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Republican Presidential Candidates Want to Build Keystone Pipeline to Reduce Unemployment by 0.01 Percentage Points Print
Monday, 17 October 2011 04:27

The Washington Post told readers that jobs have become a big factor in the Obama administration's decision on building the Keystone pipeline, which would allow tar sands oil from Canada to be shipped across the United States. According to the article the pipeline has become a big cause among the Republican presidential candidates because it would generate 20,000 short term jobs in an economy with 9 percent unemployment.

The labor force is slightly over 150 million people. This means that the 20,000 jobs created by the construction of the pipeline would reduce unemployment by slightly more than 0.01 percentage points. This context would have been helpful for readers.

Steve Rattner Gets It Wrong on Globalization in the NYT Print
Sunday, 16 October 2011 10:20

Wall Street financier Steve Rattner gets just about everything wrong on globalization in a column in the NYT yesterday. He argues that the country will continue to lose manufacturing jobs, since we can't compete with low paid workers in the developing world. He argues that instead we should focus on highly-paid service sectors like software, entertainment and finance. Remarkably, he never once mentions either the trade deficit or the value of the dollar.

The reason why the United States has lost so many manufacturing jobs to trade is because that has been an explicit goal of U.S. trade policy. Trade agreements like NAFTA were deliberately designed to place U.S. manufacturing workers in direct competition with low-paid workers in the developing world. In these circumstances the predicted and actual result is a loss of manufacturing jobs and a drop in wages for the jobs that remain.

This was not a pre-determined outcome. Trade agreements could have been structured to put doctors and lawyers and other highly paid professionals into competition with their counterparts in the developing world. There is no shortage of intelligent people in countries like Mexico, India, and China who would be happy to train to U.S. standards and learn English, if this would give them an opportunity to work as professionals in the United States.

However, we did not design our trade deals to facilitate the flow of foreign professionals into the United States, we designed them to put downward pressure on the wages of U.S. manufacturing workers. In this story the difference between autoworkers and doctors is that autoworkers were smart enough to know that they needed protection, but not powerful enough to get it. Doctors were too dumb to know that they needed protection, but powerful enough to get it.

The trade deficit and the value of the dollar are central parts of this story because the U.S. is currently running a trade deficit that is equal to 4 percent of GDP and would rise to closer to 6 percent of GDP if the economy were at full employment. This is not sustainable unless we think that countries will give us their products for nothing indefinitely. Since that is difficult to envision, the dollar will have to drop at some point (this is the adjustment mechanism for a trade deficit in a system of floating exchange rates) and we will then export more and import less.

While Rattner envisions that we will actually import even more manufactured goods and presumably pay for this with increased exports of services, any look at the data would show this view to be absurd. The volume of trade in these services is swamped by our trade deficit in manufactured goods. Furthermore, there is no reason to believe that we will be any more able to overcome the enormous gap in wages for our service workers compared to the rest of the world than we could overcome our gap in manufacturing sector wages. The United States already faces a large deficit in computer software with India, which will almost certainly grow rapidly in the years ahead.

In short, Rattner has a completely unworkable answer to a problem that he totally misrepresents. It is inconceivable that the United States will not have a large manufacturing sector in the future with a considerably lower trade deficit in this area than it has today.

[Btw, Rattner is also very misleading in his use of statistics. He asserts that the wages of college graduates have risen by 4 percent in the last decade, after adjusting for inflation. This is misleading because it is entirely the result of wage increases for workers with post-graduate degrees. The wages of workers with college degrees but nothing beyond have not risen more than inflation over the decade.]

Thomas Friedman, Bard of the 1 Percent, Reports on the Problem of Incompetent CEOs Print
Saturday, 15 October 2011 19:34

After referring to David Brooks as the "Bard of the 1 Percent," I was assaulted with a barrage of threatening letters and phone calls from representatives of Thomas Friedman who insisted that he holds this title. I will let the two NYT columnists slug it out between themselves and deal with the substance. 

In Sunday's column Mr. Friedman inadvertently warns us about the potential economic risks this country suffers from being run by incompetent CEOs. Friedman recounted a conversation he had with Chicago's new mayor, and former Obama chief of staff, Rahm Emanual. Emanual reportedly told him:

"I had two young C.E.O.’s in the health care software business in the other day, sitting at this table. I asked them: ‘What can I do to help you?’ They said, ‘We have 50 job openings today, and we can’t find people.’ ”

Friedman then goes on to add:

"Doug Oberhelman, the C.E.O. of Caterpillar, which is based in Illinois, was quoted in Crain’s Chicago Business on Sept. 13 as saying: 'We cannot find qualified hourly production people, and, for that matter, many technical, engineering service technicians, and even welders, and it is hurting our manufacturing base in the United States. The education system in the United States basically has failed them, and we have to retrain every person we hire.'"

While Friedman favorably quotes Emanual describing this as, "staring right into the whites of the eyes of the skills shortage," the most obvious shortage of skills in this story is with the CEOs. Competent CEOs know that in a market economy you attract good workers by offering higher wages.

This is known as the principle of "supply and demand." If the demand exceeds the supply, then the price of the item in question is supposed to rise. In this case the item in question is labor. If these companies were run by competent CEOs then they would be offering higher wages in order to attract the workers that they say they need. If they offered high enough wages people would leave competitors to work for their companies. They would also move from other parts of the country or even other countries to accept their job offers. In the long-run more people would train to get the skills needed to fill the positions these employers are offering.

However, there are no major occupational categories that show large wage gains at present. This means that if employers really are having trouble attracting good workers then it must be due to the fact that they don't understand the basics of a market economy. Unfortunately nothing in Friedman's column indicates that Emanual or anyone else is educating CEOs on how they can raise wages in order to attract the workers they need.

It is also worth noting that Friedman implies that the Chicago school system is desperately in need of the reform that Emanuel plans to give it. Emanuel's predecessor as mayor, Richard Daley, also placed an emphasis on reforming Chicago's schools. From 2001 to 2009 he installed Arne Duncan, currently President Obama's Secretary of Education, as head of the Chicago school system. If Friedman and Emanual's complaints about the current state of Chicago's schools are accurate, this would imply that Duncan must not have been very successful in his tenure even though he was widely acclaimed as a reformer at the time. 

Post Does the Old He Said/She Said on Perry Energy Plan Print
Saturday, 15 October 2011 07:24

Texas Governor Rick Perry announced an energy program yesterday that involved drilling everywhere in sight. According to the Post article on the plan, Perry claimed that his plan would create 1 million jobs. In classic he said/she said style the Post told readers:

"Perry predicted his energy plan would create more than 1 million new jobs. Weiss [a researcher at the Center for American Progress] sharply disagrees."

This is utterly useless information for readers. A Washington Post reporter should have the time to talk to some experts on this issue and/or read some of the key articles. Post readers do not have the time. Simply reporting opposing claims that readers have no ability to access is a pointless exercise. Trees died for nothing.

(Perry's claim is nonsense -- it is unlikely that it would in the long-run lead to even 100,000 additional jobs [0.07 percent of total employment]. The short-run effect would be considerably less.)

Does the Post Get Paid to Push Trade Agreements? Print
Friday, 14 October 2011 07:47

One would hope so, since its reporting on the topic is so embarrassing. The paper told readers:

"There have been some compromises on jobs measures this year, as both parties have sought small wins. On Wednesday, Congress approved new trade agreements with Colombia, Panama and South Korea, lowering barriers to American exports."

While politicians from both parties, including President Obama, have called these trade pacts job bills, it would be very difficult to find any economist anywhere who is not obviously on someone payroll who would claim that these deals would lead to any notable number of jobs ever, and certainly not in the next few years. Most analyses show that these deals will have very little impact on jobs and it is entirely possible that they will end up as net job losers in the short-term as has been the case with past trade deals.

The piece also described the repeal of a 3 percent withholding tax on payments to businesses that contract with state and local governments as a jobs measure. This is nonsense. The withholding an effort to increase tax compliance by small businesses who often cheat on their taxes, just like paycheck withholding is an effort to keep workers from cheating. Ending the withholding is a sop to these businesses for political reasons, no one believes that it will create any jobs.

[In response to popular demand, here is the International Trade Commission (ITC) report on the South Korea deal, by far the biggest of the three. It projects that when fully implemented (@ 10 years), it would increase GDP by around $10 billion or approximately 0.05 percent. The ITC projections for trade agreements have generally proven to be overly optimistic.)

Martin Feldstein Strikes Out Again: Big Time Print
Thursday, 13 October 2011 07:41

Harvard economics professor Martin Feldstein, who made himself famous by predicting in 1993 that Clinton tax increases would not raise any revenue, strikes out big time in his proposal for the housing market in today's NYT. He tells readers:

1) House prices are continuing to fall because of the wave of foreclosures;

2) That consumers are not spending because they are losing housing wealth;

3) That a major reason that unemployment is high is that underwater homeowners can't move to place with jobs;

In response, he proposes a plan that could bail out banks from underwater mortgages while leaving millions of homeowners as near indentured servants.

Let's deal with each of these points in turn.

First, house prices are falling for the same reason that the price of Pets.com stock plummeted in 2000. The housing bubble has not fully deflated. If Feldstein bothered to check the data he would know that real house prices are still about 8-10 percent above their long-term trend. Consistent with over-valued prices we see that there is still a near record vacancy rate in housing (topped only by the levels hit in 2010). In other words, the main reason for house prices to decline is simply excess supply. There are certainly areas where foreclosures have blighted communities and thereby caused prices to fall further, but this is not the main story of house price decline.

Second, consumers actually are still spending at an above normal rate. The savings rate out of disposable income is still just 5 percent. This is above the near zero rate at the peak of the housing bubble, but it is well below the 8 percent average of the pre-bubble years. It is strange that Mr. Feldstein appears to be unaware of the lower than normal saving rate (and higher than normal consumption) since he has done a great deal of work on precisely this topic and his original claim to fame was a paper showing that Social Security lower household savings.

We should actually anticipate that savings will increase further when the bubble has fully deflated and, according to Feldstein's pas writings, this would be a good thing. It is striking that he now seems to view saving as bad.

Feldstein's third claim is simply not supporting by any evidence. There have been several studies that examined the extent to which being underwater has prevented job losers from moving to new jobs (including one by John Schmitt and Kris Warner). They all have found little or no effect. People are prepared to leave their homes or two-earner couples separate so that one earner can move to a job. This is simply not a major cause of unemployment.

So Feldstein has no real basis for his claims about the disastrous impact that the housing market is having on the economy. However, his policy solution is a disaster. He proposes to have the government pick up half of the loss on seriously underwater mortgages. In exchange, if the homeowner consents, the lender can track them to the ends of the earth for their remaining debt.

There are two really really big problems with the Feldstein plan. First, it is completely voluntary for lenders. This means that they will not take up the deal with people who they think are likely candidates to repay their mortgage. There are many underwater homeowners who are struggling to pay their bills. Feldstein's plan offers them nothing. The bank knows that they will pay, so they will not put their mortgage in the program.

However, there will be more questionable loans that will go into the program. Some of these people may be able to make their payments after the principle write-down. They will then get to live in their home until they move and in all probability never accumulate a dime in equity (but the bank got half of its loss picked up by the government).

Others will take the deal and then find themselves still unable to pay their mortgage -- remember we still have 9.1 percent unemployment and most people in Washington don't seem to give a damn. Under the Feldstein plan the debt will now become a recourse loan, which means that the bank can hound foreclosed homeowners until the day they die for any portion of the mortgage that is not repaid by the sale of the house.

So there you have it, a solution for a non-problem that gives banks tens of billions of dollars for bad mortgages and makes foreclosed homeowners debtors for life. What could be better than that?

Post Pushes Government Versus Market Fairy Tale, Again Print
Friday, 14 October 2011 06:55

The Washington Post likes to tell readers that politics is not really about interest groups fighting to use the government to advance their ends, but rather reflects a difference in philosophy. It did so again today, telling readers that we can't get a jobs plan because:

"each side’s philosophy holds that the other’s is essentially bunk."

The piece continues:

"For the GOP, the big idea is that government is the main problem.

Republicans have proposed to stop new environmental and financial regulations, and lower corporate taxes. Then, the logic goes, a liberated private sector will pull itself off the mat.

For the Democrats, the idea is that government can be the main solution.

Democrats have also called for increases in government spending on roads and bridges, teachers and firefighters. This money, the logic goes, will spark the private sector to begin hiring workers again."

This is a cute exercise in pushing stereotypes, but now let's step back to reality for a second. The vast majority of the money in President Obama's job plan is in the form of tax cuts, mostly cuts in the payroll tax for workers and employers. How exactly does this fit with "government can be the main solution?"

As far as the Republican side, how many Republicans called for ending federal deposit insurance and other supports for the banking system? Republicans have no problem with all sorts of government regulations (e.g. patent and copyright protection) that impose enormous costs on the economy, but disproportionately benefit the wealthy. Their objection is not to government, their objection is to government doing anything to help the poor and middle class. 

The Post should stick to reporting the news and stop trying to pass off its fairy tales about politics in the United States.

WOW! Fracking Added 0.1 Percent to Employment in PA Print
Thursday, 13 October 2011 05:42
That's what NPR told listeners this morning. Although they didn't bother to put the 6,400 new jobs in any context, just reporting that fracking was leading to an employment boom. This piece is a joke, it is the sort of thing that you would expect the industry to run as an ad.
NYT Ignores Division Between Bankers and Democracy on Fed Print
Thursday, 13 October 2011 04:59

The NYT ran a piece on the divisions on the Fed over the future course of monetary policy with some members strongly supported more aggressive measures to boost the economy while others expressed concern about inflation. The piece noted that this division was in evidence in the last two votes by the Fed's Open Market Committee, however it failed to point out the fact that it was closely tied to who appointed the members.

All five of the Federal Reserve Board governors, who are appointed by the president and approved by Congress, voted for stronger action. (Three of these governors are Obama appointees, one is a Bush appointee, and Chairman Bernanke was appointed by both.) The five voting regional bank presidents, who are appointed by the banks in their region, split 3 to 2 against stronger action.

The NYT should have called readers attention to this gap in voting patterns. Banks in general tend to be very concerned about inflation, since it erodes their profits, whereas unemployment does not directly affect banks.

The piece also told readers that deflation can be a problem because it, "can cause buyers to delay purchases, derailing the economy." Actually, the likely rates of deflation that the economy might experience would have little effect in along these lines. For example, if prices were falling by 0.5 percent a year, this would mean that a person buying a $20,000 car could save $100 by waiting a year. This is unlikely to have much impact on their behavior.

The real problem is that inflation is lower than is desired. The drop from an inflation rate of 0.5 percent to a deflation rate of 0.5 percent creates no greater problem that the drop in the inflation rate from 1.5 percent to 0.5 percent. There is nothing magical about falling prices.

Covering Up Protectionism Print
Thursday, 13 October 2011 04:21

The NYT went overboard in covering up the protectionism in the trade pacts approved by Congress yesterday. All three deals substantially increase protectionism in the form of patent and copyright protection. The former will likely increase the price of drugs in the countries partnering with the United States. The distortions created by these protections will reduce real wages and lower output.

For this reason, it is wrong to call these pacts "free trade" agreements, as the NYT did four times in a short piece. It is also inaccurate to say as the NYT does:

"Economists generally predict that free trade agreements, which eliminate tariffs and other policies aimed at protecting domestic manufacturers, benefit all participating nations by creating a larger common market, increasing sales and reducing prices."

This does not follow when protectionist barriers raise the price of a substantial group of products.

[The Post committed the same sin.]

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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.