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Not Everyone is Confused by Housing Bubbles Print
Wednesday, 12 February 2014 06:53

Eduardo Porter tells readers about confusion among central bankers about how to deal with international capital flows and asset bubbles like the housing bubble in the United States. While there has been considerable confusion among central bankers, this appears to be more linked to their lack of qualifications than the intrinsic complexity of the subject matter.

For example, Porter notes how Greenspan was confused by the inflow of foreign capital that kept long-term interest rates low even as he was raising short-term interest rates.

"It was a wave of money that — to the confusion of Alan Greenspan, the Fed chairman at the time — the Fed seemed powerless to manage."

This was Greenspan's famous "conundrum." Of course it was not a conundrum to those who closely followed the economy at the time. It was easy to see that China and Japan's central banks were buying up long-term U.S. bonds, directly lowering long-term interest rates, while Greenspan was trying to affect long-term rates indirectly by raising short-term rates. (This was in effect a form of quantitative easing, but by foreign central banks.) Needless to say, directly acting in the market had more of an impact than indirectly acting.

The low interest rates that fuel asset bubbles should be good for the economy. The priority of the central bank should be to use its regulatory powers to prevent credit from flowing to markets that are experiencing dangerous bubbles.

It can also explicitly warn that it will take measures to bring down asset prices if they continue to grow further out of line with fundamentals. This would in effect be a form of forward guidance. While economists routinely deride the idea that such warnings could impact the behavior of investors, many of these same economists believe that central bank statements about future interest rates can have a large effect.

It is difficult to see the logic whereby central bank statements in one area will affect investors' behavior while it will have no effect in another area. It is also very difficult to see the downside from issuing such warnings. Comparing the Congressional Budget Office's projections of GDP from 2008 with actual GDP and its current projections, the collapse of the housing bubble will have cost the country more than $24 trillion in lost output through 2024 ($80,000 per person). Given the enormous potential gains from measures to stem the growth of such dangerous bubbles, it is hard to see any remotely offsetting downside risk.



 
Pew Research Finds Almost No Gains for Young College Grads Over Last Quarter Century Print
Wednesday, 12 February 2014 06:15

Most NYT readers probably would have missed this fact, since the blog post highlighted the growing gap between the pay of recent college grads and those with less than a college degree. While Pew did find a large increase in the gap, almost all of this was due to a fall in the year-round pay of less-educated workers.

In the 27 years from 1986 to 2013, Pew found that the median wage for full-time workers between the ages of 25-32 with college degrees increased from $44,770 in 1986 to $45,500 in 2013, a rise of 1.6 percent. This comes to an increase of 0.06 percent a year. By comparison, productivity rose 72.5 percent over this period, an average of 2.0 percent per year over this period.

It is also worth noting that the unemployment rate for college educated workers of all ages was 3.7 percent in 2013. This is higher than for any year prior to the recession since this series was started in 1992. 

While those without college degrees have been big losers, the Pew study shows that young people with college degrees have not been big winners in the economy over the last quarter century.

 

Note: 1986 wage corrected, thanks Michiganmitch.

 
$85 Million Would Be About 2.2 Percent of Arkansas' State Budget Print
Tuesday, 11 February 2014 08:06

That may not have been obvious to some of the readers of a NYT article that discussed the impact of the state rejecting an expansion of the Medicaid program under the ACA. The article told readers that this rejection would create a hole of $85 million in the state's budget. Just in case some readers haven't checked in on spending levels in Arkansas recently, the 2.2 percent number might have been useful information to include in the article.

 
Marc Thiessen Says Last Year's Stock Market Run-Up Led to a Huge Cut in Pay Print
Monday, 10 February 2014 14:58

Many people who have retirement funds in the stock market are able to retire this year as a result of the big run-up in the stock market last year. According to Washington Post columnist Marc Thiessen this means that these people will see a big cut in their pay. After all, retired people won't be collecting paychecks.

I'm not making this up, that is the argument in Marc Thiessen's latest column, cleverly titled, "Obamacare's $70 billion pay cut." Thiessen's basis for claiming that the Affordable Care Act will lead to a $70 billion cut in pay is the Congressional Budget Office's assessment that it will lead to a reduction in aggregate compensation of 1.0 percent between 2017-2024.

He tells readers;

"How much does that come to? Since wages and salaries were about $6.85 trillion in 2012 and are expected to exceed $7 trillion in 2013 and 2014, a 1 percent reduction in compensation is going to cost American workers at least $70 billion a year in lost wages."

"It gets worse. Most of that $70 billion in lost wages will come from the paychecks of working-class Americans — those who can afford it least. That’s because Obamacare is a tax on work that will affect lower- and middle-income workers who depend on government subsidies for health coverage."

Sounds really bad, right?

Well first let's go back to the CBO report cited by Thiessen.

"According to CBO’s more detailed analysis, the 1 percent reduction in aggregate compensation that will occur as a result of the ACA corresponds to a reduction of about 1.5 percent to 2.0 percent in hours worked. (p 127)"

We checked with Mr. Arithmetic and he pointed out that if hours fall by 1.5 to 2.0 percent, but compensation only falls by 1.0 percent, then compensation per hour rises by 0.5-1.0 percent due to the ACA. In other words, CBO is telling us that for each hour worked, people will be seeing higher, not lower wages. That is the opposite of a pay cut.

However because people may now be able to afford health insurance either without working or by working fewer hours than they had previously, many people will choose to work less. That is worth repeating since it seems many folks are confused. Because people may be able to afford health insurance either without working or perhaps by working less than they had previously, many people will choose to work less.

Yes, just like people will opt to retire because they have more money in their retirement accounts, some people will opt to work less because Obamacare has made it easier to afford health care insurance. This is a voluntary decision that CBO is calculating people will make.

Now Mr. Thiessen is apparently convinced that the decision to work less will be the wrong decision for these people:

"most of that $70 billion in lost wages will come from the paychecks of working-class Americans — those who can afford it least"

but apparently the working-class Americans making the decision believe otherwise. Obviously the answer here is for Mr. Thiessen to go around to all the people who quit their jobs or cut back their hours because of Obamacare and explain to them why they have made a bad choice. Maybe he will change some minds and get people to work harder, but on its face, it seems likely that these working class people would be better positioned to judge how much they need to work than Mr. Thiessen. 

 

 

 

 
Does National Public Radio Have the Ability to Control Its Obsession With the National Debt Print
Monday, 10 February 2014 11:22

In recent months we have heard comments from the chief economist at the I.M.F., the chair of the Federal Reserve Board, and the Congressional Budget Office, all saying that austerity is hurting growth and costing the country jobs. By the Congressional Budget Office's estimates we are still operating at a level of output that is more than $1 trillion below potential GDP. Comparing its most recent projections with its 2008 pre-crash projections, we stand to lose a cumulative total of more than $24 trillion in output ($80,000 per person) through the end of its budget horizon in 2024 as a result of the collapse of the housing bubble. 

In short, millions are needlessly suffering from unemployment or underemployment, and the country continues to waste a vast amount of goods and services that it could produce to meet important needs. One would think this situation would garner attention from National Public Radio and other major news outlets. But no, NPR is upset that we are not concerned about the national debt.

It told us this last week in a segment where it included no voices to make the obvious point that spending is good right now, and it did so again today when it complained that Congress lacks the will to reduce the debt.

Obviously the debt is an obsession of some reporters/producers at NPR. It would be reasonable to give them occasional opinion pieces to express their concerns. These pieces are not news.

 
It's Monday and Robert Samuelson is Beating Up on Seniors, Again Print
Sunday, 09 February 2014 21:33

It's great that the Washington Post lets Robert Samuelson run the same columns again and again. Otherwise he might have to work for his paycheck.

Today's column is a rerun of the senior bashing piece. The premise is that we can never raise taxes and that we are too stupid and/or corrupt to get our health care costs in line with the rest of the world. And, if these two claims prove to be true, then voila, spending on seniors will crowd out other spending in the budget. 

It's not clear why anyone would think we will never be able to raise taxes ever again. Reagan signed into law a large increase in Social Security taxes. Clinton raised income taxes, as did Obama. We also have polling results showing that the public would support increases in the payroll tax to sustain benefits.

As a practical matter, if we restored normal wage growth, so that wages rose in step with productivity, it's difficult to see why it would be so difficult to take 10-20 percent of wage growth in some years to meet the cost of an aging population. If Samuelson knows some reason why this is impossible he is not sharing it with readers.

We also pay more than twice as much per person for our health care as people in other wealthy countries. We have nothing to show for this extra spending in terms of outcome. It is difficult to see why we will never be able to get our costs in line. Do protectionists so dominate U.S. politics that we will never be able to open up our health care system to international competition, if we are unable to fix it?

In short Samuelson is telling us that we have to beat up our seniors because we can never raise taxes and never fix our health care system. Furthermore, Samuelson complains that those of us who don't want to join him in beating up seniors are engaged in a "charade":

"Both liberals and conservatives are complicit in this charade, but liberals are more so because their unwillingness to discuss Social Security and Medicare benefits candidly is the crux of the budget stalemate."

Of course liberals and conservatives are discussing Social Security and Medicare. They just aren't saying the things that Robert Samuelson likes so he just insists they are saying nothing.

Actually, if someone wants to assess Samuelson's credibility, he gives a line that tells readers everything they need to know:

"The military is being weakened. As a share of national income, defense spending is projected to fall by 40 percent from 2010 to 2024."

Yes, well we were fighting two wars in 2010. The projections for 2024 assume that we will not be fighting any wars. That is a big deal if you were trying to make an honest comparison of military spending in 2010 and 2024, but this is a Robert Samuelson column.

 
Take This Job and Shove It: The Fruits of Obamacare Print
Sunday, 09 February 2014 09:17

Yes, this was one of the points of Obamacare, at least for some of us. Many people find themselves stuck in jobs they hate because they need health care insurance and can't see any other way to get it. The Washington Post tells us that some workers are recognizing their new freedom as a result of being able to buy affordable insurance on the individual market.

This is great news in my book, but I see from the article that my friend Douglas Holtz-Eakin is unhappy.

 
The Efficiency of Drug Patents and Other Silly Things Economists Say Print
Sunday, 09 February 2014 08:56

If you want to see an economist get really angry, suggest imposing a 20 percent temporary tariff on imported steel, as President Bush did in 2002. He can quickly produce the charts showing how this will lead to an inefficient outcome.

If you want to see an economist get really confused, ask him how the story is different with a drug patent that allows a company to charge a price that is several thousand percent above the free market price. Of course you can use the exact same chart to show the inefficiencies, except with the drug patent the scale would be two orders of magnitude larger.

But economists don't get concerned for some reason about drugs selling for above market prices, even though the gap between the patent-protected prices and the free market prices is now running into the hundreds of billions annually. They will inevitably mumble about how we need patents to provide incentives to develop new drugs, as though they could not conceive of any other mechanism.

This is why this little piece on the potential use of vitamin C as a cancer treatment is so interesting. It refers to some promising results from scientists at the University of Kansas then tells readers:

"One potential hurdle is that pharmaceutical companies are unlikely to fund trials of intravenous vitamin C because there is no ability to patent natural products."

The conclusion is then that the government will have to finance large-scale clinical trials to determine the effectiveness of vitamin C as a cancer treatment.

The specifics of the vitamin C case are fascinating in themselves, but what is more striking is what this says about our division of research responsibilities between the public and private sector. The assumption of patent supporters is that somehow Pfizer, Merck, and the rest are hugely more efficient when they do patent supported research than when research is done through other funding mechanisms. (The issue here is patent support, not public versus private, since the government could pay Pfizer and Merck to do research.) 

So patent supporters believe that we can have efficient public funding through the National Institutes of Health (NIH) for basic research. (NIH gets $30 billion a year, which everyone seems to agree is money very well spent.) And they recognize that occasionally it will be necessary to do research on non-patentable products because these may provide effective treatments or cures. But somehow it is efficient for the government to grant patent monopolies that both lock up the product and also many important research findings for decades. 

It would be interesting to see a theory of how science develops that would support the efficient patent argument. On its face, it is hard to see anything there besides drug money.

 

Thanks to Jon Schwartz for calling this one to my attention.

 
The Secret of Slow Wage Growth: College Myths in the NYT Print
Saturday, 08 February 2014 09:46

The NYT noted that wages have been growing slowly in the recovery, which it argues also explains slow consumption growth. It then blamed weak wage growth on an uneducated workforce;

"The problem for economic growth in general, and wage growth in particular, is that only one-third of the American work force — 50.4 million out of 155 million — have a college degree or more. By contrast, there are approximately 73 million workers who have a high school diploma or some college, and 11 million workers who did not finish high school.

"With many less educated workers chasing a limited number of new jobs, employers have little reason to increase wages. 'It’s just an extremely competitive environment for workers, where people have little negotiating power,' Mr. Harris said." [Mr. Harris is identified as a Bank of America Merrill Lynch economist.]

This story doesn't fit the data. In the last year the average hourly wage of production and non-supervisory workers rose by 2.2 percent. This group, which accounts for just over 80 percent of the workforce, is overwhelmingly composed of people without college degrees. The average hourly wage for all workers, which includes supervisory workers who mostly do have college degrees, rose by just 1.9 percent in the last year. This means that wages for supervisory workers actually rose somewhat more slowly on average than did wages for non-supervisory workers, the exact opposite of what the article claims.

In fact there is no evidence that businesses are having a hard time finding college educated workers. While the piece notes that the unemployment rate for college educated workers is just over 3.0 percent, it was 2.0 percent before the recession in 2006-2007 and just 1.7 percent in 2000. In fact, the current unemployment rate among college grads is as high as at any point it hit following the 2001 recession. There is simply no evidence to support the claim that we are facing a shortage of college educated workers or that these workers are seeing a healthy pace of wage growth.

 
The WSJ Wants to Blame Obamacare for Weak Hiring, but It's Not Quite Sure Why Print
Saturday, 08 February 2014 06:01

The Wall Street Journal reported on the weak January jobs number. It's sure that Obamacare is somehow responsible, it just can't quite get a clear story together.

The article begins:

"A hiring chill hit the U.S. labor market for the second straight month in January, reflecting employers' reluctance to take on new workers despite some of the nation's strongest economic growth in years."

So the story is that the economy is growing rapidly, but firms for some reasons are not hiring workers. We get that more explicitly a couple of paragraphs down.

"The report left several puzzles unanswered, including the dichotomy of solid growth and weak hiring. Throughout the recovery, businesses have been able to boost production at a faster pace than employment. That trend could also be supporting GDP growth despite the hiring slowdown."

So businesses have been scared away from hiring and are instead increasing productivity. So let's look at that soaring productivity growth.

prod

                                               Source: Bureau of Labor Statistics.

Yeah, well not quite. Productivity growth has been 1.7 percent over the last year. That's well below the 2.8 percent average in the decade before the downturn and spectre of Obamacare haunted the business world.

If productivity growth doesn't explain the lack of hiring maybe firms are increasing hours to avoid having to commit themselves to hiring new workers. That one won't help either. The average weekly workweek was 34.4 hours in January, that's above the lows hit in 2009 and 2010, but still below the 34.5-34.6 range we saw in 2007. And the average workweek actually has fallen since November. So the WSJ wants to tell us that firms are seeing increased demand for labor and aren't meeting it through hiring, but apparently also are not meeting it through productivity growth or increased hours: very interesting.

After giving us a bit more information about the new jobs numbers the article returns to Obamacare:

"The health-care sector added just 1,500 jobs in January after a gain of 1,100 jobs in December. The sector had supplied a steady stream of jobs for years, raising more questions about whether the rollout of the Affordable Care Act last fall is restraining hiring.

"The health law has curbed hiring at Pita Pit USA Inc.'s 220 sandwich shops, said Peter Riggs, a vice president at the Coeur d'Alene, Idaho, firm. 'We're not quite sure what the unintended consequences of the Affordable Care Act will be,' he said. 'We have an ongoing commitment to the people we've already hired, but we're more wary than in the past about hiring too many new people.'"

This is more than a bit bizarre. One of the goals of Obamacare is to restrain cost growth in health care. This will likely mean restraining employment growth in the health care sector. That is a point of the Affordable Care Act (ACA), not an unfortunate consequence.

On the other hand there is a totally separate question as to whether the ACA would reduce hiring in other sectors. The WSJ again tells us it has found a business person who claims this is the case, but the data do not support the claim that this is a more general problem.

Anyhow, everyone should know that the WSJ is working hard to convince us that Obamacare is really bad for job growth. One day they may have some evidence to support this view. Btw, this is a news article.

Note: Typo fixed -- thanks Jennifer.

 

 
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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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