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Wage-Price Inflation and the Way Things Work In Economics Print
Thursday, 09 October 2014 07:00

There's an old saying in economics that it doesn't matter if what you say is right, what matters is if the right person says it. I was reminded of this line when I read Matt O'Brien's Wonkblog post on the success of the Fed in allowing the unemployment rate to fall below the nearly universally accepted measure of the NAIRU, without having any notable acceleration of inflation. 

This is a great history that should be tattooed on the forehead of everyone involved in the current debate on how low the unemployment rate can go without kicking off a wage price spiral. Back in the mid-1990s all right thinking economists thought that the NAIRU was in the neighborhood of 6.0 percent. This meant that if the unemployment rate was below 6.0 percent the inflation rate would begin to increase. And, it would keep increasing as long as the unemployment rate stayed below 6.0 percent.

While there was some difference on the precise number (the usual range went from 5.6 percent to 6.4 percent), there was almost no dispute on the basic point. As O'Brien notes, even Janet Yellen adhered to this view, expressing concerns in 1996 that if the Fed didn't raise interest rates inflation would be a big problem. (Paul Krugman also expressed a similar view at the time.)

Thanks to the eccentricities of Alan Greenspan, the Fed did not raise interest rates. Instead it allowed the unemployment to continue to fall. It fell below 5.0 percent in 1997, it crossed 4.5 in 1998, and reached 4.0 percent as a year-round average. And inflation remained tame. The result was that millions of people had jobs who would not have otherwise. Tens of millions of workers at the middle and bottom of the wage distribution saw substantial real wage gains for the first time in a quarter century.

And, for the folks fixated on budget deficits, we saw a large surplus for the first time in decades. As much as the Clintonites like to boast of their great surpluses, the reality is that the budget would have remained in deficit if Clinton's Fed appointees (Janet Yellen and Lawrence Meyer) had gotten their way. It is only because the Fed allowed the unemployment rate to fall far lower than these folks thought wise that the budget shifted from deficit to surplus. (In 1996 the Congressional Budget Office projected a deficit of $240 billion [2.5 percent of GDP] for 2000. In fact, we ran a surplus of roughly the same amount. According to CBO, the legislative changes over this four year period went a small amount in the wrong direction.)

Anyhow, all of this should be a good reminder that the whole of the economics profession can be completely wrong on the most important issues affecting the economy. But that isn't why I brought you here today.



If a Higher Dollar Costs More Jobs than Measures to Stop Climate Change (i.e. "The War on Coal"), Why Isn't That a Problem? Print
Thursday, 09 October 2014 04:02

Neil Irwin has a piece today on the causes and consequences of the recent run-up in the dollar. He argues that the rise is largely due to the fact that the U.S. economy seems to be doing better in recent months than most other major economies, especially the euro zone and Japan. In those cases, the central banks are looking to ease up further in the foreseeable future, while the Fed is debating when to tighten.

This is certainly a plausible explanation for most of the rise (doesn't work well for the British pound), but the consequences are not as benign as Irwin's piece might lead readers to believe. The main consequence of a higher dollar is a larger trade deficit and therefore slower job growth and fewer jobs.

To get an idea of the magnitude of this effect, last month Goldman Sachs estimated that the 3.0 percent rise in the dollar we had seen by that point (it's a bit more now) will shave 0.1 to 0.15 percentage points off GDP growth in each of the next two years (sorry, no link). That translates into lost jobs. If the economy is 0.25 percent smaller in 2016 due to the higher dollar that would imply a loss of roughly 350,000 jobs.

In considering whether this job loss is a big deal, remember that the country has less than 80,000 people employed in coal mining. There have been frequent news stories warning of the dire job impact of measures to reduce greenhouse gas emissions, which would lead to substantial job loss in the coal industry. Just as a matter of arithmetic, if the coal industry were completely wiped out by environmental measures, the job loss in the coal industry would be less than one fourth as much as the job loss implied by Goldman's estimate of the impact of the rise in the dollar.

In fairness to Irwin, he does note there will be winners and losers:

"If you frequently fill up your car with imported oil or drink French wine, it’s good news. If you are Boeing competing against Airbus, or General Electric competing against Siemens, or Cadillac competing with Mercedes-Benz, it is terrible news."

We might add to his list of winners people who frequently take vacations in Europe or other foreign countries. A high percentage of the people involved in crafting economic policy (e.g. congressional and administration staffers, reporters, economists) fit into this category. It is probably also worth mentioning that the financial industry generally likes a stronger dollar since it means less risk of inflation and their money goes farther overseas. And, companies like Walmart that bet big on low cost imports are also happy with a higher dollar.

For these reasons, the high dollar may not be portrayed as a matter of concern in the media, even if the impact on jobs is far larger than other issues to which they have devoted considerable attention.

Which Way Is Up Problems on the Dollar at the WSJ Print
Wednesday, 08 October 2014 07:17

The Wall Street Journal ran a short piece headlined, "Dudley [N.Y. Federal Reserve Bank President William Dudley] elevates the strong dollar in the Fed's policy outlook." The point is supposed to be that the rise of the dollar in recent weeks will both put downward pressure on inflation and increase the U.S. trade deficit, as U.S. goods become less competitive. Unfortunately, the piece couldn't quite keep the story straight. The second paragraph told readers:

"First, Mr. Dudley has elevated the strength of the dollar and soft global growth as factors affecting the Fed’s policy thinking. He said the weak dollar puts downward pressure on U.S. inflation and dims U.S. near-term export prospects, factors that keep the Fed patient about raising rates even as the job market improves (emphasis added). It’s unusual for a senior Fed official to speak so directly about the impact of the currency on his thinking, in part because the currency is supposed to be the domain of the U.S. Treasury."

Yes, it is unusual for a Fed official to talk so openly about the impact of the value of the dollar on the economy, which is why it is important to get the story right. Obviously this was just a typo, but it is an extremely unfortunate one.


Note: I see that the WSJ has corrected the typo.

It's Hard to Find People With the Necessary Skills for Retail and Restaurant Work Print
Wednesday, 08 October 2014 04:51

That's the story that we may hear based on new data on job openings and hires. The data showed a rise in the number of job openings in August, coupled with a fall in the number of hires.

This might seem to fit the skills mismatch story that many folks are pushing. The idea is that the jobs are out there, but unemployed workers just don't have the necessary skills to fill them. If that's the case, then we apparently need more people with the skills to work as retail clerks and table servers.

The gap in retail between openings and hires increased by 123,000 last month, as hiring fell by 83,000, in spite of a 40,000 increase in job openings. Job openings in accommodation and food services increased by 73,000 while hiring fell by 5,000, adding 78,000 to the gap. (There was also a sharp fall in hiring in construction in August, but this just partially reversed an extraordinary rise reported in July.)

Anyhow, if you want to believe the skills mismatch story, you have to believe that the mismatch is most serious in sectors that we don't typically think require many skills. 

Lesson for the NYT: Companies Are Not Always Honest Print
Wednesday, 08 October 2014 04:23

At some point when we are growing up most of us discover that people don't always tell the truth. Apparently, some folks at the NYT have not learned this lesson.

In an article reporting on Walmart's decision to stop providing health insurance for 30,000 part-time workers, the NYT told readers:

"In scaling back coverage for part-time employees, Walmart joins retailers including Home Depot, Target and Trader Joe’s, which have dropped benefits in response to the Affordable Care Act, the health care overhaul enacted by the Obama administration."

Actually, the NYT doesn't know that the Affordable Care Act (ACA) is the reason these retailers cut their health care coverage. Retailers have been cutting health care coverage, along with wages and other benefits, for more than a quarter century. While the ACA may have been a factor in these recent benefit cuts, it is entirely possible that these stores would have cut health coverage even if the ACA had never passed. That would be the case even if the companies may have told the NYT that the ACA was the reason they were ending coverage. 



I should mention that in standard economic theory, payments for health care are seen as coming out of wages. This means that if Walmart is cutting its health care because workers can now get access to insurance through Medicaid or the exchanges, we should expect to see a roughly equal increase in their wages. On the other hand, if Walmart is just cutting benefits with no increase in wages, this is in effect just a cut in pay. Since the piece makes no reference to any planned pay increases, it sounds like the latter.

It Is News That the AIG Bailout Was a Way to Give Money to Goldman Sachs Print
Tuesday, 07 October 2014 04:32

Andrew Ross Sorkin tells us that the fact the AIG bailout was about helping Goldman Sachs and other big banks is not news because we knew it all along. This is one that gets the blood flowing early in the morning.

This brings to mind the old line, what's this "we" jazz, white man? Yes, it was knowable that the AIG bailout was about saving the banks and many of us argued that at the time. But this money was not generally included on the list of handouts to Goldman Sachs and its CEO Lloyd Blankfein, who takes home $20 million a year. (That's roughly equal to what 12,700 food stamp beneficiaries receive.) So yes, many of us did call the AIG bailout a backdoor handout to the banks, but that was not something generally conceded in policy circles.

It matters because if everyone understood that the $192 billion injected into AIG was largely about keeping big banks from failing then there might have been more political support for breaking up the big banks and in other ways restricting their conduct. Conceding this point now that the debate over financial reform is largely in the past seems more than a bit dishonest.

If I can be allowed a brief digression, back in the mid-1990s the Washington Post ran a major front page article that bemoaned the fact that U.S. soldiers who had died in the civil war in El Salvador had not received proper military honors. The problem was that the Reagan administration was trying to conceal that we had troops in combat situations, so it couldn't acknowledge the true fate of these soldiers. Incredibly, the piece only discussed the plight of the soldiers and their families. It acted as though we all knew that the Reagan administration had lied about the involvement of U.S. troops in combat.

Of course many people did believe that the Reagan administration was lying back in the 1980s, but there had never been any major stories in the Washington Post, or any other major newspaper, that told readers that the Reagan administration was lying. In the same vein, it has not been the generally accepted backdrop in reporting that the AIG bailout was about rescuing the big banks, even though many of us did know this at the time.

Finally, Sorkin again makes the annoying assertion on the AIG bailout that, "we got our money back — with more than $22 billion in profit."

This one deserves derision. Access to liquidity back in 2008-2009 carried an enormous premium. We gave $192 billion to AIG at a time when other companies were dying for cash. We would have made an enormous profit if we had invested government cash almost anywhere. For example, if we lent $192 billion to Dean Baker's Excellent Hedge Fund, which used it to invest in the S&P 500 and then split the gains with the government, the country would have pocketed over $100 billion from the deal. So would Dean Baker's Excellent Hedge Fund.

Saying that the government made a profit on the bailout deals is irrelevant in any meaningful sense. The people who make this assertion are either showing their ignorance or being dishonest.

NYT's Bizarre Discussion of Consumption and Jobs Print
Tuesday, 07 October 2014 04:17

The Bureau of Labor Statistics came out with new projections of consumption driven employment. This seems to have created serious confusion at the NYT. Contrary to what the article seems to imply, this study is not making projections of macroeconomic growth. It is assuming a growth rate (2.6 percent annual average over the next decade) and then indicating how it will be divided. By contrast, the article seems to be asking whether the growth assumption is plausible.

Even for this latter purpose the article is badly off. It never once mentions the saving rate. If we want to assess the rate of consumption growth we really do need to know the saving rate. If it is very low, as was the case at the peak of the bubble, it means that it is unlikely that consumption growth will keep pace with income growth and extremely unlikely that it will exceed the rate of income growth. (Some of the discussion seems to imply that there is a question as to whether consumption will increase, as opposed to the rate of increase. There is no question on the former. It will be higher ten years from now than it is today.)

Finally, the piece never discusses the trade deficit. This must be a reflection of the ban on discussing the trade deficit in elite circles. This is unfortunate since graduates of intro econ classes everywhere know that net exports are one of the components of demand. Currently they are a large drain on demand since the country has an annual trade deficit of around $500 billion a year (@ 3 percent of GDP). This has the same impact on demand as if consumers were spending $500 billion less a year (actually more, since much of that spending would go to imports). It is incredible that a piece discussing job growth over the next decade would never mention the trade deficit.


NYT Gives Up Distinction Between Editorializing and Reporting in Covering Pro-Business French Minister Print
Tuesday, 07 October 2014 03:54

Back in the good old days newspapers used to try to keep their opinions on the editorial page and try to stick to the facts on the news page. (I know, that's never neutral.) But the NYT didn't look like it was trying in its profile of Emmanuel Macron, the newly appointed minister of the economy in France.

As the piece tells us, Mr. Macron is pro-business. That seems to be agreed upon by all. However it also tells us that he "is bent on modernizing the country’s social model." It's clear that Macron wants to make cuts in France's social spending. Does that necessarily mean "modernizing." If this distinction is difficult to follow, imagine someone who advocates cutting the military budget in the United States or to breaking up the large banks and taxing the financial sector in a way that treated it like other sectors (as advocated by the I.M.F.). Is it plausible the NYT would describe such a person as wanting to "modernize" defense or finance?

In a similar vein the piece makes pronouncements on economic policy for which it has no obvious justification. It told readers:

"But behind the scenes, he called on Mr. Macron as an informal adviser to assure the business community that he was also open to reforms that would help companies create jobs and lift France from moribund growth.

"Mr. Macron’s first move was to urge Mr. Hollande to drop a proposal to tax incomes above €1 million at 75 percent, warning it would damage France’s image and turn the country into 'Cuba without the sun.'"

Is there any evidence stopping the 75 percent tax rate on very high income individuals would cost jobs? The NYT could make a major splash in the economics profession if it produced such evidence. (It is a disputed topic, but many of the countries' top public finance economists, like Peter Diamond and Emmanual Saez, have supported tax rates this high.) While there is no doubt that this tax rate would hurt folks like Mr. Macron's former colleagues at Rothschild, it's economic impact is far from clear.

The piece also tried to cover up an incredible statement from someone in a high political position in France. It told readers:

"It did not help that Mr. Macron made a major faux pas right out of the gate, in a radio interview, referring to the plight of 'illiterate' workers at a factory that was closing in northern France, because they would have few other options. The remark, though perhaps well intentioned, deepened an impression that he was out of touch with the Socialist base."

An important fact that the paper should have told readers is that these workers were almost certainly not illiterate. While they certainly did not enjoy the same elite education as Mr. Macron, France has a highly-educated workforce. While he is right that due to economic mismanagement these workers likely have few job options, it is unusual for a top political official to publicly and wrongly denigrate a significant segment within society. 

Jason Millman Thinks Firefighters Should Be Paid Millions of Dollars a Year Print
Monday, 06 October 2014 19:13

That would be the logic of his Wonkblog column arguing that specialty drugs are worth the cost. The basic point is that some of these specialty drugs constitute radical breakthroughs that substantially extend or improve the quality of life. The $84,000 Hepatitis C drug Sovaldi is the case in point. After all, isn't it worth a great deal of money to save a life?

By this same logic when the firefighter shows up at our burning house with our family and dogs inside we would gladly pay her millions of dollars if we had the money or insurance that covered the cost. Certainly saving their lives would be worth the cost.

Of course we don't typically pay firefighters millions of dollars a year. Rather than negotiating a payment at the point where our house is burning down and our families' lives are at stake we pay them a salary. Saving the lives of our family members is part of their jobs. We don't hand over our life savings when they show up at the door, they have already been paid.

If we had a little clear thinking in policy circles it would be the same story with prescription drugs. It doesn't cost Gilead Sciences (the patent holder for Sovaldi) $84,000 to manufacture each patient's dosage. Based on the price of generics elsewhere, it probably only costs about 1 percent of this amount. Almost all of this  $84,000 price tag is ostensibly due to Gilead Sciences need to recoup research costs, which it can do because the government issued it a patent monopoly. (This means competitors get arrested if they try to produce the drug without Gilead Sciences' permission.)

Financing drug research with patent monopolies is equivalent to arranging terms to pay firefighters when they show up at our burning house, except it makes less sense. Unlike the case of the burning house, which we can usually see pretty clearly, patients don't really know how effective the drugs are that the pharmaceutical companies try to sell us. After all, they are the ones who did the research. The have to show results to the Food and Drug Administration to get approval, but what they disclose to the public is up to them. And when you can make $83,000 on every sale ($84,000 minus $1,000 for production costs) there is a substantial incentive not to disclose information that may raise questions about your drug's safety and effectiveness. And, if you don't think drug companies would conceal information, then you probably have not been alive very long.

We would be stuck if patent monopolies were the only way to finance research, but fortunately they are not. There are many other ways to support research funding, most obviously through public funding, like the $30 billion that goes to the National Institutes of Health (NIH) every year. There is no reason in principle that the public money used to support research could not be doubled or tripled. The research could even be done by the same drug companies who do research now. The difference is that they would be paid upfront. In this situation all their findings would be fully available to the public and all patents would be placed in the public domain. Then we could all buy generic Sovaldi at $1000 a dosage and we wouldn't have to waste so much time debating the value of a human life.

The drug industry will of course fight this change to the death. They will pay billions to politicians and advocates to argue that we could never have successful research without patents. After all, if government bureaucrats touch the money then it is worthless (except for the $30 billion that goes to NIH, which they always lobby to increase).

Anyhow, we all recognize the power of the pharmaceutical industry and the corruption of the political system. But folks should know that the problem of high-priced specialty drugs is a result of this corruption, not some inherent paradox of modern life.


If Only the Washington Post Could Get Its Hand on the Social Security Trustees Report Print
Sunday, 05 October 2014 20:25

It might help editorial page editor Fred Hiatt understand how the budget works. He is appalled because "reactionary defenders" of Social Security think that seniors should be able to get the benefits they paid for. (I wonder if it's reactionary to think that Peter Peterson type billionaires should be able to get the interest on the government bonds that they paid for.)

Anyhow, the basis for Hiatt's fury is that John Podesta, now a top advisor to President Obama, is boasting about entitlements having been brought under control. To Hiatt this is outrageous.

"Federal debt has reached 74 percent of the economy’s annual output (GDP), 'a higher percentage than at any point in U.S. history except a brief period around World War II,' the CBO says, 'and almost twice the percentage at the end of 2008.' With no change in policy, that percentage will hold steady or decline a bit for a couple of years and then start rising again, to a dangerous 78 percent by 2024 and an insupportable 106 percent by 2039."

Yep, the debt is much higher today than in 2008, so what? Millions of people lost their jobs due to the collapse of the economy. The deficits of the last six years created demand that would not otherwise have been there. It led to more growth and put people back to work. To those in the real world, people losing their jobs and losing their homes, would be the big story. This means kids growing up with unemployed parents and maybe hustling from house to house or even living on the street. But hey, Fred Hiatt wants us to worry about the deficit in 2039.

Just to be clear, the gloom and doom story is all Hiatt's not CBO's, although some readers may be confused by the presentation. There is no obvious negative consequence to a debt to GDP ratio of 74 percent, although readers can get that Fred Hiatt doesn't like it. Nor is there any obvious negative consequence to a debt to GDP of 78 percent by 2024, even if Fred Hiatt calls it "dangerous."

And the assertion that a debt to GDP ratio of 106 percent is insupportable is just Fred Hiatt's invention. There are many countries that have much higher debt to GDP ratios today (Japan's is more than twice as high) and continue to pay very low interest rates on long-term debt. In other words, Fred Hiatt is just like the little kid who who is worried about the monster under his bed when the lights are turned off. Undoubtedly it is very real to him, but when you turn on the lights you can see there is nothing there.



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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.