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Spring Follows Winter, Economies Recover Print
Tuesday, 24 January 2012 05:49

While it didn't quite put it this way, the NYT told readers that President Obama plans to really lower the bar big-time on his economic record. It told readers:

"The president and his advisers are confident their course will lead to a full recovery, though not this year. That long-term prospect has stoked Mr. Obama’s competitive juices, lest a Republican take the White House and with it the eventual credit for economic gains."

Economies generally recover over the long-term unless you do some really really awful economic policies. The real question is how long the recovery takes. If President Obama's track record is so bad that all he can do is say that the economy will eventually recover, then he is in serious trouble.

David Brooks' Ignorance Is Showing Again Print
Tuesday, 24 January 2012 05:30

In his column today David Brooks provided a brief discussion that purports to show that the growing inequality is attributable to a mix of globalization and technology and the moral failings of the working class. A little reflection would lead people to reject both parts of this explanation.

The first claim ignores the way in which deliberate policy shaped globalization. The reason that wages are much lower and the skills expected are much higher  for manufacturing workers than in the past is because it has been government policy to place U.S. manufacturing workers in direct competition with their much lower paid counterparts in Mexico, China and elsewhere. The predicted and actual result of this policy is to reduce the pay of manufacturing workers.

The government could have adopted the same approach to doctors, lawyers, economists and other highly paid professionals. There are many millions of smart hard-working people in the developing world who would be delighted to fill these jobs at much lower wages than their counterparts in the U.S. receive. However, the barriers that make it difficult for these people to work in the United States have not been lowered by recent "free trade" agreements and some have even been increased.

In other words, it was not globalization and technology that led to the upward redistribution of income, it was conscious policy. The vast majority of people in the United States who hold high-paying jobs are able to maintain their income because they enjoy far more protection than manufacturing workers.

Moral turpitude side of this story also has an important economic policy aspect. Parents who work long and erratic hours are likely to find it much more difficult to watch over their children than parents with decent paying jobs with predictable hours. Given the large number of workers, especially younger workers who are likely to be parents of young children, who have irregular employment and irregular hours, it would be surprising if many children were not having serious problems staying focused on their education.

Silliness About New Businesses Print
Monday, 23 January 2012 06:02

Folks in Washington policy circles are go really wild for silly fads: hula hoops, streaking, lava lamps, etc. Okay, I don't know if the policy wonks really got into any of these, but they do fall for silly intellectual fads.

The Washington Post showed this sort of infatuation by printing a column from Steve Case telling us that new businesses were responsible for all the new jobs created in the last three decades. Case concludes from this that we should have policies that foster the growth of new businesses.

This is classic silly logic. New businesses both gain and lose jobs, just as do existing businesses. There is no obvious reason to prefer jobs in new businesses than existing businesses. If we adjust the balance so that we favor new businesses to the detriment of existing businesses, there is no reason to assume that the additional job growth in new businesses will exceed the additional job loss in existing businesses. The fact the new job growth happened to all be in new businesses is irrelevant.

To see this, imagine that all the job growth in the United States over the last three decades had occurred in the South, with the rest of the country just holding its own. It does not follow that if we had tax incentives for businesses to locate in the South, which were paid for with tax increases on the rest of the country, that we would see more overall job growth.

This is the essence of the argument put forward by Case. It makes no sense on its face. Policies toward new business should not be affected by the fact that they are net job creators just as it doesn't make sense to favor a specific region because it is a net job creator.


The 70s Don't Look Like This Downturn Print
Monday, 23 January 2012 05:44

Robert Samuelson tried to explain the Fed's failure to recognize that the collapse of the housing bubble, which had been driving the economy in the last cycle, would lead to a serious downturn. He blamed it on complacency that resulted from the relatively stable growth of the prior quarter century. He compared this to the complacency following the 60s boom that led to the 70s inflation.

The comparison is more than a bit off. In the four years since this downturn began, GDP growth has averaged less than 0.2 percent. (This assumes 3.0 percent growth for the fourth quarter of 2011.) By contrast, growth averaged 3.5 percent from the business cycle peak in 1970 to the peak in 1980. Even if the timing is adjusted to have the 70s end with the trough of the 1982 recession, average growth over this period would still average 2.6 percent. Growth would have to far exceed projections in order to produce a comparable record following the 2008 crash.

It is also important to note that the financial crisis has little direct relevance to the current weakness of the economy. The problem is simply that there is nothing to replace the demand generated by the housing bubble. Consumption is actually unusually high relative to income and investment in equipment and software is back to its pre-recession share of GDP.

Hasn't Anyone at the NYT Heard of Exchange Rates? Print
Sunday, 22 January 2012 07:59

The NYT has a lengthy piece on how Apple has outsourced all of its manufacturing operations over the last two decades. This is seen as telling a larger story about the loss of U.S. manufacturing jobs.

Remarkably, the piece never once mentions exchange rates. This is a major determinant of relative prices. If the dollar rises by 30 percent against other currencies, as it did in the late 90s, then it becomes 30 percent more expensive to produce goods in the United States relative to other countries. This rise in the value of the dollar was the major factor behind the explosion in the trade deficit at the end of the 90s and at the beginning of the last decade.

The dollar is also supposed to be the mechanism through which trade is rebalanced. Large trade deficits are supposed to cause currencies to fall in value. This leads their deficits to move back toward balance. This has not happened to any significant extent with the United States in the last decade in large part because foreign governments have placed a high priority on accumulating large amounts of dollars, buying up trillions of dollars of U.S. government debt and other dollar denominated assets. If the dollar were allowed to fall to a level consistent with more balanced trade, then many manufacturing jobs would return to the United States.

The piece also treats the issue as one of being whether middle class manufacturing jobs can exist in the United States and be competitive. The United States is no more competitive with higher paying professional jobs, like doctors and lawyers. The main difference is that these are politically powerful groups who manage to maintain barriers that make it difficult for foreign professionals to come to the United States.

If the government had made the same commitment to eliminate barriers to foreigners in these professional services, it is likely that the pay of doctors, lawyers, and other highly educated professionals would be half or less of what it is today. The issue here is not one of skills, it is one of relative political power. The NYT should have presented the voice of someone who could have made this point.

The article also claims that the United States has a shortage of well-trained manufacturing workers. This assertion is contradicted by the fact that there is no large group of manufacturing workers for whom wages are rising rapidly, which would be the case if there were really a shortage.

A Moving Story in the NYT Magazine Print
Sunday, 22 January 2012 06:05

Actually the story is that people are not moving. Adam Davidson had a piece noting the sharp decline in the percentage of the population that is moving out of state each year.

While the share of movers has fallen sharply, there are two important points about the data worth noting. First, there has been a downward trend in share of interstate movers in the population since the late 70s. There is an obvious reason for this: the aging of the population. People are most likely to pick up and move when they are in their 20s or early 30s. Interstate moves are much rarer when people have family and community roots later in life. With baby boomers now mostly in their 50s and 60s, we would expect to see a lower rate of moving than when they were in their 20s and 30s.

The other notable item in the graph is that the rate of movers appears to drop off in every downturn. It slows in the recession in the mid 70s, the early 80s and the early 90s. This suggests that there is a strong cyclical component to moving. While more people find themselves without jobs in a downturn, they need somewhere that is creating large numbers of jobs to justify a move. At the moment, there is no large geographic location that fits the bill. (North Dakota, with its labor force of 370,000 doesn't count.)

At this point, it is not clear that the reduction in movers is any more than we should expect given the aging of the workforce and the severity of the downturn, as opposed to an underlying structural problem. It is worth noting that being underwater in a mortgage does not appear to be an important factor. It seems that families may separate or rent out homes if they need to move out of state to get a job.

Thomas Friedman Wants Us to Follow Greece Print
Sunday, 22 January 2012 05:45

At least he does when it comes to restructuring our Social Security system. One of the widely ridiculed features of Greece's social welfare system was a differential retirement age for the public pension system that made the qualifying age for their Social Security system dependent on a worker's occupation. According to a widely repeated account hair dressers could retire at age 50.

The co-chairs of President Obama's deficit commission, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson proposed that the U.S. adopt a similar system of occupation specific eligibility ages to go along with its proposal to raise the normal retirement age to 69. (Friedman wrongly attributes the plan to the commission as a whole, when he endorsed it in his column. The commission did not approve a plan.)

The Bowles-Simpson plan would also sharply cutback benefits for middle income workers like school teachers and firefighters in future decades. It would also immediately change the annual cost of living adjustment formula so that benefits would reduced be by 0.3 percentage points annually compared with the current formula. Their plan would reduce benefits by 3.0 percentage points after workers have been retired 10 years and 6.0 percentage points after workers have been retired 20 years. In case we don't think this is a sufficient sacrifice from retired workers, the Bowles-Simpson plan also proposes sharp cuts in Medicare that are likely to lead to much higher health care costs for the elderly.

Interestingly, in spite of his concern about competitiveness, Friedman never discusses the value of the dollar. The over-valued dollar is the main factor in the country's trade deficit. A lower valued dollar makes U.S. goods more competitive by making imports more expensive for people in the United States and our exports cheaper for people living in other countries. For some reason, he never mentions the over-valued dollar in his piece.

Educating Steven Rattner on Government Debt Print
Sunday, 22 January 2012 05:14

Steven Rattner remains convinced that handing future generations trillions of dollars of government bonds imposes a burden on them and is very unhappy that I don't see things that way. Let's try this one more time.

Let's say that we add $10 trillion to the national debt over the next decade. We'll assume that it is owned domestically. That is of course not true, but the foreign ownership of debt is determined by our trade deficit, which in turn depends on the value of the dollar, not the budget deficit. Furthermore, no one is disputing that foreign ownership of U.S. assets (either government debt or private assets) will be a drain on the economy.

At some future point, everyone who owns this debt today will be dead. They will have no choice but to hand this debt on to members of the next generation, either their own heirs or someone else's. (Note, contrary to Mr. Rattner's assertion in his original NYT piece, the debt does not disappear, the ownership is transferred. [Sorry Mr. Rattner, you don't get the $1 million prize.]) This means that future generations will be both paying and receiving debt service on $10 trillion of debt. How is this a burden on future generations as a whole?

Again, the taxes needed to pay the debt service do imply distortions, but the distortions will not be anywhere near the size of the debt. Furthermore, there are all sorts of distortions in the economy, many of which could be much larger, that we never think of as imposing a burden on future generations.

The most obvious are patent and copyright protections. By virtue of these government-granted monopolies, we force people in the future to spend hundreds of billions more per year to buy protected products like prescription drugs and computer software than they would pay in a free market. The additional costs associated with these protections have the same impact on the economy as a tax of the same size. Why are deficit hawks like Rattner completely unconcerned about the implicit tax burden of patents and copyrights that we are imposing on our children?

There is one other logical point where Mr. Rattner needs some education. I had suggested that the Fed could just hold the $3 trillion in assets currently on its books. In this case the interest on the debt is paid to the Fed and is refunded right back to the Treasury. Where is the burden on our kids?

Rattner responds by favorably quoting a blog commentator:

"You don’t know what the Fed will do or be able to do in the next generation."

Of course I don't know what the Fed will do, but this is a matter of public policy. Congress could mandate that the Fed will hold $3 trillion in assets and refund the interest to the Treasury. The Fed can raise reserve requirements (the favored tool of China's central bank) to stem any inflationary impact from this decision. The point of raising this issue is that this is one way that we can issue debt today and impose no debt service burden on future generations. The debt service is paid from the government to the government. That's pretty straightforward, isn't it?

Where Does Ezekiel Emanuel Get His Wage Data? Print
Saturday, 21 January 2012 22:29

Ezekiel Emanuel told readers of the necessity of controlling health care costs in order to allow workers to see real wage growth and to free up spending for other areas of the budget. To make this case he comments:

"During those 30 years [1980-2010], the only sustained period when real hourly earnings increased was 1990 through 1998 — which coincided almost exactly with a period of unusually low increases in health care costs."

That is not what the data from the Bureau of Labor Statistics show. In fact, there was essentially no real wage growth from 1990 to 1996. However, wages grew at a healthy rate from 1996 to 2001. The major factors behind the stronger wage growth of the late 90s were the uptick in productivity growth beginning in the middle of 1995 and the low unemployment rate in the years 1996-2001.


Source: Bureau of Labor Statistics.

It is also worth noting that in discussing ways to control costs, Emanuel never mentions increased trade. Every other country in the world pays far less for their health care than the United States even though they have comparable outcomes. This suggests the possibility for large gains from more trade. Unfortunately, discussions of health care policy are dominated by protectionists who do not want to see the industry exposed to increased international competition.

Would Mrs. O'Grady Be an Outstanding Teacher In Nicholas Kristof's Evaluation System? Print
Saturday, 21 January 2012 22:09

Nicholas Kristof used his column Sunday to tell readers about how an exceptional teacher, Mildred Grady, had made a huge difference in the life of a young African American boy. According to Kristof, Ms. Grady saw the boy, a known trouble-maker, steal a book from the library. Instead of turning him in, she bought several other books by the same author, which the boy subsequently stole from the library and read. As a result he became attached to reading. He went to college and then law school and went on to become a judge.

Kristof uses the example to explain the importance of good teachers. He argues that we need regular evaluations, with the teachers who score well getting big pay increases, and those who score poorly getting fired.

However, we do not know how Ms. Grady would have performed on the evaluations advocated by Kristof. It's possible that she would not have done very well under this system. That is especially the case if other less conscientious teachers focused on teaching to the exam, while she spent more effort trying to make an impact on the lives of her students.

It is entirely possible that Ms. Grady would not be one of the teachers rewarded under the system advocated by Kristof. In fact, such a system of evaluation could even drive dedicated teachers like Ms Grady away from the profession.

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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.