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Bad News In China: Blue Collar Wages Are Soaring Print
Wednesday, 18 February 2015 11:38

Yes folks, the news just keeps getting worse. The NYT had an article touting India's economic prospects, which it contrasts with China. It told readers:

"China’s investigations of multinationals, persistent tensions with neighboring countries and surging blue-collar wages have prompted many companies to start looking elsewhere for large labor forces."

The piece also includes a box with a figure showing that the number of people in China between the ages of 15-24 (prime factory worker age) is projected to fall from 250 million in 2009 to roughly 160 million in 2019. It adds the information that, "a sharp increase in college attendance has made the problem more acute." Needless to say, this story is being told from the standpoint of businesses seeking low cost labor.

It's fine for the NYT to run such pieces, but it would also be worth having a piece that described the impact that surging blue collar wages and a sharp increase in college attendance are having on the standard of living of hundreds of millions of people in China. From the standpoint of businesses looking for cheap labor this might be bad news, but from the standpoint of those who would like to see poor people lifted out of poverty, this sounds like very encouraging news. It would be great to see more coverage from the NYT from the perspective of workers in China. 

Confusion on Japan's Economy Print
Monday, 16 February 2015 09:00

A NYT piece on the release of new data showing Japan's economy grew at a 2.2 percent annual rate in the fourth quarter gave an excessively pessimistic view of Japan's economic performance under Prime Minister Shinzo Abe. The article tells readers:

"The economy did not grow at all in 2014, with two quarters of recession almost exactly canceling out two quarters of expansion, according to Monday’s report. Growth in the two years since Mr. Abe began his campaign has added up to a modest 1.6 percent, slightly less than the 1.8 rate recorded in 2012, the year before he took office."

As the article notes, the reason the economy did not grow in 2014 was because of a sharp increase in the sales tax that had been planned before Abe took office. While it says that the resulting downturn was a surprise to economists, this is exactly what standard economics would predict. The sales tax increase was clearly foolish policy (Abe has put off another hike that had been scheduled this year), but the economy clearly would have grown at a healthy pace in the absence of this rate hike.

It is also worth noting that Japan's employment to population ratio (EPOP) rose by 2.2 percentage points from the fourth quarter of 2012, when Abe came to power, to the fourth of 2014. By comparison, the EPOP in the United States has risen by 1.1 percentage point over the same period. News reports have been nearly ecstatic over the rate of job growth in the United States.



Supporters of Trans-Pacific Partnership Claim Obama Has Incompetents Negotiating Trade Deals Print
Sunday, 15 February 2015 23:16

That would have an appropriate headline for a NYT article on the fact that many members of Congress may refuse to support fast-track trade authority without some rules on currency. At one point it refers to comments by Bruce Josten, a senior lobbyist at the U.S. Chamber of Commerce and supporter of fast-track, who argued that the administration could not effectively write rule on currency values:

"Would the Federal Reserve’s program of 'quantitative easing' — basically printing money to keep interest rates low — be an actionable offense under a strict currency regime? What about large government spending programs financed by international borrowing?"

It is difficult to believe that anyone involved in these negotiations would have difficulty distinguishing between policies explicitly focused on boosting the U.S. economy and policies that have the explicit purpose of lowering the value of the dollar. (If Mr. Josten is confused, quantitative easing is when the Fed buys U.S. government bonds. If the main purpose was to lower the value of the dollar the Fed would be buying the bonds of other countries.)

Fred Bergsten and Joe Gagnon, two prominent economist at the very pro-trade Peterson Institute for Economics have developed guidelines for defining currency manipulation that negotiators should be able to learn from if they are confused on the topic. As a practical matter, defining currency manipulation is almost certainly much simpler than many other topics covered in the Trans-Pacific Partnership (TPP), like defining "bio-similar" drugs so that patent protections can be extended to them or defining the types of regulatory takings that could be actionable under the investor-state dispute resolution tribunals established by the pact. (For example, can a company claim damages for a higher minimum wage?)

There are several other errors in the article. At one point it tells readers:



Funny Numbers on the Cost of 529 Accounts Print
Sunday, 15 February 2015 14:27

The NYT seems to be backsliding again in its commitment to put numbers in context. A NYT article on the prospects of tax reform threw around many big numbers which would almost certainly be meaningless to nearly all of its readers.

I will pick on one here, because it doesn't seem to make any sense. According to the article, President Obama's proposal to end the tax deductions for money placed in 529 accounts in future years would have saved the government $1 billion over the next decade. (These accounts allow people to deposit after-tax dollars and have the money accumulate tax free, if used for educational purposes.) I have seen this figure cited elsewhere, but it is surprisingly small.

According to a recent GAO report, there were 11 million accounts in 2011 with a total balance of $167 billion. The report estimates that the lost revenue due to the accounts was $1.6 billion in 2011. If we adjust upward for 2015 based on the nominal growth over the economy, the implied lost revenue for the current year would be just under $2.0 billion. This would almost certainly be an understatement, since the sharp rise in the stock market would mean that the holdings in 529 accounts would have grown far more rapidly than the economy over the last four years. Furthermore, since the top tax rate has been raised, the implicit tax savings from these accounts would be higher for the same amount of holdings in 2015 than in 2011.

If the one-year cost of the program is $2 billion, then how can ending future deductions only save $1 billion over ten years? President Obama proposal did protect the tax sheltered status of current deposits, but unlike retirement accounts, there is a limited period of time over which people can accumulate money in 529 accounts, basically from when a child is born until they complete their college education. This means that by the end of the ten-year budget horizon, most of the 529 money with grandfathered tax exempt status would already have been spent.

If the counter-factual assumes that 529 withdrawals grow in step with projected economic growth over the next decade, then they would be costing the Treasury over $3 billion in lost taxes in 2025. If 70 percent of this represents money contributed in 2016 and later, then the implicit savings in 2025 alone from President Obama's proposal would be more than $2.1 billion. If this calculation is anywhere close to accurate, how can the 10-year savings be just $1 billion?

Another way to think about this is the cost per account. If the number of accounts does not rise from the 11 million in 2011, then the implicit tax cost per account holder over 10 years is $91 or $9.10 per year. Is this plausible? Did hundreds of thousands of middle class families really get outraged over a proposal that would have cost them 18 cents a week in higher taxes?

Something in this picture is not adding up. The $1 billion figure over 10 years (0.002 percent of projected spending) doesn't make sense. If the paper had been tried to put this number in a context that made it meaningful to readers it might have gotten the number right.

Washington Post and the Affordable Care Act: Another Swing and a Miss Print
Sunday, 15 February 2015 09:13

As regular readers know, the Washington Post editorial board has problems with economics. They were foremost among the Very Serious People who warned about financial crises and soaring interest rates if we didn't tame the deficit. They still regularly issue demands for what they consider fiscally responsible policies (e.g. cutting Social Security and Medicare).

Anyhow, today they used their lead editorial to wag their finger at supporters of the Affordable Care Act (ACA) for not acknowledging that it would lead many employers to cut workers' hours. The issue is a provision in the law (which has yet to be applied) that would require large employers to provide insurance for workers who work more than 30 hours per week or to face a fine.

The editorial noted a directive from Staples to its store managers to restrict part-time workers to less than 25 hours as evidence of this ACA effect. The piece then cited work by Ben Casselmen to support its "Iron Law No 1: Incentives influence behavior":

"In 2009, 9.7 percent of part-timers worked between 25 hours and 29 hours and 7.7 percent worked between 31 and 34 hours. In about mid-2013, just before the employer mandate’s original implementation date, the gap between those numbers began to widen, hitting 11.1 percent and 6.6 percent, respectively, by year’s end."

Are you impressed by that iron? Let's add some more details.



Productivity Debates: Confusion is Not a New Argument Print
Saturday, 14 February 2015 08:39

It speaks to the state of economic debate in the United States that we have prominent voices arguing both that we face a future in which productivity growth will be near zero (Robert Gordon)  and that productivity is about to soar through the roof so that most of us will not have any work to do (Erik Brynjolfsson and Andrew McAfee). If we envisioned the same debate in climate science, a substantial group of climatologists would be warning of an impending ice age even as others raise concerns about global warming. Needless to say, this sort of split would encourage most people to disregard the pronouncements of climatologists about anything, which is perhaps what the public should do in the case of economists.

When confronted with two sharply divided views about the world, the NYT doesn't help matters by adding a large dose of confusion, as it did in printing a column by Daniel Cohen, a French economist. Cohen's ostensible contribution is to tell us:

"both sides in this debate are right: We’re living an industrial revolution without economic growth. Powerful software is doing the work of humans, but the humans thus replaced are unable to find productive jobs." He then goes on to say that we will have to adjust to a world without growth because living standards will not be rising.

Apparently Cohen does not realize that he has taken Brynjolfsson and McAfee's side in this debate. The problem he has described is one of too much productivity growth. Workers find themselves without jobs because there is not enough demand for goods and services.

To see this point, imagine in the world Cohen describes that we ran the printing presses overtime and handed out $1 million in cash to every man, women, and child in the country. (Yep, we'll give a $1 million to deadbeat welfare cheats, hardworking middle income people, and even Bill Gates.) Now all you right-thinking people out there will want to scream that this will lead to massive inflation. After all, we're just printing money.

But the problem that we supposedly see is that the robots are doing all the work and there is no demand for most of our labor. If we there is more demand for goods and services now that we have been given our handouts, then we will ask the robots to work harder and a few of the formerly unemployed will get jobs doing robot maintenance or other such tasks. What in this story would cause prices to rise? Would the robots demand a pay hike?

If Brynjolfsson and McAfee are right, and we are not seeing growth, it's because boneheaded policymakers (I didn't say the European Union) are pointlessly restraining demand. In this context it is foolish to talk about "when the growth model fails." What we should be talking about is teaching economics 101 to the people determining economic policy.

Since no one asked, I think Brynjolfsson and McAfee are probably closer to the mark than Robert Gordon in that I see no reason to believe that our ability to achieve large gains in productivity is hitting any sort of limit. Nonetheless, I also don't expect a quantum leap in productivity growth. If we could get anywhere near the 3.0 percent annual productivity growth of the golden age (1947-1973) I would be very impressed.




David Brooks Is Making History Print
Friday, 13 February 2015 16:35

David Brooks cast his column today as a battle between the economic agendas put forward by Larry Summers in a recent report for the Center for American Progress and Marco Rubio in his campaign book, American Dreams. After a brief summary of key points Brooks asks,

"The questions for Summers are: Have we forgotten the lessons of the last quarter-century? Do we think government is smart enough to intrude into millions of business decisions? Do we worry that in making hiring more expensive we will get less of it, and wind up with European-style sclerosis and unemployment levels?"

What lessons of the last quarter century does Brooks have in mind? The major economy with the best record on employment at this point is Germany, with an employment to population ratio (EPOP) that is almost 4 full percentage points higher than in the United States. Its unemployment rate is currently 4.9 percent. There are few countries in which the government intervenes more in the corporate governance process than Germany.

In fact, even France has a higher EPOP among prime age workers (ages 25-54) than the United States. The United States has a slightly higher overall EPOP because we expect students to work and we expect people to retire later. In terms of employers being willing to hire prime age workers, France does better than the United States.

The problem is not that Summers has forgotten the lessons of the last quarter century, the problem is that Brooks is inventing lessons that fit the policies he wants to promote rather than the data.

Cheap Gas Depressed Consumption Print
Friday, 13 February 2015 05:57

That's not my line, it's the headline of an AP article in the Washington Post. The exact words were, "cheaper gas lowers retail sales; spending up elsewhere." Yes folks, once again we see the march of surprised economists.

The immediate cause was a report from the Commerce Department showing a drop in retail sales of 0.8 percent in January that followed a drop of 0.9 percent in December. These declines do not quite fit with the story of a soaring economy led by a consumption boom. So now in the hunt for culprits, this AP article has apparently fingered lower gas prices.

Back in the good old days before this report was released we used to think that lower gas prices would be a spur to consumption as it freed up money for other purchases, but I guess we have an audible here:

"The modest gain suggests Americans are still cautious about spending their windfall from lower gas prices. ...

"Economists were disappointed by the weak showing, but most expect that consumers will eventually spend much of the extra cash left over from lower prices at the pump.

"'With lower gasoline prices leaving households with more to spend ... the labor market on fire and consumer confidence back at its pre-recession level, we had hoped to see a much stronger performance,' Paul Ashworth, an economist at Capital Economics, said in a note to clients."

There are two important data points that were apparently missed by the surprised economists. First, the labor market is very far from being "on fire." The percentage of unemployment due to people voluntarily quitting their jobs is still at extraordinarily levels. This is a key measure of workers confidence in the state of the labor market. Nominal wage growth has been just 2.2 percent over the last year, virtually unchanged from the prior three years.

The other data point apparently unavailable to surprised economists is the saving rate. Contrary to what they routinely assert, the saving rate is actually quite low, meaning that consumption as a share of disposable income is already quite high. People have need to save, for example for things like retirement. Some folks may have heard stories about the retirement income crisis. This refers to the fact that workers approaching retirement no longer have defined benefit pensions and have little savings.

For this reason, we should not expect some big surge in consumption going forward. If we expect to see a sharp uptick in growth we will have to look to some other component. Since there ain't many choices out there (the textbook says GDP is equal to consumption, investment, government spending, and net exports), some of us are less optimistic than the surprised economists.

Throw the Truth Out the Door: President Obama Has to Pass a Trade Deal Print
Thursday, 12 February 2015 15:41

Wow, this stuff just keeps getting worse. Apparently anything goes when the big corporations want a trade deal. Otherwise serious people will just make stuff up, because hey, the big campaign contributors want a trade deal to make themselves richer. The latest effort in creative myth-making comes from Third Way, which tells us that post-NAFTA trade deals aren't job losers like NAFTA.

As Jim Tankersley and Lydia DePillis point out, this implicitly tells us that all those pro-NAFTA types weren't right in telling us that NAFTA would create jobs. (Hey, when did these folks stop telling us things about trade that were not true?)

But getting to the meat of the matter, the line from Third Way is that our trade negotiators have learned from past mistakes. Now, trade agreements include labor and environmental standards and other provisions that ensure they will be job gainers. They show this by comparing U.S. trade deficits in goods with the countries with whom we have signed trade pacts in this century, in the years since the pact with the decade prior to the pact. In their analysis they find that in 13 of the 17 countries the trade deficit was smaller in the years since the pact than in the decade before the pact.

Before anyone becomes convinced that we can now count on new trade deals to reduce our trade deficit, let's pretend that we approached this like serious people. We would want to control for overall trends in the deficit and region-specific trends (e.g. compare the pattern in Chile after the signing of the pact with the pattern with other Latin American countries).

I don't have time to do a full analysis (no one pays us for correcting this dreck), but a very quick look shows how the deck is stacked in favor of getting the Third Way result. Most of the trade deals were signed right as the United States was reaching its peak deficit (2006) or in the years just after.

To see how this stacks the deck, the table below shows average trade deficit (in constant dollars) in the decade prior to the year of the pact and for the years since: [The data is available from Bureau of Economic Analysis, Table 1.1.6; modify the table to to show additional years]

           Prior decade             Years since pact

2006   $530.5 billion             $488.7 billion

2007   $587.3 billion             $456.7 billion

2008   $616.5 billion             $439.5 billion

2009   $618.3 billion             $448.8 billion

2010   $616.4 billion             $446.3 billion

2011   $612.2 billion             $441.9 billion

2012   $599.0 billion             $436.6 billion

2013   $576.8 billion             $452.6 billion


In short, this methodology would lead you to find smaller trade deficits in the years following an agreement even if the U.S. trade balance with these countries worsened compared to other countries. This ain't serious stuff, but like they say, when pushing trade deals, truth doesn't matter.         



Export Subsidies and Currency Values in China Print
Thursday, 12 February 2015 05:49

The NYT reported on a decision by the Obama administration to file a complaint before the World Trade Organization over alleged subsidies by China to its exports. The subsidies take the form of government support for product design, information technology, and worker training for exported items. According to the article, the value of these subsidies came to roughly $1 billion over the last three years.

It would have been helpful to put this complaint in some context for readers. China has an explicit policy of holding its currency to a level that is far below its market value. If we assume that the market value of the yuan would be 20 percent higher than the current value, the export subsidy implied by keeping the yuan below its market level would be on the order of $260 billion over the last three years. Even if the gap between the market value and China's targeted rate is just 10 percent, the implied subsidy would be over $130 billion over this period.

As the piece notes, the administration's move was intended primarily as a gesture to win support from Congress for fast-track authority to allow the passage of the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact. The effectiveness of this gesture would be substantially reduced if the NYT had pointed out that the Obama administration continues to do nothing with reference to an export subsidy that is more than 100 times as large.

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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.