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Unemployment Insurance Claims Did Not Exactly Fall Print
Friday, 20 April 2012 04:14

In its top of the hour news segment, Morning Edition told listeners that weekly unemployment claims fell last week (sorry, no link). This is sort of true, since claims were reported at 386,000 compared to 388,000 the prior week.

However the more important news here was that this was the second consecutive week in which claims were above 380,000 after hovering near 360,000 for the last two months. The number from two weeks ago was also revised upward with the release of yesterday's data from 380,000 to 388,000. Almost every report in the last year has been revised upward the following week.

In this context, the latest release was not good news about the state of the economy.

U.S. Imports from China Hit a New Record Print
Thursday, 19 April 2012 05:06

Remarkably this fact did not appear in a Washington Post article discussing U.S. trade with China, which did find room to tell readers that:

"But U.S. exports to China, whose growing affluence has increased the appetite for American goods, are now reaching record levels."

While it is true that exports to China have reached a record high, this is true of imports as well, if we compare the same months of 2012 with the corresponding months of 2011. (In other words, we are controlling for seasonal effects.) The failure to note the record level of imports is especially surprising since our imports from China matter much more than out exports to China.

We are importing goods and services from China at the rate of more than $400 billion a year, whereas our exports are just a bit over $100 billion a year. This means that imports have close to four times the impact in reducing growth and employment as exports have in the opposite direction.

In discussing the issue of the relative value of the dollar and the Chinese currency it would have been useful to point out that important interests in the United States do not want to see China increase the value of the yuan. For example, Walmart has devoted considerable resources to developing a low-cost supply chain in China and other developing countries. This gives it an enormous advantage over its competitors.

Walmart is not anxious to have this advantage eroded by an increase in the value of the yuan relative to the dollar.  The same is true of many companies that have established manufacturing operations in China for the purpose of exporting goods back to the United States and other countries.

This means that the debate over the relative value of the yuan and the dollar is not simply a debate between China and the United States. It is also a debate that pits different groups in the United States against each other. 

The NYT Doesn't Like Argentina's Decision to Nationalize Repsol Print
Thursday, 19 April 2012 04:19

It seems that the NYT disapproves of the decision by Argentine president Cristina Kirchner to nationalize YPF, the country's major oil company. At least that would be the impression of an article on reactions to this decision.

The article begins by telling us about a "fiery" speech in which Ms. Kirchner justified her decision to nationalize the company, which is currently owned by Repsol, a Spanish oil company. The piece concludes with a critical comment from Daniel Altman, who is identified as "an expert on Argentina’s economy at the Stern School of Business at New York University." Altman is probably better known as a former New York Times business reporter, who did not specialize in coverage of Latin America.

In between the article gives us the views of many people who do not approve of the decision, although the article does point out that the company was just privatized back in the 90s and also that most other Latin American countries with substantial energy resources have a state owned oil company.

The article includes a bizarre paragraph telling readers:

"Yet in Brazil, where Petrobras’s achievement of energy independence and huge offshore oil discoveries have made it a model for oil companies in other developing nations, the YPF expropriation served as an opportunity to draw important contrasts with the situation in Argentina.

"As recently as 2000, Brazil still relied on oil imports from Argentina to meet energy needs, buying about 74,000 barrels of a day from its neighbor.

"Now the tables are turned. Petrobras, through its acquisition of Perez Companc, an independent Argentine oil company, has aggressively expanded in Argentina to the point where concerns have emerged here as to Petrobras’s exposure if Mrs. Kirchner opts to expand her nationalizations."

It is not clear what "important contrasts" readers are expected to draw from this comparison. The piece seems to be describing the operations of a highly successful state-owned oil company which appears to be gaining ground at the expense of the privately-owned company in Argentina. This would be exactly the sort of argument that someone would make to justify the nationalization of YPF, although it is not clear if this is the conclusion the reader is expected to reach.

The reality is that there are examples of successful state-run companies, as this article shows. There are also many examples of poorly run government enterprises, just as there are many examples of poorly run private companies.

Whether or not Argentina will be able to improve the operation of YPF if it carries through the nationalization of the company remains to be seen. While there is evidence that might shed insight on this question, the article does not present any.

In Industrial Production Data, Focus on Manufacturing Print
Wednesday, 18 April 2012 05:17

The Federal Reserve Board's data on industrial production are often badly misinterpreted. The error occurs for two reasons. First, there are often large revisions to the monthly data and second, the aggregate index is often moved by large changes in mining or utility output.

The data for March released yesterday gave us examples of both. Therefore the NYT missed the story when it gave us the ominous news that: 

"A Federal Reserve report showed American industrial output was flat for a second consecutive month in March, held back by a 0.2 percent drop in manufacturing."

While the manufacturing index did show a 0.2 percent decline in March, its February reading was revised up by 0.5 percent. Therefore the March reading stood 0.3 percent from the advanced report for February and 0.6 percent above the February level. The reason that the industrial production index as a whole was flat over this period was a decline in mining output of approximately 3.8 percent. 

Is Thomas Friedman for Real? Print
Wednesday, 18 April 2012 04:34

I would make fun of the part of this Thomas Friedman column that calls for cutting entitlements to put the budget on a sustainable footing (the problem is not "entitlements," the problem is a broken health care system that raises the cost of public sector health care programs like Medicare and Medicaid), but I don't believe this piece is genuine. Yesterday, Atrios proclaimed Thomas Friedman the "Wanker of the Decade," referring to the first decade of his blog's existence.

I suspect some sort of side arrangement. Friedman is clearly trying to publicize this designation by writing exactly the sort of inane centrist, above-the-political-fray column that earned him this award. He can't fool me.

NAFTA and Free Trade Do Not Belong in the Same Sentence Print
Tuesday, 17 April 2012 16:17

[Note: Adam Ozimek wrote to tell me that the headline, "4 politically controversial issues where all economists agree," was not his. Without this headline, the blogpost is not especially objectionable.]

Megan MaCardle turned over her blog to Adam Ozimek to spread some misinformation about NAFTA and trade policy. Ozimek headlines the piece, "4 politically controversial issues where all economists agree." While I'm pretty comfortable with three of the four, the claim that all economists agree that, "the benefits of free trade and NAFTA far outweigh the costs" is highly misleading.

First, NAFTA was not about free trade. First and foremost, it was about reducing barriers that made U.S. companies reluctant to invest in Mexico. This meant prohibiting Mexico from expropriating factories and outlawing any restrictions on the repatriation of profits to the United States.

The agreement did little to loosen the obstacles facing highly-educated professionals in Mexico, like doctors and lawyers, from working in the United States. If the agreement had freed up trade in this area, it could have led to gains to consumers in the tens of billions of dollars a year.

In other areas, like patents and copyrights, NAFTA increased protection by extending the length and scope of these government granted monopolies. Mexico was forced to develop a U.S. type patent system for prescription drugs which led to considerably higher drug prices.

It is easy to see why someone who might in general support free trade would oppose NAFTA. The winners are the businesses that are in a position to take advantage of access to cheap labor in Mexico. The losers are the manufacturing workers in the United States who will now have to accept lower wages or lose their job.

It is entirely possible that an economist could agree that NAFTA did lead to net gains to the country as a whole, even if most people end up as losers (e.g. every worker loses $100 in wages, but Mitt Romney's clique pocketed an additional $50 billion in profit). In this case, she might say the policy was bad in spite of the net gains. (Several of the economists questioned raised exactly this concern.)

The higher costs imposed by higher prices for drugs and other products in Mexico could mean that a full assessment of costs would show Mexico to be a net loser from NAFTA. While tariffs are rarely more than 20-30 percent of a product's price, patents can raise the price of a drug by several hundred or even several thousand percent. The cost to Mexico's consumers in the form of higher drug prices can easily outstrip the small gains that showed up elsewhere. Of course this will lead to higher profits to U.S. drug companies.

Given the predicted distribution of gains, it is entirely possible that a fully informed economist could believe that the losses from NAFTA to the poor and middle class easily swamp the gains to the rich and for that reason oppose the policy. This is not bad economics as the discussion seems to imply.

Or, to put in terms that even an economist could understand, suppose there was a trade deal that completely opened up doctors, lawyers, and economists to international competition, but maintained the protection for everyone else, and hugely increased the protection for autoworkers. It is entirely possible that many economists would oppose this deal. They certainly would not call it a "free trade" agreement.

There is one final point worth making about this exercise. The line "all economists agree" carries much less weight these days because almost the entire economics profession somehow failed to see the $8 trillion housing bubble, the collapse of which wrecked the economy. Tens of millions of people continue to suffer with the loss of their jobs, their homes, and/or their savings as a result of this incredible incompetence.

In the wake of this momentous failure it is understandable that the public would be reluctant to take the advice of economists on economic policy. (Best question to ask an economist: when did you stop being wrong about the economy?) This is unfortunate, since economists really have learned some things from their studies that may not be apparent to everyone.

However, economists will have to earn back the public's trust. As long as economists pay no price in their careers for even the most disastrous failures, this may prove difficult. After all, if there are no consequences to getting things wrong, why would the public believe that economists will get things right? That is a point on which all economists should agree.

He Said/She Said on the Economy at NPR Print
Tuesday, 17 April 2012 06:54

Is today Tuesday? Some people say it is and others say it isn't. It's just so hard to decide.

That is pretty much what NPR told us about President Obama's record in turning around the economy this morning. It cited Alan Blinder, an economist who has served in past Democratic administrations, saying that President Obama's policies helped the economy. It then cited Douglas Holtz-Eakin, who served in the Bush administration and was the chief economic advisor to John McCain saying that his policies harmed the economy.

It would have been helpful to give us the assessment of neutral observers such as the Congressional Budget Office. It also would have been helpful to try to evaluate the claims of the Romney campaign that the stimulus harmed the economy.

NPR reported that the Romney campaign said:

"The president made the recession worse, the statement says, 'by pursuing a series of disastrous, partisan policies that created uncertainty, discouraged investment and stifled job creation.'"

There is a simple claim that can be evaluated here. The Romney campaign says that investment would have been higher had it not been for Obama's actions. This can be evaluated by comparing the path of investment with what might have been predicted absent the bad policies from President Obama.

Investment in equipment and software is currently close to 7.5 percent of GDP. It was 7.9 percent before the downturn in 2007. Given the huge amounts of excess capacity in large sectors of the economy, it is difficult to envision a scenario in which investment would have been much higher than it is today. If the Romney campaign is to be taken seriously in this claim then it should have to present some evidence that would establish its counter-factual as being credible. On it's face, it is not.

This piece also included a very misleading assertion from Holtz-Eakin. Referring to Holtz-Eakin the piece reported:

"He says any president would have acted to stop the economic free fall in 2009. The issue, he says, is the quality of the president's responses."

Actually, the free fall begin in September of 2008. President Bush did nothing to stop the free fall in the last four months of his presidency. Perhaps he would have eventually taken some action to boost the economy had he been in office longer, but given President Bush's track record it is far from clear that any president would have taken action to stop the free fall.

Educating David Brooks on the Budget Print
Tuesday, 17 April 2012 04:57

I enjoy teaching, I used to do it for a living. So I am happy to take on the job of teaching David Brooks about the budget so that he does not consistently embarrass himself in his NYT columns.

Today he is trying to give us a balanced assessment of President Obama's case for his budget. He just puts the facts on the table. Brooks tells us, "I’m not going to pass my own comprehensive judgment on this here."

The problem is that the facts are not quite as Brooks lays them out. To start with, Brooks seems more interested in scaring people than informing them. He tells readers:

"I’ve based that argument on certain facts. President Obama’s 2013 budget will add roughly $6 trillion to the nation’s debt over the next 10 years. By 2022, Americans will be spending $915 billion on interest payments on the debt alone, a number far larger than that year’s entire defense budget."

That sounds really really bad. After all, $915 billion is a really big number, can we afford that? The way that you look to answer that question is by comparing the spending to the projected size of the economy. GDP is projected to be $24.7 trillion in 2022. The projected interest spending in that year is then 3.7 percent of GDP. That is somewhat higher than 3.3 percent of GDP we hit in 1991, but not hugely so.

Furthermore, if the Federal Reserve Board continued to hold the $3 trillion in assets it has purchased to boost the economy, much of this interest would be refunded to the Treasury. Currently, the Fed is refunding about $80 billion a year to the Treasury, or a bit more than 0.5 percent of GDP. Its interest earnings would be projected to rise when interest rates go higher. (The Fed could raise reserve requirements to offset the potential inflationary impact of the additional reserves in the banking system.)

[ CORRECTION: Brooks is right here. He said "that" year, not "last" year.] Comparing projected interest payments in 2022 to last year's defense spending is a joke. Serious people do not compare nominal sums that are more than a decade apart. This is because serious people have heard of inflation. Hey, we're spending 8 times as much on the military today as we did at the height of World War II. This is true using nominal dollars, but obviously an absurd comparison.]



Japan Has Not Suffered from "Crushing" Deflation Print
Monday, 16 April 2012 05:12

A NYT article that reported on the declining importance of manufacturing to Japan's economy at one point referred to:

"the crushing deflation that has burdened Japan’s domestic economy for nearly two decades."

Actually, Japan has experienced modest inflation rather than deflation for most of the last two decades. Even when prices did fall, the rate of decline has been slow, exceeding 1.0 percent only in 2009, in the wake of the world financial crisis.

Japan, like other countries, suffers from having an inflation rate that is too low. This is a problem because nominal interest rates cannot fall below zero. It would be desirable to have a large negative real interest rate at present (the real interest rate is the interest rate minus the inflation rate), but this is not possible when inflation is a low positive number or a negative number.

The fact that the inflation rate is below zero has no special importance in this story. The decline in the inflation rate from a positive 0.5 percent to a negative 0.5 percent is no worse than a decline in the inflation rate from a positive 1.5 percent to a positive 0.5 percent.

This fact can be seen clearly if we remember that the rate of inflation is an aggregate of tens of thousands of price changes across the economy. When the inflation rate is near zero many of these price changes will be negative, meaning that the prices of some goods are falling. (Computer prices have been falling rapidly in the United States for decades.) When the rate of inflation goes from a small positive number to a small negative number it simply means that the percentage of items with falling prices has risen. It is difficult to see how that could amount to some sort of calamity.

This point is important because the obsession with deflation has been a serious distraction in policy debates. Many have implied that the Fed and other central banks have been successful in their anti-recession policy because they have managed to avoid deflation. This is not true. They have in fact failed because they have not been able to lower the real interest rate as much as would be desirable given the weakness of the economy.

Republicans Show Inability to Understand Arithmetic in Energy Policy Debate Print
Monday, 16 April 2012 04:45

That would have been a reasonable headline for a Washington Post article that told readers that Republicans hope to make the price of gas a major issue in the election. The article says that they hope to blame the rise in the price of gas on President Obama's restrictions on drilling and the construction of the Keystone pipeline.

The Republicans will only have a chance in succeeding in this effort if the media help them deceive voters. The price of oil, and therefore the price of gas, is determined in the world market. Even under the most extreme assumption (e.g. oil companies get to expropriate private property to drill everywhere, with no environmental regulations) it is unlikely that we could increase the world supply of oil by more than 1 percent. 

This could lower the price of oil by 2-3 percent. That means that, other things equal, a drill everywhere policy might reduce the price of gas by 7-8 cents a gallon. If voters knew this simple fact, it is unlikely that the Republican strategy to make gas prices a political issue would have much chance of success.

It is also worth noting that domestic production of oil and gas has increased substantially under President Obama. The main impact of the Keystone pipeline (which would not have yet been operational in any case) would be to equalize gas prices across the country. It would lead to lower gas prices on the East Coast, but higher prices in the Midwest. It is not clear that voters in the Midwest would be upset if they realized that delaying the pipeline has helped keep down the price they pay for gas.

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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.