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The WAPO Still Has Not Heard About the Housing Bubble Print
Saturday, 07 June 2014 13:05

It is amazing that the country has not taken everyone involved with economics -- academic economists, policy economists, economics reporters, and investment advisers -- and thrown them in prison or at least exiled them to some ungodly place where we (I'll go too) could never do any harm again. Look, the housing bubble was incredibly easy to see. I took arithmetic in third grade, apparently I'm the only economist who remembers it.

The housing bubble sent construction and consumption demand soaring, hence the relatively strong growth and low unemployment in the years 2004-2007. Then the bubble burst. In addition to all the fun associated with the financial crisis (bankers too dumb to see the bubble, but well-connected enough so that it didn't matter), the collapse of the bubble meant a huge loss in demand. Instead of having a boom in construction, we went to a big time bust since there had been enormous overbuilding. And consumption plummeted since the bubble-generated equity that was driving it had disappeared.

This is the cause of the recession and the weak recovery. We lost over $1 trillion in annual demand. What was going to replace it, hot air from politicians? Demand comes from consumption, investment, residential investment, government spending, and net exports.

That's it folks -- ain't nowhere else to get demand. So where did we expect the demand to come from to replace what we lost from the collapse of the housing bubble? Were consumers supposed to spend a a larger share of their income after they lost $8 trillion in housing wealth than when they still had that wealth? What have you been smoking?

Were we going to get an investment boom when most companies have vast amounts of excess capacity? I'll come back to residential construction in a moment. We could have the government spend lots of money to boost the economy, but Very Serious People in Washington want us to worry about the budget deficit.

That leaves net exports. If the "net" has you fooled, that's because it is exports minus imports that generate demand. We don't get any jobs from exporting car engines to Mexico to be assembled into cars that are re-imported into the United States. We could look to increase net exports, but that would mean talking about our trade deficit and we aren't supposed to do that. (Don't ask me why, but I don't recall any big pieces on the large jump in the April trade deficit that the Commerce Department reported on Wednesday.)

Okay, let's get back to residential investment which was the motivation for this tirade. The Post had an article with a headline complaining:

"The economy has reached a milestone. No thanks to the housing sector."

The point is that while employment has returned to its pre-crisis level, jobs in the residential construction are still way down.

"While jobs overall are back to their pre-recession peak, residential construction jobs are 34.5 percent below their peak.

"Even if the specialty contractor jobs are stripped away, the residential construction jobs are still way off, almost 27 percent down from the peak, according to a Freddie Mac analysis."

Ummm folks, no one told you about the housing bubble? We aren't going to get back to the number of jobs during the bubble years. We were building homes at a ridiculous rate during the bubble years, why would we expect to get back to the same rate? And, we still have extraordinarily high vacancy rates, according to our friends at the Census Bureau. This will depress new construction. There is no mystery here. 

(There is a separate issue in this article that requires some serious ridicule. The piece notes a sharp rise in the number of construction workers for each home being built. It attributes this to labor hoarding. This is what big manufacturing companies do during a downturn. It is not what small fly by night construction companies do. The reason why reported employment did not fall as much as housing units is that many workers were never reported on company payrolls. Construction companies hired hundreds of thousands of undocumented workers many of whom probably never appeared on their books. Also, many workers will be misclassified as independent contractors. That way the company doesn't have to pay for unemployment insurance, workers' compensation, and other benefits. The household survey finds close to 1.5 million more people working in construction than the establishment survey, which is pretty good evidence for this story.)

 
Is the Recovery Leading to More Job Polarization? Print
Saturday, 07 June 2014 07:50

That's what the Washington Post told readers.

"Unemployment fell from 3.3 to 3.2 percent for people with a bachelor's degree or more, and from 5.7 to 5.5 percent for those with some college. But it actually rose from 6.3 to 6.5 percent for people with only a high school diploma, and from 8.9 to 9.1 percent for those without one.

"In other words, our polarized labor market isn't getting any less so. The Cleveland Fed points out that routine jobs disappeared during the Great Recession, and haven't come back during the not-so-great-recovery — which partly explains why our economic upswing, such as it is, has been much less dramatic for the least educated."

The data doesn't necessarily agree with this story. If we ignore monthly changes, since these are extremely erratic, and instead look at the changes over the last two years we see that the unemployment rate for college grads in the first five months of 2014 averaged 3.3 percent, down 0.8 percentage points from its 4.1 percent average in the first five months of 2012. By comparison, the unemployment rate for those with just a high school degree averaged 6.4 percent, down by 1.8 percentage points from two years ago. Those with less than high school degrees saw a drop in their unemployment rate of 2.5 percentage points from 12.9 percent in 2012 to 9.4 percent in the first five months of this year.

If we go back to 2010 we see a comparable pattern. The drop in the unemployment rate from the 2010 peaks was 1.5 percentage points for college grads, 4.3 percentage points for high school grads, and 5.6 percentage points for those without a high school degree. The declines in unemployment rates in percentage terms were actually larger for less-educated workers than for college grads. But hey, why let the data get in the way of a good story?

 
The Question on People Leaving the Labor Force is 41-Year-Olds, Not 61-Year-Olds Print
Friday, 06 June 2014 12:54

In his discussion of today's employment report Neil Irwin notes that the unemployment rate is considerably lower than would otherwise be the case because so many people have simply given up looking for work and are therefore not counted as being unemployed. Irwin then adds that the big question is that if the economy eventually recovers is:

"How many of the 61-year-olds who gave up looking for a job in the last few years are going to return to the labor force when they smell opportunity, and how many have retired for good?"

Actually, the story of people leaving the labor force is not primarily one of older workers who are near retirement age, it is primarily a story of prime age workers. According to data from the OECD, the employment to population ratio for workers between the ages of 25-54 is down by 3.5 percentage points from its pre-recession level. For workers between the ages of 55-64 it is only down by 0.9 percentage points.

It is difficult to envision any obvious reason why people in their prime working years would suddenly decide that they did not want to work other than the weakness of the labor market. Most of these workers will presumably come back into the labor market if they see opportunities for employment.

 
If Employers Can't Find Workers With the Right Skills Why Don't They Try Raising Wages? Print
Friday, 06 June 2014 05:13

John Ydstie concluded a mostly good piece giving a preview of the May employment report being released today by saying that one reason employment is not growing more rapidly is due to a skills mismatch. According to this story, employers would be hiring more workers if they could find workers who have the skills they need.

While employers and many economists often make this claim the evidence doesn't seem to support this position. If employers were actually having difficulty finding workers with the necessary skills we should expect to see occupations or industries in which wages are rising rapidly. That is how employers attract workers for positions they have trouble filling.

In fact, there are no major sectors of the economy in which wages are rising rapidly. This means that either there is no serious problem of skills mismatch or that employers are completely clueless about basic economics. Given the ineptitude we saw in the financial sector during the run-up of the housing bubble, the clueless explanation cannot be dismissed out of hand, but it is more likely that there really is no issue of a skills mismatch.

 
Economic Collapse Gives Russians Some Reason to be Unhappy With Boris Yeltsin Print
Friday, 06 June 2014 04:53

The NYT ran an article on the construction of a monument to former Russian President Boris Yeltsin. The piece notes that Yeltsin is not very popular, and therefore there is little interest in the monument, however it never gives much explanation for his unpopularity.

Russia's economy suffered one of the worst collapses in history during the Yeltsin years. According to the Penn World Tables, Russia's economy contracted by more than 40 percent between 1990 and 1998, the years in which Yeltsin held power. This is a far sharper drop-off than the United States saw in the Great Depression. During this period the health care system put in place under the Soviet Union largely collapsed and life expectancy plunged.

There was also enormous corruption. According to the World Bank the government received just $8.3 billion for privatizing most of the economy's assets. This is less than half of the current market capitalization of Twitter.

An article discussing Russian views of Yeltsin should have pointed out these facts.

 
Is Our Economists Learning? The Case of Deflation Print
Thursday, 05 June 2014 07:57

It was gratifying to see the following in the Washington Post:

"It's called 'lowflation,' and it's crippling Europe. It's, simply enough, inflation that's well below target. Now, there's a common misconception that low, positive inflation is alright, but low, negative inflation is the end of the world. As the IMF points out, though, these are continuum of the same problem. See, it doesn't really matter whether prices aren't rising enough or are actually falling. In either case, it's harder to pay back debts, harder for real wages to adjust, and harder for countries to regain competitiveness. Of course, deflation is worse than lowflation, but not so much that we should fear the former and not the latter. We should fear them both."

For those of us who have been making this simple point as loudly as possible for many years (here, for example) it is good news to finally see its truth finally recognized by the honchos in the profession and the reporters who defer to them. It just proves that if you say something that is true long enough, the right people will eventually repeat it.

 
Contrary to What You Read in the NYT, Economics Says That Rising Imports Are Bad for Growth Print
Thursday, 05 June 2014 07:28

The NYT decided to turn the standard textbook economics on its head and told readers that the higher imports reported for April is good news for the economy. An article headlined, "Data readings converge to show an economy regaining momentum," told readers:

"'Rising imports are not a sign of economic weakness,' said Joshua Shapiro, chief United States economist for MFR Inc. 'To the contrary, it’s a sign of economic demand.'"

Okay, let's get out the detective hat and glasses. Imports can rise for two reasons. One is the story here from Mr. Shapiro, demand is growing rapidly. That means we are buying more of everything, including more imports. Then we have reason two, the U.S. is becoming less competitive so we are substituting imported goods for domestically produced goods. Let's go look at the evidence.

As this piece notes, exports fell by 0.2 percent in April. That one seems consistent with the declining competitiveness story. After all, if our economy is booming that should very directly boost our exports since many exports are components of products that are ultimately consumed in the United States. For example, we export many car parts to Mexico, which are then assembled into cars purchased in the United States. In this way more demand for cars here means more exports of car parts to Mexico.

Of course we don't have more than a single month's data to look at. If we compare real exports over the last three months with the prior three months they are down by an average of 1.0 percent. That certainly seems to be good evidence of the declining competitiveness story.

If we turn to real imports, there is a jump of 1.8 percent on average over the last three months. While much of this jump is attributable to the April data, even in the winter months, when we know the economy was growing slowly (if at all), imports were up over the pace in the fall. That is certainly consistent with the declining competitiveness rather than rapid growth view.

Finally, if the jump in imports in April was due to rapid growth, what was the component of domestic demand that was growing rapidly? Retail sales increased by just 0.2 percent from March's pace. Manufacturing inventories increased by a modest 0.4 percent (as compared to a 0.7 percent rise in January). And shipments of manufacturing goods increased by just 0.3 percent in April, down from 0.4 percent growth in March, and 1.0 percent in February.

In short, we seem to have a pretty good case here that the jump in imports is a story of declining U.S. competitiveness. The data refuse to cooperate with the NYT's story line.

 

 
The New York Times Didn't Hear About the Euro Zone Crisis Print
Thursday, 05 June 2014 04:11

It's apparently difficult for the New York Times to get very basic economic information, or at least to remember it. That is the implication of an article that discusses the benefits that joining the euro offers to Lithuania and other non-euro zone EU countries.

The article pointed out that tying a country's currency to the euro eliminates its ability to improve its competitiveness by lowering the value of its currency. It then points out:

"Lithuania has tied its currency, the litas, to the euro for a decade. So it is will not really give up any room to maneuver. On the contrary, use of the euro relieves the country’s central bank of the stress of having to defend the value of the litas on currency markets."

This assertion ignores the fact that the European Central Bank (ECB) has not been a reliable guarantor its currency and the debt of the countries in the euro zone. For this reason, at the peak of the crisis countries paid an additional risk premium as a result of being in the euro zone.

This was most evident in the difference between interest rates on Finish and Danish debt. In principle, the interest rate on these two countries debt should have been very close. Both were relatively healthy economies with modest debt burdens. Yet Denmark, which tied its currency to the euro from its inception, but did not join the euro, consistently had a lower yield on its debt. The implication is that being a euro member during the crisis imposed a burden, at least on a relatively healthy economy. It was not an asset as implied in this article.

The article also implies that joining the euro would allow Lithuania to benefit from the ECB's policies to fight deflation. After noting the economic crisis facing Greece the article tells readers:

"In fact, the European Central Bank is now preoccupied with preventing other countries from slipping into the same deflationary cycle of falling prices and wages as Greece."

While the bank may be "preoccupied" with combating deflation, its policies have been a disastrous failure in this respect. The inflation rate in the euro zone is just 0.5 percent, well below the bank's 2.0 percent target (which is arguably far too low). The economy of the euro zone is operating far below its potential by every measure, with excess unemployment running in the millions. And, according to research from the International Monetary Fund, this is leading to long-term costs in the form of lower potential GDP.

In short, there is considerable evidence that the ECB has done considerable damage to the economies of its members. This article ignores this evidence.

 
Why Do the Media Give So Much More Attention to Jobs We Lose Due to Environmental Restrictions Than Jobs We Lose Because of the Trade Deficit? Print
Wednesday, 04 June 2014 08:48

It was hard to miss all the news stories the last few days about the jobs that will likely be lost in coal mining areas due to efforts to curtail carbon emissions. And these are stories that should be pursued. Most coal miners will never have another job that pays anywhere near as well if they lose their job in the industry.

Nonetheless a sense of scale would be appropriate. There are a bit less than 80,000 coal mining jobs in the whole country. They will not all go away and the regulations proposed by the Obama administration are being phased in over 16 years. By comparison, we lost roughly 80,000 jobs in coal mining in the eight years from 1985 to 1993, when the labor force was less than three quarters its current size. I don't recall anywhere near the same focus on this far more serious hit to coal country.

By comparison, we just has trade data released this morning showing that the deficit had jumped by $3 billion in April. The trade deficit has been running at a $535 billion annual rate over the last three months. This compares to a $450 billion annual rate over the prior three months. The difference, if sustained, implies a direct loss of roughly 700,000 jobs since GDP would be 0.5 percentage points lower with this larger trade deficit. (This doesn't count the multiplier effect, which would increase the impact by roughly 50 percent.)

It is striking that a rise in the trade deficit that could cost the country 700,000 jobs this year is likely to get so much less attention from the media than the Obama administrations' proposal to reduce carbon emissions, which will cost less than 80,000 jobs over the next 16 years. If the concern is simply jobs, it is a bit hard to explain the fact that job loss due to environmental restrictions is given so much more attention than the job loss due to trade, which is more than an order of magnitude greater and happening immediately.

Perhaps the explanation has something to do with the gainers from the trade deficit. The recipe for reducing the trade deficit is lowering the value of the dollar against foreign currencies. (This is pretty basic, a lower valued dollar makes our exports cheaper to foreigners. Therefore they buy more of our exports. It also makes imports more expensive. This causes us to buy domestically produced goods rather than imports.)

While it is not hard to see a path to a lower valued dollar and a smaller trade deficit not everyone benefits in this story. Walmart has spent decades building up low-cost supply chains throughout the world. It is not anxious to see the price of the goods it is importing increase by 15 to 20 percent due to a lower valued dollar. Similarly General Electric and other major manufacturers have set up operations in Mexico, China, and other low-wage countries. They don't want to lose the advantage they get from cheap labor by seeing the dollar fall in value relative to the currencies of these countries.

Add in the fact that the financial sector also likes a high dollar since it means their money goes farther overseas and you can see why it is hard to put together a political coalition pushing for a lower valued dollar. But honest reporters would focus on what matters for jobs and the economy. 

 

 

 

 

 

 
Euro Zone Already Suffers from Dreaded Low Inflation Print
Tuesday, 03 June 2014 20:05

The NYT persists in pushing the bizarre notion that something horrible happens to economies when the inflation rate crosses zero and turns negative. Today it gave us an article with the headline of an article, "Euro Zone Edges Closer to Dreaded Deflation."

The story is that inflation in the year ending in May was just 0.5 percent, as compared to 0.7 percent for the year ending in April. It tells readers:

"Many economists say that inflation is already well below the danger zone for tipping into deflation, and some analysts have taken to calling the condition 'lowflation.'

 

 

Come on folks, this makes zero sense. Borrowers face higher real interest rates any time the inflation rate falls. If borrowers had negotiated mortgages anticipating a 2.0 percent inflation rate, then the drop to 1.0 percent means that the real burden of the mortgage is larger than expected. If the inflation rate falls to zero then the real burden of the mortgage is even larger. If it becomes negative so that prices are falling at the rate of 1.0 percent a year the situation is even worse. But the drop from zero to -1.0 percent is not different from the drop from 1.0 percent to 0.0 percent, or 2.0 percent to 1.0 percent. Each increases the burden on debtors.

A basic understanding of the inflation rate should make this point clear. It is an aggregate of millions of different price changes. When the aggregate rate is near zero the prices of many items are already falling. Crossing zero would just mean that the percentage of items with falling prices has increased. How could that possibly be of great consequence for the economy?

The prices in the index are also quality adjusted price. This often lead to situations in which the quality adjusted price shows declines even if the actual price of the product increased. There have been several months in the last few years in which the quality adjusted price of cars showed a decline. I doubt there were any months in which new car prices actually fell. Are we supposed to believe that something awful happens in the economy if the statistical agency finds that products are improving at a more rapid rate and therefore quality adjusted prices are now falling?

Even the idea that the year over year measure provides some vital statistic is silly on its face. Suppose prices fell at 0.6 percent rate in both June and July of 2013 and have risen at a 0.1 percent rate in the subsequent 10 months. (We'll assume that they rose by 0.5 percent in May of 2013 so the year over year inflation rate had not previously been negative.) Does something bad now happen that we have a 12 month period in which the change in prices was negative?

This really is not hard. The problem is lower than desired inflation, end of story. Whether or not the inflation rate actually turns negative and becomes deflation means zero.

 

Note: Dates corrected, thanks folks.

 
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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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