CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press

Beat the Press

 facebook_logo  Subscribe by E-mail  


Higher Interest Rates Lead to More Investment Print
Friday, 20 June 2014 05:41

That appears to be the central claim of Kevin Warsh and Stanley Druckenmiller in a Wall Street Journal column criticizing the Fed's asset buying program. The central claim appears to be that because asset prices have been rising, companies have been discouraged from undertaking productive investment. While Warsh and Druckenmiller are certainly right that the asset buying program has had limited benefits for the real economy, it doesn't follow that the economy would be stronger without it.

First, they misrepresent the wealth situation when they tell readers:

"The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion. That's more than $26 trillion in wealth added since 2009."

The sharp rise in wealth since 2009 was due to a sharp plunge in the financial crisis. The notion of a "record" is misleading since the economy is growing we expect wealth to continually hit records. The ratio of wealth to GDP was 4.78 in the first quarter of 2014. By comparison, it was 4.86 for 2006. The Fed's policies have simply brought the ratio of wealth to GDP back to pre-recession levels.

More importantly, Warsh and Druckenmiller seem to turn causality on its head when they say:

"Meanwhile, corporate chieftains rationally choose financial engineering—debt-financed share buybacks, for example—over capital investment in property, plants and equipment."

Low interest rates encourage corporations to invest in stock rather than bonds. If interest rates were higher, then presumably they would do the opposite. Low interest rates (and high stock prices) make it easier to borrow to finance capital investment in property, plants and equipment. It is hard to imagine why they think firms would be investing more, if it cost them more money to make these investments.

 

 

 
NYT Whitewashes German Right-Winger Print
Friday, 20 June 2014 04:03

The NYT ran a piece profiling former IBM executive and Bank of America adviser Hans-Olaf Henkel, who is now head of a German anti-euro party. While it discusses much of his background in business and politics, it neglected to mention his efforts to blame the U.S. housing bubble and financial crisis on anti-discrimination laws. Specifically, he attributed the crisis to the 1977 Community Re-investment Act (CRA), which prohibited banks from discriminating based on the racial compensation of a neighborhood and required them to invest in the areas from which they were drawing deposits.

As Henkel described the problem:

"Mr. Galbraith [University of Texas economist James Galbraith] should familiarize himself Jimmy Carter's "Housing and Community Development Act" where in Section VIII Banks were prohibited the practice of "red lining" which until then enabled them to distinguish 'better living quarters' and 'slums.'"

This tidbit would seem to provide an important insight into Mr. Henkel's background that deserves to be noted in a profile.

As a practical matter, Henkel's claim about the CRA is absurd on its face. Much of the sub-prime lending of the bubble years was done by financial institutions that were not  covered by the CRA to areas that would not be covered. Huge subprime lenders like Ameriquest, Countrywide, and New Century mostly raised their money on Wall Street, not from bank deposits and therefore were not subject to CRA regulation. Furthermore much of the lending was to newly built exurbs that would not be covered by the CRA, which was intended to protect inner city neighborhoods.

The subprime loans were made for the old-fashioned reason, they were hugely profitable. Bankers don't need government bureaucrats to tell them to make money.

 
Contrary to Neil Irwin, "We" Are Not All Crony Capitalists Print
Thursday, 19 June 2014 13:48

Neil Irwin is trying to implicate the rest of us in his desire to subsidize Boeing and other big corporations through the Export-Import Bank. The Ex-Im Bank provides below market loans to select projects in order to help make sales in both directions. Irwin tells readers the debate over the bank provides:

"A fascinating case study in how modern economies really work, and the ways big business and big government are inevitably intertwined in ways that believers in free markets may not like — but may not be able to avoid. In short, we’re all crony capitalists, whether we like it or not."

Irwin argues that all foreign governments have similar sorts of subsidies for their businesses and that we would be operating at a serious disadvantage if we didn't subsidize our business deals.

There are two points worth noting on Irwin's argument. First, it goes directly against free trade 101. Remember how we call autoworkers and steelworkers Neanderthal protectionists if they support tariffs or quotas to keep their jobs? The argument that is the basis for dismissing these workers' efforts at protecting their livelihoods is the same argument that would be used against the Ex-Im Bank. (Other countries provide subsidies to their auto and steel industry also. In the standard trade models it doesn't matter.)

When Irwin tells us that we have to be crony capitalists "whether we like it or not," why don't we also have to be crony protectors of workers' livelihoods? It seems that there is a very fundamental inconsistency here. When it comes to business interests we are prepared to throw the economics textbook theory in the garbage, but when the question is worker's jobs, that textbook is the bible.

The other point worth noting in reference to Irwin's argument is the logic of the textbook story itself. The logic is that if we lose jobs in the steel or auto industry we will get jobs in other sectors that will offset these losses. This is not an absurd argument, although the new jobs are not likely to help the auto or steel workers. In the case of business as a whole, the argument would be that if we don't subsidize loans to favored businesses through the Ex-Im Bank, then we would sell less overseas. This would lead to a fall in the value of the dollar which would make our unsubsidized exports more competitive internationally and make our domestically produced goods cheaper relative to imports. In principle this market determination of winners and losers is more efficient than the government's designation through the Export-Import Bank.

People can come to different conclusions about the value of the Ex-Im Bank, but it is inconsistent to claim to be a free trader and to support the Bank. Anyone who supports the Bank is clearly willing to have the government subsidize certain businesses. If they claim support for free trade is the reason they don't care about losing auto or steel jobs to foreign competition, they are not being honest.

 
The Good News About Argentina's Economy Is That It Is Nowhere Near As Bad As Reuters Wants You to Believe Print
Wednesday, 18 June 2014 16:17

Reuters wants its readers to believe that "analysis-wary Argentines" are disgusted with their government's economic policies as "jobs [are] becoming harder to find." While there is little doubt that Argentina is experiencing difficult economic times, it certainly is doing much better than countries that have followed an austerity path, like Greece, Spain, and Portugal, all of which are experiencing double-digit unemployment rates.

In fact, Argentina's 7.6 percent unemployment rate is less than half of its own double-digit rates in the mid-1990s. Back then we were told that Carlos Menem was re-elected based on the success of his economic reforms.

 
Real Wages and May Inflation Print
Wednesday, 18 June 2014 04:37

In the NYT's Upshot section Neil Irwin correctly notes that real wages have been nearly stagnant in the recovery, however he makes too much of the inflation numbers from the last couple of months. The Bureau of Labor Statistics reported that inflation rose 0.3 percent in April and 0.4 percent in May. These increases were enough to wipe out modest real wage gains reported in prior months so that the average hourly wage has now fallen slightly over the last year, adjusted for inflation.

While this is bad news, it is wrong to make too much of the drops reported for April and May, as opposed to the modest growth reported in prior months. The higher inflation reported for April and May were largely attributable to unusually large price increases for food and energy. These prices are highly erratic and are likely to be reversed in the months ahead. (Food prices rose at close to a 6.0 percent annual rate over the last two months, compared to a 2.5 percent rate over the last year. Energy prices rose at more than a 7.0 percent rate compared to a 3.3 percent rate over the prior 12 months.)

If these price rises are reversed in the months ahead, which is likely, then we will be back on the path of very weak real wage growth. It will still be the case that workers are seeing very little of the benefit from the recovery, but the number will not be zero.

 
Aid to the Poor Did Not Grow Relative to GDP Print
Wednesday, 18 June 2014 04:05

Thomas Edsall had an interesting piece in the NYT that discussed the shift of aid to the poor from people who are very poor, unmarried, and non-working to the near poor, married, and working. At one point the piece refers to a comment from economist Robert Moffitt that spending on poverty programs increased by 74 percent from 1975 to 2007, after adjusting for inflation. This may have led readers to believe there was an increasing commitment to combat poverty over this period. In fact, since GDP increased by 176 percent over the same years, there was a substantial decline in poverty spending measured as a share of GDP over this period.

 
Is Uncertainty Delaying Hiring or Is This Just Another Make Work Project for People Who Write About the Economy? Print
Tuesday, 17 June 2014 05:51

For some of us the story of the downturn and the slow recovery is pretty damn simple. The collapse of a huge housing bubble created a big gap in demand that is not easily filled. (Name your favorite demand-filling candidates. You have consumption, non-residential investment, residential investment, government spending, and net exports -- that's all folks.) Since there was no plausible story whereby the economy could quickly fill this demand gap, continuing slow growth and high unemployment is not much of a surprise.

But no one wants to make our leading economists and policy makers look silly, so there is a considerable premium placed on efforts to make the simple story complicated. For example last week we had a discussion in the NYT raising the possibility that the economy's real problem is a skills shortage. Today, Catherine Rampell raises the troubling concern that job openings are up, but hiring isn't. Her conclusion is that firms are reluctant to actually go ahead and hire because of uncertainty about the future. She then lists causes of uncertainty which are supposed to be the cause for the delay. 

Before anyone gets too concerned about the bad effects of uncertainty on the economy, let's look at the data a bit more closely. We get our data on job openings from the Job Openings and Labor Turnover Survey (JOLTS). If we look at the most recent release and go over to the right two sets of columns we find "total separations." These are the workers who leave their jobs by quitting, layoffs, or firing. The survey shows that this number was roughly 4.5 million in the most recent month.

This is important because it means that over a six-month span we would anticipate that roughly 27 million workers will leave their job. That's a bit less than 20 percent of total employment.(The actual share will be somewhat less since some jobs will come open more than once.) This is noteworthy because it would suggest that most firms need not be too troubled about uncertainty in making a hire today since they are likely to see a substantial portion of their workforce leave in the near future in any case. In other words, if they hire someone who it turns out they didn't really need, odds are that someone will leave in the near future so they will need this worker.

This is especially true in sectors like retail and restaurant employment which have a disproportionate share of the job openings. The turnover rate in retail is 4.8 percent, which means that close to 30 percent of jobs will come open in the next six month. In restaurants the turnover rate is 5.4 percent, meaning close to one-third of the jobs will come open in the next six months. This suggests that an employer is not taking much of a risk by hiring in this time of uncertainty.

Read more...

 

 
Robert Samuelson Looks to the Stock Market to Get Guidance About the Direction of the Economy Print
Monday, 16 June 2014 08:36

Robert Samuelson agreed to be a punching bag again this morning. His column expressed his concern that the stock market and bond market are going in opposite directions. While the stock market has been rising, which in his view is supposed to mean a stronger economy, interest rates in the bond market have been falling which is supposed to mean a weaker economy.

There are two major flaws in Samuelson's conundrum story. The first is that the stock market is a horrible indicator of the future. Remember when the market plunged back in 2006 giving us advance warning of the economic disaster that would follow from the collapse of the housing bubble? Oh right, the market rose through 2007 and hit a new nominal high in late October of that year, just over a month before the beginning of the recession.

And of course there was the crash in 1987 that foretold of the ensuing recession that didn't happen, or at least not for another two and a half years (after the market had fully recovered). Given the weak relationship between the market's performance and the future state of the economy, it is difficult to believe that anyone would look to the former as predictor of the latter.

The other point is that even in theory the stock market is not supposed to be a predictor of the economy. The stock market is supposed to represent the present value of future profits. In recent years the profit share of output has been extraordinarily high. A likely reason for the surge in profit shares is the weakness of the labor market. If the economy were to get stronger the unemployment rate would fall to more normal levels. This would increase workers' bargaining power and likely lead to a drop in profit shares. This means that if traders in stock anticipated stronger growth, it could be associated with a drop in stock prices since the decline in profit shares would more than offset the higher profits associated with higher GDP.

In short there is no reason, either based on past evidence or in economic theory, that higher stock prices should be taken as implying stronger economic growth. This is another great non-conundrum to keep economic policy types in Washington employed.

 

 

 
Does the Right Hold the Economy Hostage to Advance Its Militarist Agenda? Print
Saturday, 14 June 2014 06:35

That's one way to read Tyler Cowen's NYT column noting that wars have often been associated with major economic advances which carries the headline "the lack of major wars may be hurting economic growth." Tyler lays out his central argument:

"It may seem repugnant to find a positive side to war in this regard, but a look at American history suggests we cannot dismiss the idea so easily. Fundamental innovations such as nuclear power, the computer and the modern aircraft were all pushed along by an American government eager to defeat the Axis powers or, later, to win the Cold War. The Internet was initially designed to help this country withstand a nuclear exchange, and Silicon Valley had its origins with military contracting, not today’s entrepreneurial social media start-ups. The Soviet launch of the Sputnik satellite spurred American interest in science and technology, to the benefit of later economic growth."

This is all quite true, but a moment's reflection may give a bit different spin to the story. There has always been substantial support among liberals for the sort of government sponsored research that he describes here. The opposition has largely come from the right. However the right has been willing to go along with such spending in the context of meeting national defense needs. Its support made these accomplishments possible.

This brings up the suggestion Paul Krugman made a while back (jokingly) that maybe we need to convince the public that we face a threat from an attack from Mars. Krugman suggested this as a way to prompt traditional Keynesian stimulus, but perhaps we can also use the threat to promote an ambitious public investment agenda to bring us the next major set of technological breakthroughs.

 
Why Do Calls for Immigrants Never Include Doctors? Print
Friday, 13 June 2014 05:22

The Washington Post had a pitch for allowing more high-skilled immigrants into the country, arguing that by allowing more foreign software engineers into the country we would create more jobs. While there may be some possible gains here, it is worth noting that the wages of stem workers have been flat since the late 1990s. (Also, it would be easier to be sympathetic to the demands of the tech industry if they had not conspired to hold down their workers' wages.)

However it is striking that with all the efforts to bring in more immigrants to work in tech jobs no one ever talks about bringing in more immigrant doctors. The potential gains to the economy are enormous since our doctors receive far higher compensation than their counterparts in other wealthy countries. (The linked comparison understates the actual difference in physician compensation since more than 70 percent of our doctors are specialists, whereas the share in other countries is closer to 30 percent. The greater use of specialists has little obvious benefit in outcomes, it more likely indicates rent-seeking as specialists can enforce rules requiring their services for procedures for which primary care physicians are fully qualified.) 

The fact that we see so much discussion of easing immigration to bring in more software engineers as immigrants and none on doctors presumably reflects the power of the tech sector in getting items on the national agenda and the power of the physicians' lobbies in keeping items off the national agenda.

 
<< Start < Prev 21 22 23 24 25 26 27 28 29 30 Next > End >>

Page 21 of 390

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

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.

Archives