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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.

 
Doctor Shortages at the Veterans Affairs Hospitals: Why Aren't People Talking About Immigration? Print
Friday, 30 May 2014 05:06

The Silicon Valley folks and their allies in think tanks and academia are constantly touting the need to have more immigrants to work as engineers in their companies. This is in spite off the fact that the wages of the workers in the sector do not demonstrate evidence of a serious shortage (i.e. they are not rising rapidly).

Given the frequency with which more immigration comes up in the context of the tech sector, is striking that the issue is not mentioned once in a major NYT article on doctor shortages in the Veterans Affairs hospitals. Doctors in the United States make on average more than twice what their counterparts in other wealthy countries earn, which means that many would likely be willing to work in the United States for a period of time, given the opportunity. (The piece puts the median pay of primary care physicians in the private sector at $221,000 in 2012.) It is also easy to design a mechanism to compensate developing countries for any doctors who come to United States so that they can train 2 or 3 doctors for each one that comes to the United States.

Anyhow, given the evidence of a shortage of doctors in the United States, and the huge gap in pay between the U.S. and other countries, this would seem an obvious case for benefits from increased immigration. It is remarkable that this is not front and center on the national agenda.

 
Why Is It So Acceptable to Lie to Promote Trade Deals? Print
Friday, 30 May 2014 04:36

It's not polite to use the "L" word here in Washington, but it's hard not to be more than a bit disgusted with the frequency with which trade pacts are sold as great engines of job creation and economic growth, when they clearly are not. The latest offender in this area is Bruce Ackerman, a Yale Law professor.

In a Washington Post column Ackerman called on President Obama to push for the Transatlantic Trade and Investment Pact (TTIP), which he described as, "opening the path for job-creating opportunities for workers on both continents."  Really, what evidence does Professor Ackerman have for this assertion?

The most widely cited projections for the growth impact of the TTIP are from the Centre for Economic Policy Research in London (no connection to my CEPR) which shows the pact leading to an increase in GDP of 0.4 percent in the U.S. when its effects are fully felt in 2027, and 0.5 percent in the European Union. The analysis explicitly says that it will not lead to more jobs since the models are full employment models. It may lead to somewhat higher wages, but it is not a way to employ the unemployed. Furthermore, the discussion notes that in the transition, some workers may end up unemployed as the economies adjust to the new rules.

Implying that a deal that raises GDP by 0.4 or 0.5 percent 13 years out means "job-creating opportunities for workers on both continents" is just dishonest. The increment to annual growth is on the order of 0.03 percentage points. Good luck finding that in the data.

In addition, there are reasons to believe the growth effect could go in the opposite direction. The model used by the London CEPR does not assume any negative growth impact from higher prices for drugs or other goods that might be more costly due to stronger patent and copyright protections coming out of the deal.

These will likely be a drag on growth. Economists tend to like patents and copyrights (probably because their friends and family members benefit from them), but that doesn't change the fact that they lead to market distortions and have major economic costs. If the price of a drug rises by 1000 percent because we imposed stronger or longer patent protection it has the same effect in the market as if we imposed a 1000 percent tariff on the drug.

Markets are stupid, they don't realize that the price increase was caused by a policy that economists support in contrast to a trade policy they oppose. They respond the same way in both cases. While we don't know how much increased patent and related protections will raise prices as a result of these deals, but there is no doubt that the direction is up. And that will slow growth in a way that is not accounted for in the CEPR analysis. (Yes, higher prices give more incentive for innovation. If you find evidence that this ends up as a net positive for the economy, you get a Nobel Prize and huge bucks from the pharmaceutical industry.)

Reducing trade barriers can lead to increased economic growth and gains for consumers and workers, however the barriers between the U.S. and Europe are already very low in almost all cases. This means that the potential for further gains are limited. This deal is primarily about imposing a set of regulations on both continents, some of which may be improvements, but many of which will be designed to serve the business interests who are in on the negotiations. They hope to accomplish through a "trade" deal what may not be possible through the normal democratic process. And they won't hesitate to sell this backdoor sleaze as a "job creator."

 
Andrew Sentance Wants Us to Stop Worrying About Deflation Print
Thursday, 29 May 2014 13:54

Andrew Sentance, a former member of Bank of England's Monetary Policy Committee, wrote in the Financial Times that we should stop worrying about deflation. He actually is at least partly right.

Sentance distinguishes between what he calls "chronic" deflation, "benign" deflation, and "price adjustment." He says that we need only worry about the former, a process whereby price declines become self-perpetuating, much as an inflationary spiral can become self-perpetuating. He writes that in this situation people may put off purchases and the real value of debt increases, both of which reduce demand and therefore put further downward pressure on prices. 

Sentance argues that we have little basis for fearing this sort of deflation. He is right. We have not seen this sort of deflationary cycle in any wealthy country since the Great Depression. Even in Japan the periods of deflation were relatively brief, with the rate of price decline almost always less in absolute terms than -1.0 percent.

However it does not follow from this fact that a low rate of inflation is not a problem. The low rates of inflation across Europe mean that real interest rates are much higher than would be desired in a weak economy. Given the high unemployment rate across the euro-zone, a standard Taylor rule would imply a negative real interest rate on the overnight rate of at least -3.0 percent. However with an inflation rate of just 0.7 percent, the European Central Bank can only get the rate down to -0.7 percent with standard monetary policy.

The debt burdens on homeowners and governments are also much greater than would be the case if inflation was eroding the real value of debt at the rate of 2.0 percent a year, or even better at a 3.0 percent or 4.0 percent annual rate. Since most of the outstanding debt was contracted when the inflation rate was higher and expected to remain higher, the lower than expected rates of inflation that countries are now experiencing amounts to a windfall transfer from debtors to creditors. 

More rapid inflation would also facilitate the price adjustment process that is necessary to restore balance within the euro zone precisely because we are unlikely to see the sort of deflationary spiral that Sentance dismisses. The new zero inflation rate in Germany and other core countries means that the peripheral countries can only adjust very slowly with modest rates of deflation. If the core countries had inflation rates of 4.0-5.0 percent, the adjustment could be much quicker.

And Europe is paying an enormous price for this slow adjustment. According to the I.M.F. every country in the euro zone is operating well below its potential GDP with the exception of Malta. In Greece the output gap is almost 10 percent, but the I.M.F. calculates that even core countries like Austria and the Netherlands have output gaps. In these cases, the estimated gaps are 0.9 and 4.7 percent, respectively.

Furthermore, these gaps are measured against sharply lowered estimates of potential GDP. If the I.M.F.'s pre-crisis projections are used as the basis for calculating potential GDP then almost every country in the euro zone would be looking at an output gap of more than 10 percent of GDP. (By comparison, we are supposed to believe that the Transatlantic Trade and Investment Pact, which is projected to raise GDP by 0.5 percent by 2027, is a big deal.)

This suggests that all is seriously not well in the euro zone and that a higher rate of inflation could be an important part of the cure.

 

 
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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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