country's productive potential. With countries like Greece, Spain, and possibly France looking at decade or more of double-digit unemployment under the German plan, the losses to GDP could easily last 20 years or more. If the economists the Wall Street relies upon are making GDP growth projections for 2033 and beyond, they probably should lose their licenses. 

Japan's Economy Is Not In Recession Print
Sunday, 25 January 2015 21:24

Robert Samuelson cautioned, somewhat reasonably, against over-optimism on the U.S. economy. His basic point is that other economies around the world don't look very good right now. Their weakness could spill over and dampen growth in the United States. This is largely right, especially with the recent run-up in the dollar making U.S. goods and services less competitive.

However Samuelson does get some items wrong. He tells readers that Japan's economy is in a recession. This is almost certainly wrong. We don't have growth data for fourth quarter yet, but it is almost certain to be positive. Furthermore, even the drop in the third quarter was misleading. The economy contracted because of a large drop in inventory accumulations. Final demand actually grew modestly in the quarter. The unemployment rate has actually fallen slightly through Japan's recession, with the unemployment rate averaging 3.5 percent in October and November, compared to 3.6 percent in the first quarter. 

The Japan story is fairly simple. The austerity gang got the government to impose a large tax increase in April, which was a severe hit to the economy. However, with aggressive monetary policy and no further austerity, the economy is again growing at a modest pace.

The other point worth correcting is Samuelson's comment that one-third of U.S. corporate profits now come from overseas. This is true in an accounting sense but it is almost certainly a gross exaggeration of the economic distribution of profits. Most major U.S. corporations find ways to have profits from the United States show up on the books of subsidiaries in countries with lower tax rates.

Insofar as profits are foreign only in accounting, they will not be affected by the slowdown elsewhere in the world. Of course reduced corporate profits are not likely to have much impact on domestic demand in any case. Companies are already sitting on vast piles of cash, so lower profits would likely have little impact on investment. A reduction in dividend payouts or a fallback in stock prices may have a modest impact on the consumption of the wealthy, but this would probably not be large enough to have noticeable impact on the economy.

A Stronger Dollar Means a Larger Trade Deficit and More "Secular Stagnation" Print
Sunday, 25 January 2015 09:16

The Washington Post had a major business section piece on the "winners and losers of a stronger dollar" which never explicitly discussed its impact on the trade deficit. This is truly remarkable since the $500 billion plus annual trade deficit (@3 percent of GDP) is the main cause of the economy's weakness and continued high unemployment.

The logic of this is straightforward. The deficit is money that is income that is generated in the United States but is creating demand overseas. It has the same impact on the U.S. economy as if consumers decided to stuff $500 billion every year under their mattresses instead of spending it.

This is the main cause of the "secular stagnation" that has been widely discussed, even in the pages of the Washington Post. There is no easy mechanism for replacing this $500 billion in lost annual demand. We could do it with larger budget deficits, but deficit hawks like the folks at the Post, get hysterical at such suggestions. 

In the last decade we replaced the demand lost from the trade deficit with the demand from a housing bubble, which generated record levels of construction spending (measured as a share of GDP) and an unprecedented consumption boom. In the late 1990s we filled the hole with the demand created by a stock bubble, which spurred investment and a slightly smaller consumption boom. However without another bubble, there is no plausible mechanism for filling this hole in demand.

The rising dollar will make things worse since the value of the dollar is the main determinant of the trade deficit. A rise in the dollar will make U.S. goods and services more expensive to foreigners, meaning they will buy less of our exports. It makes foreign goods and services cheaper for people living in the United States, causing us to buy more imports. The net effect will be a larger trade deficit and a loss of jobs.

The piece also makes a common mistake by implying that it matters that oil is generally priced in dollars:

"Oil prices are falling everywhere, but because the commodity is priced in dollars, American drivers are seeing a bigger discount than drivers in other countries."

Actually, the story would be exactly the same if oil were priced in euros or yen and we saw a similar run-up in the dollar against the value of other currencies. The fact that the price of oil is generally quoted in dollars is of no consequence.

Did the Keynesians Get It Wrong in Predicting a Recession in 2013? Print
Saturday, 24 January 2015 11:46

I have had several readers send me a blogpost from Scott Sumner saying that the Keynesians have been dishonest in not owning up to the fact that they were wrong in predicting a recession in 2013. The argument is that supposedly us Keynesian types all said that the budget cuts and the ending of the payroll tax cut at the start of 2013 would throw the economy back into recession. (Jeffrey Sachs has made similar claims.)

That isn't my memory of what I said at the time, but hey we can check these things. I looked at a few of my columns from the fall of 2012 and they mostly ran in the opposite direction. The Washington insider types were hyping the threat of the "fiscal cliff" in the hope of pressuring President Obama and the Democrats to make big concessions on Social Security and Medicare. They were saying that even the risk of falling off the cliff could have a big impact on growth in the third and fourth quarter of 2012.

My columns and blogposts (e.g. here, here, here, here, and here) were largely devoted to saying this was crap. I certainly agreed that budget cutbacks and the end of the payroll tax cuts would dampen growth, but the number was between 0.5-0.8 percentage points. This left us far from recession. (All my columns and blogposts from this time are at the CEPR website, so folks can verify that I didn't do any cherry picking here.)

I know Paul Krugman is the real target here, not me, but we've been seeing the economy pretty much the same way since the beginning of the recession. If he had a different story at the time I think I would remember it. But his columns and blogposts are archived too. I really don't think anyone will find him predicting a recession in 2013, although I'm sure he also said that budget cuts and tax increases would dampen growth. 

Anyhow, I'm generally happy to stand behind the things I've said, and when they are proven wrong I hope I own up to it. But I don't see any apologies in order. No recession happened in 2013 and none was predicted here.



I see that Alex Tabarrok has found a quote from me from May of 2013 in which argued that the economy would not grow fast enough to make a significant dent in the unemployment rate in the near future:

"It is absurd to think that the economy has enough momentum to make any substantial dent in unemployment in the foreseeable future."

Since that time, the unemployment rate has fallen by roughly 2.0 percentage points. That would certainly qualify as a "substantial dent." Interestingly, growth over this period averaged just 2.8 percent. With potential growth generally put between 2.2-2.4 percent (potential growth is the rate needed to keep pace with the growth of the labor force) this difference of between 0.4-0.6 percentage points would ordinarily not be enough to make a substantial dent in the unemployment rate. In fact, if we look at the employment to population ratio (EPOP), the percentage of the population with jobs, it rose by just 0.6 percentage points over this period. At that rate, it would take approximately a decade to get back to the pre-recession EPOPs.

What I had not anticipated is the large number of people who would give up looking for work and drop out of the labor force over the next year and a half. The labor force participation rate fell from 63.4 percent in April of 2013 (the most recent data available when I wrote the column) to 62.7 percent in December of 2014. This drop corresponds to roughly 1.7 million people leaving the labor force. In past recoveries the labor force participation rate rose as more people got jobs.

Anyhow, I will own up to having gotten this one badly wrong. I did not expect people to be leaving the labor force as the economy recovered. I expected that participation rates would follow past trends. I still expect that this will be the case going forward, so I do think both the EPOP and the labor force participation will rise in the next couple of years, assuming that the economy continues on its modest growth path.

Joe Nocera on Politicians and Trade Print
Saturday, 24 January 2015 08:52

Joe Nocera used his NYT column this morning to beat up on a number of politicians who oppose President Obama's call for fast-track authority to facilitate passage of the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP). He claims that they have the trade story badly wrong and that recent trade deals have actually been a big help to the country.

While Nocera may be correct in saying that many politicians have exaggerated the negative impact on NAFTA and other recent trade deals (stop the presses! politicians exaggerating!), but their basic story is correct. There are three points that people should understand in assessing the impact of trade and the meaning of these trade deals:

1) Trade has been an important factor increasing inequality in the United States;

2) The trade deficit is the major reason that the economy has weak demand and remains far below full employment;

3) The TPP and TTIP are about imposing a corporate friendly regulation structure, not trade.

Taking these in turn, the fact that trade has been a major factor contributing to inequality is no longer just a claim from the fringe lefty types. Paul Krugman has written about as has M.I.T. economist David Autor. It was even highlighted in the report of the commission on inclusive prosperity set up by the Center for American Progress and co-chaired by Larry Summers.

The basic point is a simple one. We constructed trade agreements designed to put our steelworkers and textile workers in direct competition with low-paid workers in the developing world. The predicted and actual effect of this policy is to lower the wages of steelworkers and textile workers.

If anyone finds this difficult to understand, imagine that the trade deals of the last quarter century were focused on making it as easy as possible for smart kids in India, China, and other developing countries to train to U.S. standards and then work as doctors, lawyers, dentists and in other highly paid professions in the United States. What would we expect to happen to the wages of doctors, lawyers, dentists and other highly paid professionals? They would fall, bingo!

The story on the trade deficit should be equally straightforward. Our annual trade deficit of $500 billion (@ 3.0 percent of GDP) is a direct drain on domestic demand. This represents money being spent by workers and companies in the United States that is creating demand in other countries, not in the United States. In the good old days, mainstream economists ridiculed the idea that a trade deficit could lead to a shortfall in demand because they assumed as an article of faith that any demand lost due to a trade deficit would be made by increased demand from other sources.



Ubernomics Print
Friday, 23 January 2015 11:18

In trying to push its case with the public, Uber decided to share its internal data with Alan Krueger, a prominent Princeton economist and former head of President Obama's Council of Economic Advisers. (Could this be part of Uber's dividend from hiring former Obama political adviser David Plouffe?) Anyhow, Kreuger finds that Uber drivers on average earn a gross premium of $6.00 an hour over the pay of drivers of traditional cabs. (He also had some rather unsurprising findings, for example that more people are now working for Uber after it expanded the number of cities in which it operates.)

The key issue here is the use of the gross premium rather than a direct earnings comparison. The difficulty, as the paper notes, is that we don't know the costs incurred by Uber drivers, who use their own car. (There is a good write-up of the study by Emily Badger in Wonkblog.) Depending on how much Uber drivers drive, they could still end up with less money than their counterparts in traditional cabs.

A useful piece of information is the cost of driving a car, which Badger's colleague, Andrea Peterson tells us is 57 cents per mile, according to the Internal Revenue Service. Well, this one seems pretty straightforward, if Uber drivers average more than 11 miles per hour, they are less well-paid than their counterparts working for traditional cab companies.

Krueger's study doesn't have data on miles traveled (this is strange, since Uber has this data, at least for the time that a paying passenger is in the car), but it does tell us that the median number of trips per hour is 1.3. We really would want the average here, since we are looking at an average wage pay difference. But if we take the 1.3 median number of trips per hour given in the study, then the average trip distance would have to be 8 miles or less for Uber drivers to come out ahead, assuming they did no unpaid miles.

This second assumption is of course obviously wrong. If an Uber driver take a rider 30 miles from downturn to a suburb, there is a good chance that they will be driving back with an empty car. Also, Uber drivers often cruise high density areas to try to be in line for a call. (This is my casual empiricism from asking the few Uber drivers I have been in contact with.) Anyhow, clearly total miles driven will exceed paid miles driven, which means that the average length of a ride would have to be considerably less than 8 miles for Uber drivers to come out ahead of drivers for traditional cabs.

There is one other item in this mix worth noting. The I.R.S figure of 57 cents a mile is a figure for a commercial driver. It assumes that this person has paid for the necessary licenses and insurance. Most Uber drivers have not paid for commercial licenses for themselves and their vehicles. Most probably also don't carry insurance that covers them for commercial driving.



George Will Thinks the Mortgage Interest Deduction Is Destroying the American Character Print
Thursday, 22 January 2015 10:29

There may be some case here, but of course that is not what George Will is actually arguing. He is pulling numbers from outer space to tell a story of a run away welfare state. As he quotes that great welfare reformer of the past, Daniel Patrick Moynihan:

"the issue of welfare is not what it costs those who provide it but what it costs those who receive it."

Okay, none of us like to see healthy people in their prime working years scamming the rest of us rather than working. But in spite of Will's best efforts at playing with numbers, he does not have much of a story. He tells readers:

"Transfers of benefits to individuals through social welfare programs have increased from less than 1 federal dollar in 4 (24 percent) in 1963 to almost 3 out of 5 (59 percent) in 2013. In that half-century, entitlement payments were, Eberstadt says, America’s “fastest growing source of personal income,” growing twice as fast as all other real per capita personal income. It is probable that this year a majority of Americans will seek and receive payments.

This is not primarily because of Social Security and Medicare transfers to an aging population. Rather, the growth is overwhelmingly in means-tested entitlements."

If we go to the Congressional Budget Office, we can quickly find data going back to 1973. This shows entitlement spending, which accounts for the vast majority of federal government transfers, went from 7.5 percent of GDP in 1973 to 12.3 percent in 2014. I'm not sure that this sort of growth will destroy the nation's fiber. (I realize that this excludes the 1963-73 period, but if that is the story, then the nation's fiber was destroyed more than 40 years ago.)

Furthermore, contrary to what Will tells us, most of the growth was in Social Security and Medicare payments to an aging population, which went from 4.2 percent of GDP in 1973 to 7.8 percent in 2014. This increase accounts for 3.6 percentage points of the 4.8 percentage points of growth in entitlement payments over this period. (Most of the rest can be accounted for by Medicaid, which increased by 1.2 percentage points as a share of GDP. This is a means-tested program, but more than half of expenditures go to low-income seniors.)



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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.