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The Good News About Argentina's Economy Is That It Is Nowhere Near As Bad As Reuters Wants You to Believe Print
Wednesday, 18 June 2014 16:17

Reuters wants its readers to believe that "analysis-wary Argentines" are disgusted with their government's economic policies as "jobs [are] becoming harder to find." While there is little doubt that Argentina is experiencing difficult economic times, it certainly is doing much better than countries that have followed an austerity path, like Greece, Spain, and Portugal, all of which are experiencing double-digit unemployment rates.

In fact, Argentina's 7.6 percent unemployment rate is less than half of its own double-digit rates in the mid-1990s. Back then we were told that Carlos Menem was re-elected based on the success of his economic reforms.

 
Real Wages and May Inflation Print
Wednesday, 18 June 2014 04:37

In the NYT's Upshot section Neil Irwin correctly notes that real wages have been nearly stagnant in the recovery, however he makes too much of the inflation numbers from the last couple of months. The Bureau of Labor Statistics reported that inflation rose 0.3 percent in April and 0.4 percent in May. These increases were enough to wipe out modest real wage gains reported in prior months so that the average hourly wage has now fallen slightly over the last year, adjusted for inflation.

While this is bad news, it is wrong to make too much of the drops reported for April and May, as opposed to the modest growth reported in prior months. The higher inflation reported for April and May were largely attributable to unusually large price increases for food and energy. These prices are highly erratic and are likely to be reversed in the months ahead. (Food prices rose at close to a 6.0 percent annual rate over the last two months, compared to a 2.5 percent rate over the last year. Energy prices rose at more than a 7.0 percent rate compared to a 3.3 percent rate over the prior 12 months.)

If these price rises are reversed in the months ahead, which is likely, then we will be back on the path of very weak real wage growth. It will still be the case that workers are seeing very little of the benefit from the recovery, but the number will not be zero.

 
Aid to the Poor Did Not Grow Relative to GDP Print
Wednesday, 18 June 2014 04:05

Thomas Edsall had an interesting piece in the NYT that discussed the shift of aid to the poor from people who are very poor, unmarried, and non-working to the near poor, married, and working. At one point the piece refers to a comment from economist Robert Moffitt that spending on poverty programs increased by 74 percent from 1975 to 2007, after adjusting for inflation. This may have led readers to believe there was an increasing commitment to combat poverty over this period. In fact, since GDP increased by 176 percent over the same years, there was a substantial decline in poverty spending measured as a share of GDP over this period.

 
Is Uncertainty Delaying Hiring or Is This Just Another Make Work Project for People Who Write About the Economy? Print
Tuesday, 17 June 2014 05:51

For some of us the story of the downturn and the slow recovery is pretty damn simple. The collapse of a huge housing bubble created a big gap in demand that is not easily filled. (Name your favorite demand-filling candidates. You have consumption, non-residential investment, residential investment, government spending, and net exports -- that's all folks.) Since there was no plausible story whereby the economy could quickly fill this demand gap, continuing slow growth and high unemployment is not much of a surprise.

But no one wants to make our leading economists and policy makers look silly, so there is a considerable premium placed on efforts to make the simple story complicated. For example last week we had a discussion in the NYT raising the possibility that the economy's real problem is a skills shortage. Today, Catherine Rampell raises the troubling concern that job openings are up, but hiring isn't. Her conclusion is that firms are reluctant to actually go ahead and hire because of uncertainty about the future. She then lists causes of uncertainty which are supposed to be the cause for the delay. 

Before anyone gets too concerned about the bad effects of uncertainty on the economy, let's look at the data a bit more closely. We get our data on job openings from the Job Openings and Labor Turnover Survey (JOLTS). If we look at the most recent release and go over to the right two sets of columns we find "total separations." These are the workers who leave their jobs by quitting, layoffs, or firing. The survey shows that this number was roughly 4.5 million in the most recent month.

This is important because it means that over a six-month span we would anticipate that roughly 27 million workers will leave their job. That's a bit less than 20 percent of total employment.(The actual share will be somewhat less since some jobs will come open more than once.) This is noteworthy because it would suggest that most firms need not be too troubled about uncertainty in making a hire today since they are likely to see a substantial portion of their workforce leave in the near future in any case. In other words, if they hire someone who it turns out they didn't really need, odds are that someone will leave in the near future so they will need this worker.

This is especially true in sectors like retail and restaurant employment which have a disproportionate share of the job openings. The turnover rate in retail is 4.8 percent, which means that close to 30 percent of jobs will come open in the next six month. In restaurants the turnover rate is 5.4 percent, meaning close to one-third of the jobs will come open in the next six months. This suggests that an employer is not taking much of a risk by hiring in this time of uncertainty.

Read more...

 

 
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...

 

 
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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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