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On the Economic Boom: Too Much Eggnog? Print
Wednesday, 24 December 2014 08:46

I hate to put a damper on the party, but the some of the reporting on the economy is getting a bit out of hand. The Post gave us an example, with a piece on the revised fourth quarter GDP numbers headlined, "Robust Economic Growth in the third quarter raises hopes that a boom is on horizon." That's not what Mr. Arithmetic says.

First, just to be clear, the third quarter numbers were definitely good news. Five percent GDP growth is a solid economic performance by any measure, so there is no doubt that it is a big step forward by any measure. The economy is clearly growing, and likely at a reasonably respectable rate. The issue is whether the term "boom" is appropriate.

As this article and other reporting notes, the third quarter follows a strong second quarter of 4.6 percent growth, which in turn followed a first quarter where GDP shrank by 2.1 percent. The piece dismisses the drop in first quarter GDP as the result of bad weather. This is surely true, but the strong growth in the subsequent two quarters is clearly related to the drop in the first quarter. The growth in these quarters was a reversal of the decline in the first quarter.

If we take the average growth over the last three quarters, we get a 2.5 percent annual growth rate. This isn't bad, but it's hardly anything to write home about. If we assume the economy has a potential growth rate (the rate of growth of the labor force plus productivity) in the range of 2.2-2.4 percent, then with the 2014 growth rate we are filling the gap in output at the rate of between 0.1-0.3  percentage points a year. CBO estimates that the gap between potential GDP and actual GDP is still close to 4 percentage points. This means that at the 2014 growth rate we can look to fill that gap in somewhere between 13 and 40 years. Perhaps we should put a hold on that champagne.



John Cochrane Versus the Keynesians, #23,127 Print
Tuesday, 23 December 2014 12:50

I see that John Cochrane is once again attacking Keynesian economics, giving an “autopsy for Keynesians” in the Wall Street Journal. His central line is that Keynesian economics has been repeatedly proven wrong in the recovery. He sees the U.K.’s turn to austerity as a brilliant success; and the continued U.S. growth, in spite of deficit reduction, as further proof of the failures of Keynesian economics. He tells us that even Greece and Italy are sticking with the euro, rejecting the course of “devaluation and inflation.”

I understand that Cochrane’s polemic is directed at Paul Krugman, but as a card carrying Keynesian, I will take up the defense. First, it requires some serious re-writing of history to pronounce the Keynesians wrong at every turn in this recession and recovery. Going back to the days of Great Moderation, some of us Keynesian types noticed the economy was being driven by a housing bubble long before the beginning of the Great Recession.

I’m not sure where bubbles fit in Cochrane’s world, but in this economy they are run-ups in asset prices that are not consistent with the fundamentals of the market. In most cases they are not of great consequence for the economy as a whole, only for the markets directly affected. However when the market is a massive market, like the U.S. housing market, and the bubble grows to the neighborhood of $8 trillion (@ $10 trillion in today’s economy), it is a big deal. The housing bubble raised residential construction to a record share of GDP. The associated wealth effect led to a huge consumption boom with the saving rate pushed to a record low.

When the bubble burst, there was no component of GDP that would magically replace these sources of demand. The outcome was a severe recession. The real world followed pretty well on this Keynesian’s line of thinking.

Cochrane somehow thinks the Keynesians blundered in believing that the stimulus would set everything right:

“Our first big stimulus fell flat, leaving Keynesians to argue that the recession would have been worse otherwise.”

Well, some of us were arguing at the time that the stimulus was far too small to get the economy back on its feet, so we were hardly surprised when our prognostications proved correct. (Krugman made the same case in a far more visible forum.)



The Two Percent Inflation Trap Print
Monday, 22 December 2014 05:42

Neil Irwin had an interesting piece in the Upshot section of the NYT on the origins of 2.0 percent as an inflation target for central banks. He concludes the piece by arguing that, while the target may be too low, it would be very difficult to move away from it.

There are a few issues worth noting on this point. First, the 2 percent target has not been precisely defined in most countries. In the United States, Fed chairs have been quick to note that it is an average, not a ceiling. This means that they could easily run an inflation rate above 2.0 percent for a number of years without violating their rule. If we had inflation about 2.0 percent for 4-5 years, and then the Fed announced that the recent inflation rate was in fact the target rate, it is not obvious that this would cause any great harm. The question would be whether people's expectations are based more on the target than on the inflation rates they have actually been seeing in the world.

This raises a second point, central banks, including the Fed, have been consistently undershooting their target since the start of the recession. If their credibility depends on hitting the target, then they should have lost a great deal of credibility in the last 7 years. Polls on expectations also seem to indicate that most people's expectations are based more on recent inflation rates than on targets.

A third point is that while targeting may be useful for bringing down inflation, inflation rates fell throughout the world in both countries that targeted inflation and those that didn't. If targeting can bring down inflation at a lower cost in terms of unemployment, then it would be a positive, but if it also prevents central banks from actions to boost the economy out of a downturn, then the loss can be far more than offsetting.

Finally, the piece ends with a discussion of central bank credibility, quoting Princeton economist and former Fed Vice-Chair Alan Blinder:

"Central bankers have invested a lot and established a great deal of credibility on their 2 percent inflation target, and I think they’re right to be very hesitant to give it up. If you change from 2 percent to 3 percent, how does the market know you won’t change 3 to 4?"

It is entirely possible that central bankers would find it too embarrassing to reverse course and adopt a policy that is better for the economy and the country. (Jean-Claude Trichet, the first head of the European Central Bank, patted himself on the back when he retired from the bank in 2011 even though the euro zone was still in the midst of a potentially fatal financial crisis. He pointed out that they had kept inflation below its 2.0 percent target.) In this case, it would be essential that elected leaders dictate to the central bankers that they have to swallow their pride and give up some of their hard-earned credibility.

As tens of millions of unemployed workers say, you can't eat central bank credibility.



It is also worth noting that we had very rapid growth throughout the OECD countries in the 1950s and 1960s in spite of the lack of inflation targets and uneven rates of inflation throughout this period. It is possible that growth would have been even more rapid if the inflation rate had been more stable, but clearly erratic movements in the inflation rate did not preclude rapid economic growth.

The Profit on the TARP and Bernie Madoff Print
Sunday, 21 December 2014 14:16

For folks like Timothy Geithner it is a big thing to boast about the profit the government made on the TARP. We got more of this children's story in the NYT yesterday in an article reporting on the end of the TARP. It is worth understanding the meaning of profit in this context.

The basic story is fairly simple. The TARP was a program through which we lent otherwise bankrupt banks, and actually bankrupt auto companies, hundreds of billions of dollars at interest rates that were far below the market rate. However the interest was higher than what the government paid on its borrowing, therefore Timothy Geithner gets to run around saying that we made a profit.

Before you start thinking that this is a great idea and we should give all the government's money to the Wall Street banks, imagine that we had given the same money to an different institution, Bernie Madoff's investment fund. As we all know, Madoff's fund was bankrupt at the time because he was running it as a Ponzi, the new investors paid off the earlier investors. He hadn't made a penny on actual investment in years.

But, if the government had lent him tens of billions of dollars at the rates charged to the Wall Street banks, and furthermore given the Timothy Geithner "no more Lehmans" guarantee (this meant that the government would not allow another major bank to fail), then Madoff would be able to invest the money borrowed from the government in the stock market. In fact, with the no more Lehman's guarantee he could have borrowed tens or hundreds of billions more from other sources and invested this in the stock market as well. (If he had been a favored bank, he could have also taken advantage of below market interest rate loans from the Fed.)

After a few years, Madoff would have made enough money to cover his shortfall. He could then both repay his investors and repay the loans to the government. This would have then allowed Timothy Geithner to boast about how we made a profit on the loans to Bernie Madoff.

The reality is that the boast of a profit in this context is pretty damn silly. The question is whether an important public purpose was served by rescuing the Wall Street banks from their own greed.

That's a hard one to see. Geithner and Co. trot out the Second Great Depression scare story, but this is just another children's story. We have known how to get out of a depression since Keynes, it's called spending money. And even Republicans are down with stimulus in a severe downturn. The first stimulus was signed by George W. Bush when the unemployment rate was 4.7 percent.

So TARP was about using the government to save the Wall Street banks from the market, end of story. There is no reason for anyone to care that Timothy Geithner gets to say we made a profit on the deal. We could have made a profit on rescuing Bernie Madoff too.


China and the United States: Who Is Number One? Print
Sunday, 21 December 2014 09:25

A NYT article on China's growth seems to have gotten data from the International Monetary Fund backward. It told readers:

"On the purchasing power basis, the I.M.F. forecasts the American economy at $17.6 trillion this year, while China’s is estimated at $17.4 trillion."

That's not what my I.M.F. data say. On my screen, it is China with $17.6 trillion and the U.S. with $17.4 trillion. Of course if we add in Hong Kong (which also appears to be under China's control), China would be over $18.0 trillion in 2014. FWIW, if we look to 2019, the last year in the I.M.F. projections, China's GDP is put at $26.9 trillion compared to $22.1 trillion for the United States. At that point, if these numbers prove accurate, the comparison will not even be close. 

WaPo Reports on Vladimir Putin's Economic Miracle in Russia Print
Sunday, 21 December 2014 09:18

A chart accompanying a Washington Post article on Russia under Putin tells readers that Russia's per capita GDP rose from $1,771 when Putin took power in 1998, to $14,611 in 2013. This would imply an increase in per capita GDP of 725 percent in 15 years for an annual rate of more than 15 percent. Such rapid growth in income would be unprecedented in world history. If it were true, then Russians would have cause to hold Putin's accomplishments in awe. Of course it isn't (although there was a substantial increase in Russian GDP over this period), so Putin doesn't have quite as much to boast about as the Post's chart implies.


I should have provided a bit more context here as many of the comments point out. There is actually a measure of GDP where the Post's numbers would be correct. It is by taking an exchange rate measure of GDP that converts rubles into dollars and does not control for inflation. This measure is largely meaningless, since most Russians are not buying most of their goods and services in dollars. They are paying in rubles.

The performance by a real GDP measure is still impressive. According to the IMF's data, overall real GDP has increased by 105.7 percent between 1998 and 2014, a 4.6 percent annual rate. Much of this was just bounceback from the collapse of the economy following the break-up of the Soviet Union, but there is little doubt that most people in Russia would consider themselves much better off today than when Putin took office.

Anyhow, some alarm bells should have been going off at the Post when they were putting in a chart showing an increase in per capita GDP of more than 700 percent in 16 years. Some folks were clearly asleep on the job.

If You Can Find a Way to Show Middle Income Families Are Gaining, the Washington Post Will Give You Lots of Coverage Print
Thursday, 18 December 2014 16:53

While the Washington Post might generally be sympathetic to the idea of giving a few bread crumbs to the hungry and having shelters for the homeless, it hates the idea that middle class people should be able to enjoy a decent standard of living and share in the gains of economic growth. This explains its never ending quest to cut Social Security and Medicare along with the pensions of public sector workers. This stems from a basic philosophical principle that a dollar that is in the pocket of a middle class person is a dollar that could be in the pocket of the rich.

In keeping with this theme the Post decided to highlight a new paper by Steve Rose. (Note: Steve is a friend and a decent person, who just happens to be wrong.) Steve's paper shows that middle income families made substantial gains in income over the last 40 years, contrary to what so many of us have been saying. To get this result, Steve includes the value of government benefits, like Social Security and Medicare, at the price the government pays. He also ignores the sharp rise in the number of workers per family and uses a different price deflator than is generally used. 



A Bit More on Chronic Lyme Disease: Scientists Ignoring the Science Print
Thursday, 18 December 2014 09:31

Last week I had a blogpost commenting on a snide article in Slate that ridiculed the possibility that people could have chronic Lyme disease for which long-term antibiotic treatment could be useful. (Here's a similar piece in Slate.) As I pointed out in that post, the science on chronic Lyme is far less settled than our snide columnist claimed.

Since then I was sent a study that found clear evidence that long-term antibiotic treatment is effective in alleviating the symptoms of chronic Lyme. But apparently the true disbelievers will not allow their views on chronic Lyme to be swayed by new evidence.

Anyhow, the larger context for this discussion is that efforts in trade agreements like the Trans-Pacific Partnership and Trans-Atlantic Trade and Investment Pact to take away regulatory authority from democratically elected officials and turn them over to scientists should be viewed with caution. Unfortunately our scientists often act in ways that show very little respect for science. (Yes, this is probably more true in economics than anywhere.)



To the folks warning about making claims based on a single study, please go back to my prior post. That post referred to a study that reviewed all the widely cited studies that purportedly show that long-term antibiotic treatment is ineffective. The study noted here is an additional piece of information brought to my attention since that post.

Schumer Should Focus on Keeping Government from Redistributing Income Upward Print
Thursday, 18 December 2014 05:43

There is a bizarre cult in Washington policy circles that likes to say that the markets are causing inequality, but the government can reverse the problem. E.J. Dionne treated up to an example of this cult, declaring that New York Senator Charles Schumer is a main ally. The basic story is that technology and trade have displaced large numbers of middle class workers, and thereby redistributed income upward, but government can redress this problem.

Every part of this story is wrong. Let' start with technology. Yes, computers are wonderful. Robots will displace workers. But let me tell folks a little secret. Technology has been displacing workers (i.e. costing jobs) for decades, in fact centuries. This is not new. This is not new. (I repeated that in case any pundit types are reading.) The question is the rate at which workers are being displaced. And here the news is the opposite of what we are being told. Technology is actually having less effect in recent years than in prior years because productivity growth has slowed as shown in this beautiful graph from the good people at the Bureau of Labor Statistics.

Productivity Growth (year over year change)


                                            Source: Bureau of Labor Statistics.

Productivity growth has averaged less than 1.5 percent over the last decade. This compares to more than 2.7 percent in the quarter century from 1947 to 1973. Yes, we all know stories about robots or computers making this or that job obsolete. The point is that if we bothered to look we would know many more such stories about jobs in the 1940, 1950s, and 1960s. The fact that we may not is simply a result of ignorance or laziness. And our ignorance cannot change what is true in the world.

In short, we do not have a technology story, how about a trade story? Yep, we can find low paid manufacturing workers in places like Mexico, Vietnam, and China who are costing jobs for steel workers and auto workers in the United States. The problem is that if you think this is just a natural process, then you have not been doing much thinking.



NYT Badly Confused About Monthly Wage Data Print
Wednesday, 17 December 2014 08:05

The NYT was seriously misled by the jump in the average hourly wage reported last month, headlining an article, "Economic Recovery Spreads to the Middle Class." The basis for the headline is the 0.4 percent increase in the average hourly wage reported in November. As fans of wage data everywhere know, the monthly data are very erratic. In fact, the November increase followed two months of weak wage growth. As a result, the annual rate of increase in wages for the most recent three months (September, October, November) compared to the prior three months was just 1.8 percent. That is below the 2.1 percent rate over the last year.

It may turn out that November really is a turning point and we see more rapid wage growth going forward, but given the weakness of the labor market (we are still down 7 million jobs from trend) it is more likely that it was simply a reversal from the unusually low numbers reported the prior two months. It is also worth noting that, contrary to the concern expressed in this article, wages for production and non-supervisory workers have actually been rising somewhat faster than wages for all workers, meaning that less highly paid workers have been seeing relatively larger pay increases in the recovery.

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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.