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NYT Misses the Story on the Fed and African American Unemployment Print
Tuesday, 03 March 2015 19:03

The NYT examined the impact the Fed has on unemployment among African Americans and came up with the bizarre conclusion that the Fed can't do much:

"The Fed has a hammer, and, as the saying goes, not all problems are nails."

This conclusion is bizarre, because the data are very clear; efforts to reduce the overall unemployment rate disproportionately help African Americans and Hispanics. As a rule of thumb, the African American unemployment rate is roughly twice the unemployment rate and the unemployment rate for African American teens is roughly six times the white unemployment rates. (The unemployment rate for Hispanics is generally 1.5 times the white unemployment rate.)

In keeping with this rule of thumb, the unemployment rate for whites in January was 4.9 percent. It was 10.3 percent for African Americans and 29.7 percent for African American teens. Here's what the longer term picture looks like.


If we could get back to 2000 levels of unemployment, when the unemployment rate for whites bottomed out at 3.4 percent, we might see something like the 7.0 percent unemployment rate for blacks overall and 20.0 percent we saw for black teens back in April of 2000.

Alternatively, to flip it over and talk about employment rates, the percentage of black teens that was employed peaked 31.7 percent in 2000, more than 50 percent higher than the 19.6 percent figure for last month. Does anyone really want to say that increasing the probability that black teens will have a job by 50 percent doesn't make a difference?

There is a separate issue as to whether it would be possible to get down to 4.0 percent unemployment without triggering spiraling inflation. This is an arguable point. But it is worth noting that those who say it is not possible to have 4.0 percent unemployment today also said that it was not possible back in 2000.


Note: This a corrected version, the original graph had data that were not seasonally adjusted.

What Happened to the Great American Boom? Print
Tuesday, 03 March 2015 15:38

With a string of strong jobs reports (the most recent coming with good hourly wage growth) the business section has been filled with reports of America once again being a booming economy, which contrasted with weak growth elsewhere in the world. With a bit more data, it's not clear that reporters will still be writing these stories.

First, the fourth quarter growth rate was revised down to 2.2 percent, giving a 2.4 percent growth rate over the prior year. This is almost exactly the same as the average of the last two years. Not much of a case for an acceleration of growth there.

Furthermore, the data that have come in for the first quarter don't look very promising. Construction spending fell by 1.1 percent from December to January. Retail sales fell 0.8 percent in January compared to December. Car sales were relatively weak in February. This was undoubtedly in part due to unusually severe weather, but it nonetheless virtually guarantees weak growth in consumption for the quarter. Equipment investment is up modestly, but January shipments were only slightly above the October level. In short, we are not seeing any investment boom.

With weak consumption and lackluster investment, there will be little to counter the impact of a rising trade deficit resulting largely from the increase in the value of the dollar. Look for first quarter growth under 2.0 percent and possibly a fair bit under 2.0 percent. (Insofar as the weakness is weather-related, there will be a rebound in the second and third quarters, as happened last year.) 

Meanwhile, the rest of the world is looking brighter. Japan had 2.2 percent GDP growth in the fourth quarter, which puts it about a percentage point ahead of the United States on a per capita basis. The euro zone economies are now showing modest growth, but the best news may be coming from Germany. IG. Metall, the country's largest trade union, signed a pact increasing wages by 3.4 percent. IG Metall's contracts often provide a basis for other contracts and even wages among non-union workers.

This could be a sign that wages and consumption will grow more rapidly in Germany. This also could lead to somewhat higher inflation in Germany, which will be a huge help to the peripheral countries in the euro that are trying to regain competitiveness. In short, this is really good news for German workers and the euro zone as a whole. 

Robert Samuelson Complains that the Good Fortune of Government Bond Holders Is Partially Paid by the Taxes of Struggling Millennials Print
Monday, 02 March 2015 05:43

Okay, Robert Samuelson would never see any injustice in rich people like Pete Peterson getting the interest on their government bonds. If that means that "struggling millennials" have to pay more taxes, so be it. The rich are entitled to the interest on the bonds they purchased.

No, Robert Samuelson is upset that workers are getting the Social Security and Medicare benefits they paid for. As an analysis from the Urban Institute shows, middle income baby boomers will get somewhat less back in benefits than they paid in taxes. The cost of their Medicare benefits will exceed what they pay in taxes, but this is because we pay our doctors, drug companies, and medical equipment companies roughly twice as much as they would get in other wealthy countries. If there is a complaint about someone doing well at the expense of struggling millennials, it should be directed at these groups.

Of course the other obvious issue is why are millennials struggling? If we had an economy aimed at achieving full employment, instead of having the Fed raise interest rates to slow job creation, if we had a trade policy designed to help ordinary workers instead of doctors, lawyers, and drug companies, and if we had a labor relations policy that was more balanced between workers and capital, then millennials would not be struggling. For that matter, their baby boomer parents might then have something other than Social Security to support them in retirement.

Anyhow, it's Monday morning and Robert Samuelson is unhappy that workers may be able to enjoy a comfortable retirement. In other words, it's another week in Washington. 

Greek Austerity Does Not Protect Europe's Taxpayers Print
Sunday, 01 March 2015 10:21

The NYT described Germany's insistence that Greece adhere to an austerity plan as being derived from a desire to protect taxpayers. It's not clear that this is the case. Most of the debt is owed to official lenders who have no need to make demands on Germany's taxpayers to get funding. (The European Central Bank prints its money.)

Furthermore, more rapid growth in the euro zone will both allow Greece to repay a larger portion of its debt and also improve Germany's budget situation as well. For this reason, it is hard to see how German taxpayers will derive any benefit from austerity in Greece.

"Holdouts" On Argentine Bonds, Did Not Own the Bonds at Time of Default Print
Friday, 27 February 2015 05:55

A NYT piece on the ongoing legal battle between hedge funds that own a portion of Argentina's debt and the Argentine government likely misled many readers. It referred to the hedge funds as "holdouts," saying that they had refused to accept the terms offered by Argentina to bondholders at the time the country defaulted in 2001.

In fact, these funds did not hold Argentine debt at the time of the default. They bought the debt up after the default at a small fraction of its face value. Their hope was that they could use their political connections and their legal expertise to force the Argentine government to pay substantially more on its debt than it offered to other creditors.

Conservative Economics Has Not Produced Rapid Growth Print
Thursday, 26 February 2015 08:33

The Post had an interesting piece on the debate within the Republican party over economic policy. At one point the piece notes the stagnation in middle class incomes and then tells readers:

"There is a growing sense among many conservative economists that faster growth by itself will not suffice to lift those incomes at the rate middle-class workers came to expect a generation ago ."

This comment may mislead readers into believing that conservative policies of tax cuts and deregulation have been associated with faster growth. They haven't.

The table below shows the average growth rate under the last six presidents (measured as first quarter of their term to first quarter of the next adminstration.)

Carter -- 3.4%

Reagan -- 3.4%

Bush I -- 2.0%

Clinton --3.7%

Bush II -- 1.6%

Obama -- 2.2%

This record shows that tax cutting Republicans have done worse in promoting growth during their administrations than tax and spend Democrats. While Republican policies may not have been successful in producing gains for the middle class, they have also not done very well in promoting growth. 

NYT Fact Checkers Go On Strike as Column on Greece Gets Submitted (see correction) Print
Wednesday, 25 February 2015 21:41

That is the only possible explanation for the appearance of a column on Greece's economy by venture capitalist Aristos Doxiadis. The column's central premise is that Greece's severe downturn cannot be explained by its macroeconomic policies. It claims that other countries had similar austerity but had no comparable decline in output. It instead blames Greece's problems on structural problems that have blocked the growth of exports. Both claims are untrue.

Doxiadis told readers:

"Greece has fared much worse than other eurozone countries that faced a sudden drop in foreign financing, and then enacted similar austerity programs. It lost 26 percent of its G.D.P. from the pre-crisis peak, while Portugal, Ireland and Spain lost no more than 7 percent each. Much of this difference is due to foreign trade.

"In all four countries, when capital from abroad stopped flowing in, increasing exports became an urgent goal. The other three countries achieved this quickly. Greece did not. If it had boosted exports, its recession would have been much shallower; by one estimate, a 25 percent increase in exports could have limited the drop of gross domestic product to just 3 percent."

The claim that the other three countries had similar austerity programs is wrong. According to the I.M.F. the decline in the structural deficit between 2007 and 2014 was 6.0 percentage points of GDP in Ireland, 1.8 percentage point of GDP in Portugal, and -4.1 percentage points of GDP in Spain (the structural deficit grew larger over this period). By comparison the structural deficit in Greece was cut by 12.5 percentage points of GDP over this period, more than twice as large as the deficit reduction in Ireland, the most austere of the other three countries.

The assertion about Greece being the worst export performer of the group is also at odds with the data. According to the OECD, Greece had the largest increase in goods exports (sorry, couldn't find service data) from 2007 to 2014. Measured in dollar terms, Spain's goods exports increased by 27.5 percent over this period. Portugal's exports increased by 21.9 percent while Ireland's exports fell by 3.1 percent. By comparison, the OECD reports that Greece's exports rose by 35.6 percent, far more than the 25 percent increase that Doxiadis held out as a target (he doesn't indicate his time frame).

This matters because Doxiadis' whole argument is that Greece's problems cannot be explained by austerity but rather are due to anti-business regulations and attitudes. It may well be the case that regulations and attitudes are impeding growth in Greece, but contrary to Doxiadis' claim, its downturn is well explained by its austerity, which was much more severe than in the other three countries.

The NYT should have insisted that the column get the basic facts right. 



Mr. Doxiadis referred me to data on total Greek exports, which were markedly worse than goods exports alone. Apparently Greece's service exports fared far worse since 2007 than its goods exports. 


Would Doctors Benefit from Globalization that Lowered Their Pay and the Cost of Health Care? Print
Wednesday, 25 February 2015 05:13

Better yet, would economists say they had benefited? The reason for the question is that this is essentially the question that the University of Chicago's Initiative on Global Markets (IGM) asked its group of elite economists about trade with China. It asked:

"Trade with China makes most Americans better off because, among other advantages, they can buy goods that are made or assembled more cheaply in China."

This question could be taken to be saying that most Americans are better off because they can get cheaper goods from China. It's a bit difficult to imagine how that could not be true, taken in isolation. In other words, are we better off because we have the opportunity to buy some goods at lower prices?

Other things equal, we certainly would be better off. Hence the question about having the country flooded with foreign educated doctors so that their pay is cut in half. With around 900,000 doctors in the country averaging paychecks of well over $200k a year, this would save the country more than $90 billion a year on health care costs (@ $700 per household per year -- how does that compare to your tax cut?). If we asked our elite economists whether doctors were benefited by lower cost health care, how would they answer? Aren't doctors benefited by paying less rather than more for their health care?

If this seems like a strange question it would not be the first time that IGM stumped the experts. It previously posed a question on whether Piketty's views on growing inequality were correct. The overwhelming majority answered "no," so did Thomas Piketty.



The Patent Theory of Knowledge Print
Tuesday, 24 February 2015 08:17

For thousands of years we have seen people develop knowledge and skills, make discoveries, and advance science. The overwhelming majority of this work was not motivated by the hope of getting a patent monopoly. Yet somehow, the ostensibly serious people at the Association of University Technology Managers think that patent monopolies are the only way to support the development of new drugs, or so it would seem from a speech to them by Joseph Allen.

Mr. Allen took issue with my suggestion that if the government funds research that the findings and any associated patents should be placed in the public domain. He pointed to the period before the Bayh-Dole Act when there were:

"28,000 inventions wasting away on the shelves in Washington because there was no patent incentive for anyone to develop them."

Okay, let's try to get this straight. Suppose that the government made its funding partly contingent on developing a usable product approved by the Food and Drug Administration (FDA). Would all the inventions still sit on the shelf because people are too dumb to make a usable product without the motivation of a patent monopoly?

Suppose that the funding even went to private companies who would see their payments increase 50 percent, 100 percent, or even 200 percent if they get a usable product approved by the FDA. Even in that case the inventions would just sit on the shelf because there are no patent monopolies?

One has to wonder what it is about developing drugs that require patent monopolies when people in so many other areas can be motivated simply by money. It's a great mystery.



Ezekiel Emanuel's Unnecessary Originality on New Drugs Print
Tuesday, 24 February 2015 07:43

It's always exciting to read an interesting new idea in the NYT opinion section. It's less exciting to read an idea that is not new, but presented as such. Hence my lack of joy when reading Ezekiel Emanuel's proposal for a prize fund for the development of new antibiotics.

Emanuel wants the government to put up a $2 billion prize for the first five companies that get regulatory approval for a new antibiotic. He writes his piece as though a prize fund for developing drugs is a new idea. It isn't. The idea of prize funds for developing drugs goes back close to two decades (possibly longer), and has had many prominent proponents, most notably Joe Stiglitz, the Nobel prize winning economist.

Emanuel does have an original twist on his proposal. Stiglitz and other proponents of prize funds saw them as an alternative to patents. The idea was that the company got paid for their research when they got the prize. There was no reason to pay them a second time by giving them a monopoly over the sale of the drug.

In fact, one of the main points of the prize was to allow drugs to be sold at their free market price. This would both ensure that they were affordable (drugs are almost always cheap to produce) and eliminate the drug companies' incentive to lie about the safety and effectiveness of their drugs.

Emanuel does depart from earlier proponents of prize funds in proposing that drug companies be allowed to have a patent monopoly even after having been awarded with a prize. This leaves in place the potential problems of affordability and perverse incentives that earlier proponents of prize funds had sought to address.  

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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.