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Will There Be a Recession in the Next Decade? Print
Friday, 07 March 2014 13:42

Annie Lowrey's Economix blogpost on President Obama's budget concludes by telling readers:

"But it is worth noting that perhaps the single most important factor when it comes to deficits is largely out of the White House’s hands: economic growth. Mr. Obama’s budget assumes that there will be no recession for the next decade – indeed, he sees a moderate but strengthening recovery. History suggests those might be the most unrealistic numbers in the document."

Actually the lessons of history on this point are less clear than this comment implies. Historically we have gotten recessions for two reasons, either the Fed raises interest rates to slow the economy in response to a rise in the inflation rate, or a bubble bursts throwing the economy into a tailspin. While both scenarios are in fact possible (if the Fed lets another bubble grow, can we exile these doofusses for the rest of their lives?), at the very least they would imply more rapid growth in the period leading up to the recession.

In other words, if we get a recession it is likely to be preceded by a period of faster than projected growth. The net effect on the deficit, compared to the Obama administration's projections cannot be known in advance. Anyhow, it is remarkable how much time ostensibly intelligent people spend speculating about events 6-10 years in the future when all the historical evidence shows we don't have a clue.

Take a look at the CBO projections of budget surpluses for 2014 from back in 2008 or the projections of large budget deficits in 2000 from back in 1996. I'm fine with make work jobs in a weak economy, but let's not imagine these projections for are worth anything more than the cyberspace they are printed on. 

 
Democrats Also Insist They Are on the Right Side of the Evidence on the Minimum Wage Print
Friday, 07 March 2014 06:40

A Washington Post article giving the "inside story" on how President Obama decided to push for a $10.10 minimum wage might have led readers to believe that it is only Republicans who claim to have economic evidence on their side in the minimum wage debate. It told readers:

"Republicans insist they are on the right side of the economic evidence in arguing against a minimum wage hike. But Obama is on the right side of popular opinion: Polls show that roughly two-thirds of those surveyed support raising the minimum wage, even in traditionally conservative states such as Virginia."

Actually, proponents of raising the minimum wage also insist that they are on the right side of the economic evidence and they have the data to back up this claim, unlike the Republicans. (See my colleague John Schmitt's piece on topic as well as this letter signed by many of the country's top labor economists.) This Post piece is seriously misleading in implying that the argument opposing a higher minimum wage is more evidence-based than the argument favoring an increase.

 
The Washington Post Wants the Fed to Start Throwing People Out of Work Print
Thursday, 06 March 2014 21:34

The Washington Post, which adheres rigidly to the philosophy that a dollar in a non-rich person's pocket is a dollar that could be in a rich person's pocket, argued in its Wonkblog section that it might be time for the Fed to start raising interest rates and throwing people out of work. The story is that when the unemployment rate falls below 6.5 percent, the inflation rate might start rising.

This one is almost too much to believe even from the Washington Post. Of course the unemployment rate has come down considerably from its 10.1 percent peak in 2010, but most of the reason is that people have left the labor force. According to the OECD, the employment rate among prime age workers (25-54) is up by only 0.8 percentage points from its 2010 low and is still down by 4.0 percentage points from its pre-recession level.

But let's look at the evidence the Post uses to make its case. The post has a chart that divides the years since 1983 into years when the unemployment rate was above 6.5 percent and years when it was below. The unemployment rate is then graphed against the change in the core inflation rate over the year. The regression line has the expected downward slope implying a negative relationship between the unemployment rate and the change in the inflation rate.

This is all nice and predictable. But the truly incredible part of the story is that in the graph itself we see that the rate of inflation actually declined in most of the years when the unemployment rate was below 6.5 percent. That's right, fans of counting and arithmetic everywhere will be able to see that in 10 of the 19 years where the unemployment rate was below 6.5 percent the inflation rate actually fell. It only rose in eight of these years, with the rate being unchanged in one of the years. Are you scared of inflation yet?

We could look at this one from a slightly different angle. The unemployment rate was below 6.5 percent as a year-round average for 15 consecutive years from 1994 to 2008. Over this stretch the core inflation rate fell from 2.8 percent in 1994 to 2.3 percent in 2008. See, hyperinflation is just around the corner.

The incredible part of this story is that even if we took the very worst year for inflation in this thirty year stretch, the inflation rate only rose by 0.8 percentage points. So, even if we happen to draw the bad straw and we get the same sort of jump in the inflation rate in 2014 from letting the unemployment rate fall too low, we will se the core rate of inflation rise from 1.5 percent to 2.3 percent. The horror, the horror.

Hey, but it's much better to throw more people out of work, at least by the thinking at the Washington Post.

 
How to Report on the Minimum Wage Print
Wednesday, 05 March 2014 17:06

Bloomberg had a very nice piece reviewing the employment history of Washington State which has had the highest minimum wage in the country since 1998. The piece notes that the high minimum wage has not prevented the state from having stronger than average employment growth. It also presents the views of critics of the minimum wage who argue that it has still taken a toll on employment.

This is how it should be done.

 
NPR Tells US That Pew Expert Paul Taylor Wants to Promote Generational Conflict Print
Tuesday, 04 March 2014 16:02

In the last three decades the rich have gotten the bulk of the benefits of economic growth, as those at the middle and bottom of the wage distribution have seen little improvement in living standards. This naturally leads many people to want to reverse the policies that have led to this upward redistribution, such as high unemployment, a trade policy that protects high end workers, while subjecting the middle and bottom to international competition, government subsidies to too big to fail banks, an ever more intrusive patent policy, an anti-trust policy that greenlights monopolies like Microsoft, and many others that could be added to this list.

Of course the winners of the last three decades don't want the public to consider policies that might reverse this upward redistribution, so instead they do things like try to promote generational conflict, claiming that the troubles of younger workers are somehow attributable to their parents Social Security and Medicare. Wall Street billionaire Peter Peterson is a leader in such efforts, having funded numerous groups for this purpose.

NPR did its part in the promotional of generational war, interviewing Paul Taylor, the executive vice president at Pew Research Center about his new book. Taylor repeatedly complained that younger generations don't seem angry about their parents' Social Security and Medicare. He told his interviewer:

"Well, what's so fascinating is there isn't any tension at the moment. You have a generation coming in that isn't wagging its finger with blame at mom or grandma, in fact, they're living with mom and grandma."

Later he adds:

"I leave this book thinking we have very serious demographically driven challenges, that we have a political system that at the moment isn't stepping up to the plate, but we have a population that isn't spoiling for a fight over these issues."

In addition to expressing his disappointment that the young don't share his antagonism to older people over their Social Security and Medicare, Taylor also seriously misrepresents some key points about these programs and the burdens they face. He tells listeners:

"Things are out of balance. Our Social Security and Medicare systems, which, in the public's mind, have done brilliantly in doing what they set out to do, they were based on the demographics of the 20th century. You had, literally, at the beginning, 150 workers per retiree, by the time all the baby boomers move into taking those programs, we'll only have two workers per retiree.

"The math of those programs does not work. Everybody who looks at the demographics knows that those systems are going broke with 15 or 20 years and the longer you wait, the more the burden of the solution is going to fall on the millennials."

Actually, the demographics have long been known to the people who designed these programs and were predicted almost perfectly many decades ago. Furthermore, the projected shortfalls in Social Security and Medicare can be met with tax increases on the millennials that are considerably smaller than the tax increases faced by the baby boomers.

The key issue is whether we continue to see the upward redistribution of the last three decades or whether the gains from growth are broadly shared. The Social Security Trustees project that average compensation will increase by more than 50 percent over the next three decades. If the wages of typical worker increase in step with the average then it would be difficult to see the generational injustice if their payroll taxes increased by two to three percentage points, especially since this will be needed in order to support their own longer retirements.

It is striking that NPR is willing to focus so much more attention on the threat to the living standards of millennials presented by a 2-3 percentage point increase in payroll taxes than the policies that could lead to much or all of the benefits of productivity growth over the next three decades going to those at the top, as has been the case for the last three decades.

 
That $60 Billion Increase in the Earned Income Tax Credit Is Equal to 0.14 Percent of Spending Print
Tuesday, 04 March 2014 05:54

Of course most NYT readers are well aware of the fact that the government is projected to spend around $48.5 trillion over the next decade, so they realized that President Obama's proposal to spend $60 billion more on the Earned Income Tax Credit is no big deal in terms of overall spending. That's why this NYT article saw no reason to put the number in any context. However for that tiny group of readers who don't have the total budget in their heads and may have thought this proposal would be a big deal in terms of federal spending, the CEPR Responsible Budget Reporting Calculator would quickly tell you that this spending amounts to 0.14 percent of projected spending.

The piece also includes a quote from Harvard economist Nathaniel Hendren, saying "we’re rightly concerned about budget deficits." It would have been worth reminding readers that the efforts to lower the budget deficit have cost the country at least $5 trillion (@ $17,000 per person) in lost output over the last six years and kept millions of people from working. Some NYT readers may not realize the costs the country is enduring because some people like smaller budget deficits.

 
January Spending Was Driven by Health Care Print
Monday, 03 March 2014 22:03

There was a larger than normal jump in spending on consumer services reported for January. The Reuters article attributed this to weather driven increases in spending on heating.

Actually the biggest rise in spending on services in January was for health care. The Commerce Department showed the annual rate of spending increased by $30.5 billion in January. This amounted to a 1.6 percent increase in spending compared with December. This is an extraordinary rate of increase, especially considering the slow growth in health care costs over the last five years.

Most likely the increase was due to one time factors associated with the Affordable Care Act. It will matter hugely to the success of the program and the budget and the economy if this increase turns out not to be a one time increase.

 
Robert Samuelson's Bad Math on Generational Equity Print
Sunday, 02 March 2014 22:03

Yes, it's Monday morning and Robert Samuelson again complains we are being cruel to our children. As in the past, he is not bothered by the likelihood that we will hand them a planet badly damaged by global warming. Nor is he upset that we might hand them a country in which the rules are rigged to give the rich a hugely disproportionate share of national income.

Nope, this is the Washington Post. He is upset that seniors will be getting Social Security checks averaging $1,500-$1,600 a month. And that it will be paying bloated prices for seniors' health care. In keeping with the Washington Post's fundamental philosophy that a dollar in the pocket of someone who is not rich is a dollar that could be in the pocket of a rich person, Samuelson is not upset about overpayments to wealthy doctors and drug companies, he's upset about seniors getting health care.

Those who actually give a damn about the well-being of our children and grandchildren know that on average their pay will be about 40 percent higher in three decades. If they pay two or three percentage points more of their wages in Social Security taxes, to support their own longer retirements, who gives a damn? We pay much higher Social Security and Medicare taxes than our parents and grandparents' generations.

If most people in our children and grandchildren's generation do not enjoy substantially higher living standards than we do it will be due to the fact that the Jeff Bezos of the world have managed to appropriate most of the gains from growth. Serious people therefore focus on policies to reverse the upward redistribution of income over the last three decades, however employees of Jeff Bezos, and apparently the Pew Foundation, try to divert people's attention to get them upset about the $1,300 monthly Social Security checks going to today's seniors. 

 
Arthur Brooks Is Upset that Some Folks Don't Like the Government Redistributing Income Upward Print
Sunday, 02 March 2014 21:05

Brooks tells us that people who are unhappy about the enormous upward redistribution of the last three decades are guilty of the sin of envy. Let's try an alternative hypothesis, large segments of the public are angry because the wealthy are rigging the rules so that an ever larger share of the pie gets redistributed to their pockets.

There are a large number of well-documented ways in which they have engineered this heist. For example, they have too big to fail insurance that transfers tens of billions of dollars each year into the pockets of the CEOs and shareholders of the country's largest banks. They also managed to secure near tax-free status for the financial industry, which puts tens of billions more into the pockets of the big actors there. And they have constructed a tax code chock-full of shelters that allow pension fund managers like Mitt Romney to get incredibly rich by buying up new companies and teaching them the game.

They have created longer and stronger government-granted patent monopolies that redistribute hundreds of billions annually from the general public to pharmaceutical companies, tech companies, and patent lawyers. They have put in place a corporate governance structure under which CEOs essentially pay off corporate directors to look the other way as they pilfer their companies. And they have maintained protectionist barriers that allow doctors and other highly paid professionals to earn far more than their counterparts in other wealthy countries.

Many folks think these economic distortions that slow growth while making the rich richer at the expense of everyone else are bad policy. But Brooks wants us to think that efforts to eliminate these distortions are simply envy that must be held in check.

 
Washington Post Discovers that CBO Is Not God Print
Sunday, 02 March 2014 08:40

The Washington Post is widely known as the newspaper that uses both its opinion and news pages to constantly tell readers that we have to cut Social Security and Medicare spending because the Congressional Budget Office (CBO) predicts big deficits 10, 20, or 30 years in the future. That is why it was extraordinary to see an article in the Sunday paper telling readers that CBO is often wrong and that its scores may not always be the best basis for policy decisions.

The central theme of the piece was that the Eisenhower administration was able to commit $25 billion to building the inter-state highway system in 1956 (the equivalent of $1.1 trillion in today's economy) in part because he didn't have to get this spending scored by CBO. While this was clearly a large expenditure relative to the size of the economy, the benefits would have been very difficult for a CBO-type agency to quantify.

In pointing out the errors of scoring by CBO, the piece seriously understates the case. In 1996, after all the Clinton era increases and spending cuts had already been put into law, CBO still projected a deficit for 2000 of 2.5 percent of GDP ($420 billion in today's economy). In fact, in fiscal year 2000 we actually had a surplus of roughly the same size, implying a forecasting error of close to 5 percentage points of GDP.

This was not due to further legislative changes. The tax and spending changes over the intervening four years actually added slightly to the deficit. The problem was that CBO grossly under-estimated economic growth over this four year period and over-estimated the unemployment rate, predicting a 6.0 percent unemployment rate for 2000 when the actual rate was 4.0 percent. 

Having underestimated growth in the years 1996-2000, CBO then hugely over-estimated growth and revenue in the next decade, failing to see that the stock bubble would collapse, sending both the economy and revenue plunging. As a result, we never came close to paying off the national debt, Federal Reserve Board Chairman Alan Greenspan's big fear when he argued in favor of the Bush tax cuts in 2001.

And of course the CBO completely missed the collapse of the housing bubble and the fact that it would tank the economy. As a result, the Washington Post was highlighting concerns about the relatively small deficits of 2006-2007, while completely ignoring the bubble that was about to devastate the country.  

More recently CBO has likely been exaggerating deficit concerns by failing to fully incorporate the slowdown in health care cost growth in its projections of future spending. If this slowdown continues, then not only will near-term deficits be relatively modest, but even the longer term deficits highlighted by the Post will also be easily contained.

One issue this article gets wrong is the nature of the data at CBO's disposal. We have very reliable data on GDP dating back to the early post-World War II years. The Bureau of Labor Statistics is a reliable source of inflation data for 100 years. CBOs problem in its scoring does not stem from a lack of data.  

 
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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.

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