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Robert Samuelson Celebrates Stagnation in Europe Print
Monday, 08 October 2012 07:59

Robert Samuelson is excited by the fact that Europe's economy faces stagnation. Unfortunately he gets almost everything in the piece wrong.

First, his central point, that the stagnation is due to overly generous welfare state, is 100 percent at odds with reality. The countries with the most generous welfare states are the Nordic countries and Germany, all of which are doing fine. The problem countries are Greece, Italy, Spain, and Ireland, all countries that rate near the bottom in the generosity of their welfare states.

The proximate cause of stagnation is quite evidently the decision by the European Central Bank to require austerity across the continent. In case anyone disputed this fact, the Conservative government in the U.K. agreed to prove the point by implementing an austerity plan in that country, which quickly threw it back into recession. In short, the immediate problem facing Europe is hardly overly generous welfare states; it is contractionary fiscal policies being pursued by European governments, in many cases against their will. 

Other items that Samuelson gets wrong is his obsession with GDP growth. There is no obvious reason to be interested in growth per se, as opposed to per capita growth. China is not richer than Denmark even though its GDP is more than 80 times as high. The reason is that its population is more than 400 times as high. Economists focus on GDP per person, not absolute levels of GDP.

Furthermore, if GDP per capita grows less rapidly because people opt to take the benefits of productivity growth in leisure time or in quality of life improvements that may not be picked up in GDP (e.g. more park space), there is no economic basis for objecting to this decision. Samuelson is just expressing a personal preference for people working longer hours and getting rewarded with more consumption goods.

Samuelson urges the removal of constraints on growth. While this is a good idea, the top of the list would probably include things like patent protection for prescription drugs, which raises prices by around $270 billion a year and the removal of obstacles to trade in professional services. While Samuelson was no doubt thinking of cuts to Medicare and Social Security, my list would have a much more positive impact on growth.

 

 
Very Good Account of Patent Abuse in High Tech Print
Monday, 08 October 2012 07:48

The NYT has an excellent piece on how patents can obstruct innovation in high tech. The sector has wasted tens of billions of dollars in lawsuits in recent years and now takes out patents routinely as a legal weapon. The one major error is that the piece implies at one point that the story with prescription drugs is better, if anything it is almost certainly much worse. The enormous patent rents that drug companies are able to earn (drugs that can be profitably sold for $5 are instead sold for 100 or even 1000 times this much with patent protection) give them a huge incentive to misrepresent their effectiveness and safety and to market them for inappropriate uses. As the NYT has frequently documented in news stories, the drug companies respond to these incentives as economic theory predicts.

 
Greg Ip Gets the Basics Wrong in Analysis of Downturn (with response) Print
Sunday, 07 October 2012 07:05

Greg Ip is usually a solid analyst of economic trends. However he apparently agreed to adopt house standards in his column for the Washington Post that told readers that "Obama is saving the economy, but maybe not in time to save the economy."

The main assertions in the piece are just flat out wrong. For example, the column tells readers:

"Paradoxically, the same forces that made for such a weak recovery during Obama’s first term suggest that the next four years will be better, regardless of who holds the White House. Right now, businesses, households and governments are all trying to wrestle down their debts. That “deleveraging” saps spending and blunts the power of low interest rates."

This statement would lead readers to believe that the problem is low consumer spending and low business investment because of high debt burdens. However the Commerce Department's data strongly disagrees with this assessment. Here is the ratio of consumption to disposable income over the last four decades. (Adjusted disposable income has to do with the statistical discrepancy in GDP accounts.)

consump-disp-09-2012

Source: Bureau of Economic Analysis.

The Commerce Department strongly disagrees with Ip, telling us that consumption remains far above its long-term share of disposable income even if it is somewhat below the peaks driven by the wealth from the stock and housing bubbles. It also disputes the business side of Ip's argument. In the second quarter of 2012 (the most recent quarter for which data are available), businesses spent an amount equal to 7.4 percent of GDP on equipment and software investment. In 2007, the last pre-recession year they spent 7.9 percent. See the collapse? In fact, given the large amounts of excess capacity in major sectors of the economy, business investment is surprisingly high.

The real story of the current shortfall in demand is very simple. The wealth generated by the housing bubble led to unusually high consumption. It also led to a building boom in both residential and non-residential construction. Consumption fell back to more normal levels after the wealth that was driving it disappeared. Construction went from boom to bust, as we had enormous overbuilding of both homes and most types of non-residential structures.

Read more...

 

 
The Washington Post Gets It Wrong on the Economy, Again Print
Saturday, 06 October 2012 07:18

The Washington Post once again reminded readers why so many people are praying for the day that the paper shuts its door. Its lead editorial touted the September jobs report as though this was great cause for celebration.

The piece begins by saying that President Obama asked to be evaluated based on the economy's performance, it then tells us:

"Friday’s employment report gave Mr. Obama a reason to crow. Having hit a high of 10 percent in October 2009, the jobless rate fell in September to 7.8 percent, the level it was when Mr. Obama took office amid a historic wave of job losses. More important, it fell even as the labor force grew; previous rate declines partly reflected worker discouragement. The percentage of adults with a job rose from 58.3 percent to 58.7 percent, wages by 0.3 percent."

Huh? It took us almost 4 years to get to an unemployment rate that is still higher than at any point in the last recession and equal to the peak in the 1990-91 recession and the Post thinks that President Obama has reason to crow? In fact, most of the improvement has been due to people dropping out of the labor force. Even with the jump in September, at 58.7 percent the employment to population ratio stands much closer to its low of 58.2 percent reached last summer than the pre-recession peak of 63.3 percent. (The picture is slightly better using an age-adjusted EPOP, as Paul Krugman constructed, but the story is very much the same.)

No one expects an economy to remain permanently depressed. The fact that we are still seeing unemployment rates and other measures of labor market weakness that are consistent with a severe recession almost 5 years after the recession began is really really bad news. If the Post applied the same performance standards to teachers as it does to our economic policy makers, no teacher in the country ever would have been fired for not being competent. 

Much else in this column is annoyingly wrong. For example, the piece tells us that wages rose 0.3 percent in September. Yes, this was after two months of essentially zero growth. The monthly data are extremely erratic. (Doesn't anyone there know this?) Over the last year the average hourly wage has increased by 1.8 percent, roughly enough to keep pace with inflation, meaning that workers are getting none of the benefits of the economy's productivity growth.

It then does another pitch for supporting the bailout of its rich Wall Street friends:

Read more...

 

 
Catherine Rampell Explains the Job Numbers Are Not a Conspiracy Print
Friday, 05 October 2012 14:38

Very nicely done.

 
George Will Definition of "Rationing" Is When the Government Does Not Pay for Something Print
Friday, 05 October 2012 06:57

I'm not kidding. In his column today he complains about the Independent Payment Advisory Board (IPAB) for Medicare that was set up under one of the provisions of the Affordable Care Act. The IPAB will decide on which procedures will be covered under Medicare. If it determines that a procedure is either not effective or not worth the cost, then Medicare will not cover it, unless Congress overturns the decision.

George Will then trumpets this as rationing of health care. Of course under this system, anyone will be able to get whatever health care they want, they will just have to pay for it out of their own pocket. The fact that Will now calls this situation "rationing" of care shows the state of modern conservatism.

Btw, the same situation under all the plans put forward by Governor Romney and Representative Ryan. There is no insurance company that covers all care. So insurers will decide which procedures they want to pay for. Furthermore, unlike Medicare, there will be no elected representatives who can overturn their decisions. They can also change coverage on people unexpectedly -- that is unless pointy headed bureaucrats in Washington stand in their way.

 

[Note -- headline corrected 11:00 A.M. 10-6-12 and "IPAB" was originally written as "IPAD"]

 
Casey Mulligan and a Trip to the Supply Side Print
Friday, 05 October 2012 05:27

Casey Mulligan takes another shot at explaining the downturn as a decision by millions of people to stay at home and collect government benefits (joining the 47 percent) rather than work, in response to the increased generosity of programs like unemployment insurance and food stamps under the Bush and Obama administration. I don't have time to deal with all the points that Mulligan raises, but it is worth focusing on one implication of his story.

Not everyone was in a position to gain from these benefits. For example, young workers just entering the labor force with no work history would not be eligible for unemployment insurance. Also, if they have no children they will probably not eligible for food stamps or other government benefits. In other words, this group of workers would not have seen any increased disincentive to work as a result of any changes in benefits over the last 5 years.

For these workers the increase in benefits for other workers would imply somewhat of a bonanza in Mulligan's world. It would effectively pull many of their competitors out of the labor force. Think of a situation where your employer just offered a very generous early retirement plan to everyone who had more seniority to you at your workplace. With these people out of the way, there will be great opportunities for promotions and pay increases.

The same would situation would exist if we believe Mulligan's supply-side theory. This should mean that workers who stay in the workforce have much lower unemployment rates that we would have otherwise expected (i.e. lower than their 2007 levels) and higher wages. I haven't looked closely at the data, but this doesn't seem to fit the facts. The sharpest rise in unemployment rates or fall in employment rates has been among the young workers who are likely not eligible for the benefits that have become more generous. (The minimum wage story won't help here, their employment rates have not risen as the its real value was eroded inflation.) In other words, this trip to the supply side again looks like a dead end.

 

 
The NYT's Romance of Start-up Businesses Print
Friday, 05 October 2012 05:09

Politicians and the media just LOVE start-up businesses. We got another example of this relationship in an NYT piece on start-ups hiring fewer workers that told readers:

"But the implications for the American work force are worrisome, and may help explain why economic output is growing much faster than employers are adding jobs."

Actually the economy always grows faster than employers add jobs because of productivity growth. It would be very scary if productivity growth vanished, which would mean that we are not getting wealthier collectively. In other words, there is zero mystery to be explained, businesses are not hiring because the economy is not growing fast enough.

The relationship more generally between start-ups and job growth is also misrepresented. The piece told readers:

"For decades, new companies have produced most of the country’s job growth. Without start-ups, the country would have had a net increase in jobs in only seven years since 1977."

This assertion likely will lead readers to believe that we would need start-ups to create jobs. That is not true. Start-ups are a substitute for expanding existing businesses, often by choice. In many cases businesses find it more attractive to buy up a new firm in a sector that can show that it has a successful business model rather than expanding its own operations. If it lacked the opportunity to buy a new firm then it would simply expand itself.

The NYT piece is trying to imply that this accounting relationship (that job growth was concentrated in new firms) into a causal relationship. This would be comparable to a situation in which we found that all the hob growth in the United States was in states west of the Mississippi and thereby concluding that if we did not have the West there would have been no job growth. This is of course not at all an implication of finding that the job growth had been located west of the Mississippi. If firms did not have the option of expanding west of the Mississippi then they would have expanded east of the Mississippi.

While it's great that people have the opportunity to start businesses and pursue their aspirations, that is not an excuse to make up stories about how they affect the economy. The NYT should know better.

 
Washington Post News Article Praises Romney for Lying About His Tax Plan Print
Friday, 05 October 2012 04:48

The Washington Post ran a front page piece on Governor Romney's debate performance that was headlined, "Romney benefits from rigorous defense of tax plan." The article begins:

"With his forceful denial of charges that he would raise taxes on the middle class, Mitt Romney used Wednesday’s debate to launch an aggressive new effort to regain his footing in the battle over taxes.

In one of the debate’s first exchanges, the Republican presidential nominee directly challenged President Obama’s assertion that Romney’s tax plan would finance big new breaks for the wealthy by wiping out popular deductions for those who earn less than $250,000 a year."

As the article later explains, Romney's assertion is inconsistent with his past description of his tax plan. Romney proposes to cut income tax rates by 20 percent but also to have a deficit neutral tax cut. He argues that the lower tax rates will be offset by eliminating tax deductions.

However, it is not possible to make up the lost revenue from lower tax rates on the wealthy simply by taking away tax breaks for the wealthy. (Romney explicitly rejected raising the tax rate on capital gains or dividends, so the main tax break for the wealthy is off-limits.)

The point here is very simple. If you cut Warren Buffett's tax rate by 20 percent you will not get back the money by taking away his mortgage interest deduction. This is why every independent economist who has analyzed the tax cut has said that Romney's plan implies large tax increases on middle income families. However the Washington Post is apparently proud of Romney for denying for boldly denying this fact. 

 

 
Morning Edition Debate Commentary Badly Misinforms Listeners Print
Thursday, 04 October 2012 05:19

Morning Edition's fact check of comments in the debate badly misled listeners by implying that choosing between reducing deficits between higher taxes and greater growth through tax cuts are alternative paths to deficit reduction that people can choose from like flavors of ice cream at the ice cream store. They are not.

There is no plausible path through which a tax cut will generate enough growth to even pay for itself, much less produce additional revenue. The best analysis of this issue was done by the Congressional Budget Office in 2005, when it was headed by Douglas Holtz-Eakin, a Republican who was the chief economic advisor to Senator McCain in his presidential campaign. His analysis found that using the most favorable set of assumptions, additional growth could temporarily replace one-third of lost revenue. This revenue increase was largely offset by slower growth in the longer term.

The country also had the opportunity to experiment with cutting taxes as a way to increase revenue when President Reagan cut taxes in the early 80s and President Bush cut them at the start of the last decade. In both cases, deficit rose considerably as revenue fell. It would have been helpful to supply this information to listeners who may be less familiar with economic research or recent economic history.

The analysis also said that both President Obama and Governor Romney believe in energy independence. That is unlikely since it is almost inconceivable that the United States will become energy independent any time in the foreseeable future unless it imposed huge protectionist barriers on imported oil. Presidents and presidential candidates have been talking about energy independence for 40 years, there is no reason to believe that these two candidates are any more serious than their predecessors.

 
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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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