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COMMERCIAL ANNOUNCEMENT -- "The End of Loser Liberalism: Making Markets Progressive" is now available Print
Monday, 29 August 2011 14:41

You don't have to be ignorant all your life. You can download my new book free.

[Addendum: In reponse to some questions posted, we do not store contributor's information. And, the Bichon on the cover is one of my three dogs. The others are an adorable doberman and a lab shepherd mix. All three are shelter dogs.]

Have the Double-Dippers Been Dipping Too Much? Print
Monday, 29 August 2011 07:46

The Commerce Department just released data showing that real consumption spending rose by 0.5 percent in July. This makes it highly unlikely that growth will turn negative in the current quarter. Consumption is 70 percent of GDP and this figure implies a 6.0 percent annual growth rate.

Of course consumption is not really growing that fast, more likely it is increasing at near a 2.0 percent annual rate, but maybe this number will shut up the arithmetic challenged economists who keep talking about a double-dip recession.

The economy's problem is pathetically slow growth. We should be seeing growth of 5-7 percent as the economy rebounds from the worst downturn of the post-war period. Instead, we will be lucky if growth just keep pace with the growth of the labor force, preventing unemployment rate from rising further.

The implication is that tens of millions of people will remain unemployed or underemployed because of the Wall Street sleazes and the incompetent economists who could not see an $8 trillion housing bubble and still don't know a damn thing about the economy. It's a crime that they still have their jobs.

The Canadian Oil Pipeline: Good for 2 Days Worth of Jobs Print
Monday, 29 August 2011 04:32

Robert Samuelson urged President Obama to support the building of an oil pipeline to Canada which would facilitate the import of oil from Canadian oil sands. One of his arguments is that:

"TransCanada, the pipeline’s sponsor, says the project should result in 20,000 construction and manufacturing jobs. Most would be American, because 80 percent of the 1,661-mile pipeline would be in the United States."

If the pipeline's sponsor's job estimate is taken at face value, it implies that the pipeline would create 16,000 jobs in the United States. This would be less than 2 days of job creation at the late 90s' pace of 3 million a year.

Samuelson also trivializes the impact that this oil would have on greenhouse gas emissions, telling readers that:

"When all these “life cycle” emissions — from recovery to combustion — are compared, oil sands’ disadvantage shrinks dramatically. Various studies put it between 5 and 23 percent."

If we use the mid-point of Samuelson's studies, it implies that this Canadian oil would increase greenhouse gas emissions by 14 percent over the use of other types of oil.

The Post Still Gets It Wrong on Consumption and the Housing Bubble Print
Monday, 29 August 2011 03:54

Students in introductory economics classes learn about the housing wealth effect. The basic story is that consumption depends in part on housing wealth. The size of the effect is usually estimated at between 5 to 7 percent, meaning that for every additional dollar of housing wealth annual consumption will increase by between 5-7 cents.

This effect was very important during the years of the housing bubble. The $8 trillion of housing bubble wealth led to a consumption boom that pushed the savings rate to near zero. With the loss of most of this wealth, it was 100 percent predictable that consumption would fall.

This is why it is surprising that the Washington Post had a front page article complaining about weak consumption and the possibility that pessimistic consumers may throw the country back into a recession. While consumers are undoubtedly pessimistic, consumption is actually somewhat higher than would be expected given the loss of wealth. The savings rate is still hovering just above 5 percent, by contrast its post-war average was over 8 percent until it began to be depressed by the stock and housing bubbles in the 90s and 00s.


Source: Bureau of Economic Analysis.

Savings have fallen first and foremost because most of the $8 trillion in housing bubble wealth that was driving consumption has disappeared since the collapse of the bubble. Consumer sentiment, especially about future conditions, is a very poor predictor of consumption. The most obvious explanation for the weakening of consumption in the second quarter was the surge in oil prices which reduced real incomes. With oil prices falling again in the last two months, most economists expect somewhat of an upturn in consumption in the second half of 2011.

It is also important to note that the article is fundamentally confused about debt and its relation to consumption. Consumer debt is an asset for someone else. To a large extent, the debt of consumers is wealth to other consumers. For example, most mortgage debt sits in mortgage backed securities. These securities are owned by institutional investors (e.g. pension funds, university and foundation endowments) and individuals, either directly or through retirement accounts. The debt only affects consumption insofar as the debtor has a greater propensity to consume out of wealth than the creditor. This explains how consumption can still be unusually high, even though the debt to income levels remain unusually high.

Unless another asset bubble again propels consumption by pusing the savings rate to extraordinarily low levels, the factor that will eventually have to lift the economy is an improving trade balance. This is not a matter of speculation, it is an accounting identity. That means it has to be true.

The Post might give better reporting on these issues if it did not rely exclusively on economists who were unable to see the housing bubble.

Does America Need Manufacturing? What Does Mr. Arithmetic Tell Us? Print
Sunday, 28 August 2011 14:36

The NYT devoted a major Sunday magazine piece to this question. It never raised the most fundamental question, if we buy all our manufactured goods from someone else, how are we going to pay for them?

Our goods deficit is currently running at annual rate of around $800 billion or 5.3 percent of GDP. We have a surplus on services of around $170 billion a year, less than 1.2 percent of GDP. If we lost all our manufacturing, then the deficit on goods would increase by about $1.2 trillion to more than 13 percent of GDP.

What services do we think that we will export to make up this gap? We are rapidly losing ground in many areas. For example in software and computer services we are already a big net importer from India. It is hard to see how this gets reversed any time soon. We do earn a lot of patent licensing fees, but these fees will always be vulnerable to a tide of free trade sentiment. Besides, it is very hard to imagine them rising beyond a couple of percent of GDP as a maximum.

One of our biggest surplus areas is tourism. This raises the prospect that the anti-manufacturing crowd thinks that we are too sophisticated to work in factories, but not to clean toilets and make beds. There is nothing wrong with latter (I have done it as a summer job), but it's not what most folks would consider upscale employment.

The bottom line is that unless we think someone is going to hand us trillions of dollars worth of manufactured goods for nothing indefinitely, then there is zero doubt that America needs manufacturing. It also needs people writing on economic issues who know arithmetic.

[Thanks to Hapa for catching the typo.]

Thomas Freidman Spews Nonsense with Hurricane Force Print
Sunday, 28 August 2011 12:18

Yes, it’s Sunday and Thomas Friedman has another of his whacky big picture columns:

“Now let me say that in English: the European Union is cracking up. The Arab world is cracking up. China’s growth model is under pressure and America’s credit-driven capitalist model has suffered a warning heart attack and needs a total rethink. Recasting any one of these alone would be huge. Doing all four at once — when the world has never been more interconnected — is mind-boggling. We are again ‘present at the creation’ — but of what?”

pretty profound stuff.

Okay, let’s get to specifics. We leave out the Arab world, skip China for a moment, and jump to the European Union. Friedman tells us:

“Farther north, it was a nice idea, this European Union and euro-zone: Let’s have a monetary union and a common currency but let everyone run their own fiscal policy, as long as they swear to work and save like Germans. Alas, it was too good to be true. Large government welfare programs in some European countries, without the revenue to finance them from local production, eventually led to a piling up of sovereign debt — mostly owed to European banks — and then a lender revolt. The producer-savers in northern Europe are now drawing up a new deal with the overspenders — the PIIGS: Portugal, Italy, Ireland, Greece and Spain.”

There is lots of good stuff here. First, the European Union and the euro-zone are not the same thing. There are countries with names like the United Kingdom, Denmark, and Sweden that have been longstanding members of the European Union that are not members of the euro-zone. While there have been some suggestions that heavily indebted countries consider leaving the euro, one would be hard-pressed to find anyone suggesting they leave the European Union.

This is not the only complete  invention in Friedman’s story. The story of the heavily indebted countries as serious overspenders spits in the face of reality. Spain and Ireland were actually running budget surpluses in the years preceding the recession. Italy and Portugal had relatively modest deficits. Only Greece had a clearly unsustainable budget path.

The story of the debt crisis of these countries is primarily the story of the inept monetary and financial policy run by the European Central Bank (ECB) in the years leading up to the crisis. They opted to ignore the imbalances created by housing bubbles across much of the euro zone and the rest of the world. Rather than taking steps to rein in these bubbles, they patted themselves on the back for hitting their 2.0 percent inflation targets. Remarkably, none of these central bankers lost their jobs and the 2.0 percent cult still reins at the ECB.

If there is a crisis in the euro zone it is that a dogmatic cult has seized control of the euro zone monetary and financial policy to the enormous detriment of its economy and its people. And, there is no obvious mechanism through which they can be dislodged. Friedman might have devoted his column to this problem, but it requires far more knowledge of the economy than he seems to possess.

Now let’s get to the China and U.S. problem that Freidman discusses.  Friedman tells us that:

“China’s growth model is under pressure and America’s credit-driven capitalist model has suffered a warning heart attack and needs a total rethink.” To a large extent these are actually the same issue.

The United States has been running large trade deficits ever since the Rubin-Greenspan-Summers clique used their control of the IMF to impose draconian bailout terms on the East Asian countries following the East Asian financial crisis. The result of this action was that countries throughout the developing world began accumulating dollars like crazy in order to protect themselves against ever being in the same circumstances.

Their effort to acquire dollars led to the over-valued dollar (Robert Rubin’s “strong dollar”), which in turn gave us our large trade deficits. Large trade deficits logically imply either large budget deficits or large private sector savings. This fact is well-known to people who know national income accounting, which unfortunately is a tiny minority of those who write about economic issues for major media outlets.

China is one of the countries that has been accumulating massive reserves. If it desires to slow its growth rate (no one other Friedman would call going from 10 percent growth to 7 or 8 percent a crisis), the most obvious mechanism is to raise the value of its currency against the dollar. This will reduce its exports to the U.S. and increase its imports from the United States. That will help boost growth in the United States and reduce its indebtedness. In short, Friedman’s two problems here are in fact one problem with a simple solution.

Finally, Friedman shows a stunning ignorance of arithmetic when he tells readers:

“China also has to get rich before it gets old. It has to move from two parents saving for one kid, to one kid paying for the retirement of two parents. To do that, it has to move from an assembly-copying-manufacturing economy to a knowledge-services-innovation economy. This requires more freedom and rule of law, and you can already see mounting demands for it. Something has to give there.”

Using somewhat more realistic numbers (China is not seeing its population cut in half), let’s say that it is moving from having 5 workers per retiree to 2 workers per retiree over 30 years, a far faster decline than it is actually seeing. China’s output per worker has been increasing a rate of more than 8 percent a year. This means that over a 30 year period, output per worker will increase more than 10 fold.

Suppose our 5 workers are taxed at a 12 percent rate at the start of the period to give retirees an income equal to 70 percent of the typical worker’s after tax income. If we want to maintain this 70 percent ratio, when 2 workers support each retiree, it would take a tax rate of just under 24 percent to maintain this ratio.

Okay, so output per worker has increased by 1000 percent. We have to increase the tax rate from 12 percent to 24 percent. This means that with the higher worker to retiree ratio, the average worker will have a bit less than 9 times the after-tax income (76% of 1000 percent, as opposed to 88 percent of 100 percent) of her predecessor thirty years earlier who only had to support one-fifth of a retiree. If there is a problem here, it is very hard to see it.

So there we have it, Thomas Friedman once again letting his poor grasp of economics and arithmetic invent grand problems where there are none. What would be do without him?

Leonhardt Nails It on the Fed Print
Sunday, 28 August 2011 07:58
David Leonhardt has a great piece outlining the battle over Fed action and the way it is affected by outside pressures. It is well worth reading.
NYT Misleads on Federal Spending with a Seriously Bad Headline Print
Saturday, 27 August 2011 17:10
The headline of an NYT story told readers: "out of debt ceiling fight, some see a bit of stability on federal spending." While the headline might lead readers to believe something like the deal restrained out of control spending, the article says nothing like this. The article is referring to the budget process which has become chaotic since the Republicans took control of the House. It does not focus on the levels of spending, which were projected to fall relative to the size of the economy even before the debt ceiling deal.
Obama Says He Just Found Out How Bad the Economy Was in 2008, Where Is the Ridicule? Print
Saturday, 27 August 2011 08:10

The media love to jump on politicians when they say something stupid or inaccurate about their personal lives.They will fill pages and pages of print, and take up hours on radio and TV, talking about the comment. They will bring on experts (i.e. political reporters and gossip columnists) to tell the public what the gaffe means and why it makes that person inappropriate for elected office.

However they somehow don't get the same urge when a political figure makes an incredibly foolish remark about a policy matter. This is striking because most people are perfectly competent to assess the appropriateness of a statement about a personal matter based on their own lives' experience. In other words, they really don't need the "experts" to tell them how important or unimportant a particular remark is. On the other hand, most people do not have expertise in the various areas of public policy, so they could benefit from having an expert tell them when a political figure makes an especially off the wall comment.

In that spirit, the Washington Post absolutely should have included a heavy dose of expert ridicule when it reported that President Obama said:

“I have to admit, I didn’t know how steep the climb was going to be. Because we didn’t realize — we just found out a week ago that the economy that last few months in 2008 was even worse than we had realized.”

It is true that the Commerce Department just revised down the GDP data to show that the decline at the start of the recession was even steeper than had previously been reported. However, by far the most meaningful measure of the steepness of the climb needed for recovery is the employment to population ratio (EPOP):the percentage of the working age population with jobs. This is reported monthly and is not subject to substantial revision.

President Obama's team always knew exactly how far the EPOP had fallen since the start of the downturn and therefore knows how many people must be put to work to get the economy back to full employment. The lower than previously reported GDP is an interesting piece of information, but tells us almost nothing new about how much ground must be made up. 

The Post should have included the comments of economists ridiculing the idea that President Obama has just now discovered how bad the downturn was. It might even be worth a separate article or two. If the statement is actually true (i.e. President Obama just realized how bad the downturn was) then it is deserving of far more attention than his comment about working class whites being bitter and clinging to gun and religion before the Pennsylvania primary.

NPR Justifies Its $211 Trillion Debt Scare Print
Friday, 26 August 2011 15:11

It is the media's responsibility to inform the public about the key issues affecting their lives. One of the key issues is the economy. At the moment more than 25 million people are either unemployed, involuntary working part-time, or have given up looking for work altogether. The reason is that the folks running the economy somehow could not see the $8 trillion housing bubble that eventually collapsed and took the economy down with it.

One way to get people back to work is government stimulus. This could be spending on various items, it could be tax cuts, or it can (and usually is) some mix. However, stimulus does cause deficits. This brings us to an NPR story that told us the real debt was not the widely advertised $14.3 trillion debt subject to the debt ceiling, but rather $211 trillion.

The implication is that we shouldn't be worried about putting people back to work, we should be worried about cutting the deficit. And by the way, that may also mean taking an ax to Social Security and Medicare.

I blogged on this story when it ran a couple of weeks ago and called it cesspool journalism. The reason is that it's only purpose could be to frighten people about the deficit. It could not possibly be to inform since it is almost inconceivable that anyone hearing or reading this story would have any clue of how this $211 trillion debt figure was derived.

The methodology used for the calculation is obscure and used by almost no one except Lawrence Kotlikoff, the economist who developed it, and a few of his former students. For example, the debt figure is based on the assumption that no one not currently in the work force ever pays taxes. It also conceals a projected explosion in private sector health care costs whereby it will cost an average of $40,000 a year in 2030 (in 2011 dollars) to provide care to an 85-year old. By 2080 this number will exceed $100,000 a year (also in 2011 dollars). These are among the reasons that almost no one other than Mr. Kotlikoff uses this methodology.

NPR ombudsman took up my blognote and turned to Weekend All Things Considered Supervising Senior Editor Rick Holter for a response. In essence, Mr. Holter's response was that NPR had aired the views of people less hawkish on the deficit, like Paul Krugman and Peter Diamond (I have also been NPR talking about the deficit), so it was reasonable to include an extreme deficit hawk like Kotlikoff.

The question of devoting a segment to Kotlikoff is not simply one of balance, although I would argue that NPR has been seriously unbalanced in its coverage of the deficit in general and especially in the last few months. The issue with Kotlokoff is that the piece could not have provided information to NPR's audience. There was almost no way that anyone who is not a policy analyst working on budget issues would have the ability to assess Kotlikoff's $211 trillion number. This was about scaring people, not informing them.

There's nothing wrong with having Kotlikoff present his views on NPR. But the station has the responsibility to ensure that it is done in a context where it is providing information, not just spreading scare stories. This piece only did the latter.

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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.