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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.

 
NPR Hypes the Job Loss Story on Restricting Carbon Dioxide Emissions Print
Tuesday, 03 June 2014 04:24

Like building a new airport, restricting carbon dioxide emissions will cost jobs. (If it's not obvious that building a new airport will cost jobs, then you better study more economics. The new airport will pull business away from other forms of transportation and other airports. That will cause people to lose jobs. On net, there will likely be job gains, but there will definitely be people who lose their job as a result of the new airport who either don't get another job or at least another job that is comparable to the one they lost.)

The reason that many people may not immediately realize that most government measures to improve the infrastructure, or really promote any form of economic development, lead to job loss is that the media generally ignore the job losers. They don't talk to the workers at the airports that are losing business, the truck drivers who might be displaced by air freight, or all the workers in restaurants, stores, and hotels who served the old facilities.

That is clearly not the case with measures to restrict carbon dioxide emissions. We have already heard numerous accounts of how this will devastate the economies of large parts of the country that are dependent on coal. NPR ran two such pieces on Morning Edition today.

It would be helpful if these stories gave some idea of the numbers involved. According to the Bureau of Labor Statistics there are just under 80,000 employed by the coal mining industry. This is less than 0.06 percent of total employment. If the economy generates jobs at the rate of 200,000 a month (roughly its pace over the last year), the total number of jobs in the coal industry are equal to the number that would be generated in 12 days.

Of course the measures proposed by Obama would not immediately eliminate all the jobs in the industry. They are supposed to be phased in by 2030 and even then the number of jobs in the industry is not likely to be zero. If we assume that the job loss occurs at an even pace over the next 16 years, it comes to a bit less than 5,000 jobs a year.

Read more...

 

 
How Does the NYT Know What Republican Governors Really Believe About the World? Print
Tuesday, 03 June 2014 04:08

An NYT article on President Obama's plan to have the Environmental Protection Agency impose restrictions on the emission of carbon dioxide told readers:

"Many Republican governors, in particular, are ideologically opposed to the prospect of enacting cap-and-trade programs."

How would the NYT know Republican' governors ideological beliefs and why would they think it is the basis for their actions? Politicians are not elected for their political philosophy, they are elected because they get the support of powerful interest groups. They advance their careers by pleasing these interest groups. Why would the NYT think that politicians would turn around and act on their ideology, rather than serving these interest groups?

It may be news to the NYT, but politicians sometimes don't give the real reason for their actions. Since it probably doesn't sound good to say that you are willing to let the planet be destroyed to serve the coal and industry magnates that contribute to your campaign, it shouldn't be surprising that many politicians will say that they oppose measures to restrict emissions for ideological reasons.

As a practical matter if the NYT wants to claim the opposition is for ideological reasons, it might be worth explaining to readers what the ideology is. The issue with carbon dioxide emissions is that they are creating damage to large parts of the world through changing the climate. This means rising oceans leading to enormous problems of flooding in densely populated countries like Bangladesh. It also means increased desertification in places like Sub-Saharan Africa. The result will be hundreds of millions of people losing their livelihood and in many cases their lives.

It would be interesting to know what ideology the NYT thinks these Republican governors hold that says that people have a right to destroy others' property and take their lives with impunity. It's certainly not one that is openly espoused. (It's not worth claiming that they don't believe in human caused global warming. Not one of them is that ignorant.)

 

Note: link fixed.

 
If Kentucky Is a Coal Mining State Is It Also a Heavy and Civil Engineering Construction State? Print
Monday, 02 June 2014 14:36

The reason for asking is that a New York Times article on reactions to President Obama's plan to have the Environmental Protection Agency restrict carbon emissions referred to Kentucky as a "coal state." According to the Bureau of Labor Statistics (BLS), Kentucky has 11,600 people employed in the coal mining industry. With total employment of 1,846,000, coal mining jobs account for just over 0.6 percent of total employment in the state.

By comparison, BLS reports that Kentucky has 12,400 employed in the heavy and civil engineering construction sector. If it can be called a coal state, presumably the larger number of people employed in heavy and civil engineering construction should also provide a basis for identifying the state. There are several occupations that have employment levels in Kentucky that dwarf the coal industry employment.

For example, the state has 35,700 people working as merchant wholesalers that sell durable goods. It has 25,200 people who are employed at car dealers. And it has 51,800 people working at employment services.

In short, the numbers suggest that Kentucky's economy as a whole may not be affected much by restrictions on the emission of greenhouse gases (which will be phased in through time).

 
Income Growth is Not Quite What Robert Samuelson Implies Print
Monday, 02 June 2014 05:10

Robert Samuelson is correct to point out that income inequality in the United States at present is not anything like what it was back in the 1920s because of the social welfare state. We have programs like Social Security, Medicare, Medicaid, and food stamps that are a substantial source of income and security for the middle class and poor. So conservatives are correct to point out that inequality is not nearly as bad today as it was in the 1920s due to these programs.

However his column is somewhat misleading on the income gains over the last three decades for families at the middle and bottom of the income distribution. For those at the bottom, much of the 50 percent gain in income since 1979 is due to the increasing cost of Medicare and Medicaid. The measure being used refers to the amount the government pays for these programs. Using methodology, every time a heart surgeon raises her fees or Pfizer raises the price of its drugs the income of the poor rises. If we just treated health care as a service and priced it at its per person cost in the average wealthy country, the income gain for those at the bottom would be much smaller.

Much of the 40 percent gain in incomes for families in the middle is the result of an increase in the number of workers per family. In 1979 there were still many two parent families in which the women did not work outside the home. Such families are rare today. The additional number of workers is the main factor explaining the rise in income over this period since wages have increased little. It is also worth noting that these measures of income do not adjust for work related expenses like transportation or the cost of child care.

 
Do Small Countries Really Spend 0.4 Percent of GDP Changing Currency? Print
Monday, 02 June 2014 04:13

That's what the NYT told readers in an article reporting on the debate over Scottish independence. The article referred to a study by a Scottish engineering company, the Weir Group, that Scotland would incur $840 million in transactions costs if it were to adopt its own currency. This would be the equivalent of roughly $65 billion a year in the United States. Since many countries that have smaller economies than Scotland have their own currencies, it is difficult to believe they incur these sorts of costs. (Trading costs on most currencies are typically in the range of 0.01 percent.)

The article also said that Great Britain may not let Scotland keep the pound if it were to become independent. Actually Great Britain really doesn't have any choice in the matter. Any country can use any currency it wants as their official currency. Several countries (e.g. Ecuador and Panama) use the U.S. dollar as their currency. They did not ask the United States for permission to do so.

The better question is why an independent Scotland would want to keep the pound as its currency. Presumably one of the goals of independence would be to free Scotland from the grips of the austerity policies being pursued by the conservative government. This would not be possible if Scotland remained tied to the pound, just as the euro zone countries cannot break from the path of austerity as long as they stay in the euro zone.

The piece also includes the claim, based on two studies, that:

"Creating a border with Scotland’s largest trading partner — the rest of Britain — could also be costly. Researchers at the University of Edinburgh and the University of Stirling project that such a change could reduce Scottish output more than 5 percent."

This implies an enormous cost to international borders. The implication is that Canadians effectively pay a tax of roughly $2,000 per person per year because their country is not part of the United States. That doesn't seem plausible.

 
George Will Still Can't Get Access to Government Data Print
Sunday, 01 June 2014 08:15

George Will is again making misleading statements on economic issues because of his inability to get access to government data. In today's column he is touting the economic record of the North Carolina, which he attributes to the state's conservative policies.

He told readers:

"The state has added more than 200,000 jobs in three years. Unemployment has fallen from 10.4 percent in January 2011, then eighth-highest in the nation, to 6.2 percent, one of the largest improvements among the states in the past 13 quarters."

According to data from the Bureau of Labor Statistics (BLS), the 200,000 job gain in North Carolina over the last three years amounts to an increase of 5.18 percent, that is a hair better than the nationwide average of 5.12 percent job growth over this period, but doesn't seem like the sort of thing on which to base a political campaign. Furthermore, the number of jobs in North Carolina is still a full percentage point below its pre-recession peak, while nationally the number of jobs is down by less than 0.1 percent from pre-recession levels.

This gap is worse when we take into account the southern premium. Like most southern states, North Carolina had been adding jobs more rapidly than the country as a whole. This is in large part due to the weather. (People prefer to live in warmer climates, especially in their retirement years.) In the years from 1990 to 2007, the number of jobs in North Carolina increased by 34.3 percent compared to 26.7 percent for the country as a whole. At best, the policies that Will is celebrating has brought job growth in North Carolina even to the pace in the country as a whole.

The sharp drop in North Carolina's unemployment rate has all been in the last year. Its unemployment rate in the first four months of 2013 averaged 8.6 percent, well above the national average. This drop was the result of a reduction in the length of unemployment benefits, as well as making it more difficult to qualify for benefits. The result was that many people dropped out of the labor force. People who are getting benefits have to look for jobs, they often give up looking when their benefits expire. 

From the first four months of 2013 to the first four months of 2014 the size of the national labor force increased by 0.2 percent. (Benefit duration was shortened for the country as a whole, but not by as much as in North Carolina.) The size of the workforce shrank in North Carolina over this period by 1.1 percent, the equivalent of 1.7 million people leaving the workforce nationally. It is not clear that this is something over which politicians would want to boast.

 
Do Fugitives Answer Government Surveys? Print
Saturday, 31 May 2014 13:55

Tyler Cowen had an interesting column discussing a book by Alice Goffman that described the life of people trying to evade the law. Cowen points out that fugitive status undermines family relations and can make normal work impossible.

The discussion is interesting and the book sounds well worth reading, but as an economist nerd type it is difficult not to ask a seemingly obvious question; do these people answer government surveys? Of course fugitives almost certainly do not answer the door for the people conducting the Current Population Survey (CPS) and other government surveys.

This matters because it could mean that the data from the CPS (the main survey for determining employment and unemployment rates) are biased, especially for those demographic groups who are disproportionately likely to be in trouble with the law. This likely appears to be the case with young African American men. While the overall coverage rate for the CPS is around 88 percent, for young African American men it is around two-thirds.

The current methodology effectively assumes that the people who don't get covered by the survey are as likely to be employed as the people who do. Based on comparisons between the 2000 long-form Census and the overlapping months of the CPS, my colleague John Schmitt found that the CPS may overstate employment rates for young African American men by as much as 8 percentage points.

By its nature is hard to get a clear fix on the size of this problem, but it does seem reasonable that not only actual fugitives, but people on probation or parole or in other ways involved with the criminal justice system might be less likely to talk with someone asking questions from the government. If we think these people are less likely to be employed, then our data may be overstating employment and understating unemployment. It would be good if the Bureau of Labor Statistics took some interest in this issue.

 
"Recovery" In Spain Doesn't Mean the Same Thing as Elsewhere Print
Saturday, 31 May 2014 04:51

A New York Times article on four nights of riots in Barcelona was headlined, "In Spanish riots, anguish of those recovery forgot." The unemployment rate in Spain was 25.3 percent in March, the most recent month for which data are available. It is down by less than 1.0 percentage point from its year ago level. At this pace of recovery, the unemployment rate will first fall below 10 percent somewhere around 2030.

 
The $84,000 Drug Costs $84,000 Because of Government Patent Protection Print
Friday, 30 May 2014 05:17

The Washington Post had an interesting piece discussing the issues associated with the cost of Sovaldi, a new drug designed to treat Hepatitis C. As the headline tells readers, Gilead Science, the manufacturer of the drug, is selling a year's dosage for $84,000. The piece notes that many new drugs are now being developed which will likely carry similar price tags.

At one point the piece raises the possibility of price controls, which it implies would be a government intervention into the market. Actually, the $84,000 price is the result of a government intervention into the market. It is due to the fact that the government grants companies a complete patent monopoly, threatening to arrest those who try to compete in selling the same drug.

While patent monopolies are one way to provide an incentive for research and development, they are an extremely inefficient mechanism. Not only do they lead to a situation in which drugs that would otherwise be cheap (absent patent protection, Sovaldi would almost certainly cost less than $1,000) become very expensive, they provide enormous incentives for drug companies to misrepresent the safety and effectiveness of their product. And they do this all the time, just as economic theory would predict.

In addition, patent monopolies provide incentives for duplicative research as other companies attempt to innovate around a patent in order to get a share of patent rents. The article reports that this seems to be happening in the case of Hepatitis C where other companies are bringing similar drugs to the market.

In short, the problem of high-priced drugs is the direct result of government policy. That point should be front and center in any piece that discusses the topic.

 
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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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