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The Invisible Skills Gap in Almost Every Industry Print
Sunday, 29 March 2015 10:25

Alexandra Levit tells readers of her NYT column that we should be thankful that Generation Z is entering the workforce because, "the United States is facing a skills gap in most industries."

Really? I wonder how Ms. Levit knows about this skills gap? Usually we would look to things like high vacancy rates, longer hours for the workers that employers can find, and of course, rapidly rising wages. We don't see this for any major occupation group. So what is the basis for asserting there is a skills gap?


Note: Thanks to Stefano Monti for calling this one to my attention.

Deflation Due to Lower Commodity Prices Is Not a Problem (Except to Commodity Producers) Print
Sunday, 29 March 2015 07:48

For some reason economics reporters and economists seem to have a really hard time understanding deflation. There are two lessons for today. First, we get the standard lesson: crossing zero means nothing, the problem is too low a rate of inflation.

As I've written a few thousand times, inflation is an aggregate measure that combines price changes of hundreds of thousands of goods and services. When the inflation rate gets near zero it means that than many of the price changes are already negative. Going from a near zero positive to a near zero negative just means a higher ratio of negative price changes to positive price changes (or the negative ones are larger). How can going from 45 percent negative price changes to 55 percent negative price changes be a disaster? That makes zero sense.

Furthermore, since these are all quality adjusted price changes it may not even be the case that prices are actually falling for the goods themselves. The price index for new cars in the United States is less than 3 percent above its 1998 level, yet the average new car costs considerably more in 2015 than it did in 1998. The difference is that the Bureau of Labor Statistics (BLS) attributes most of the price rise to quality improvements. The story would be even more dramatic with computers where BLS reports that prices have fallen by more than 95 percent since 1997. Does anyone believe that an economy faces disaster just because its cars and computers are getting better?



The Rationality of Continued Austerity in Greece Print
Sunday, 29 March 2015 07:26

The NYT ran an a piece by Hugo Dixon that boldly proclaimed that if Alex Tsipras, the prime minister of Greece is rational, he will get tough with his left-wing supporters and impose more austerity measures. This is an interesting notion of rationality.

Greece's economy has shrunk by more than 25 percent since 2008. Its unemployment rate is close to 25 percent. The current projections from the I.M.F. and others show little improvement in these numbers by the end of the decade if it sticks to this austerity path. By contrast, if it breaks with the euro its goods and services would suddenly become far more competitive in the world economy as their price would fall due to a lower valued currency. It would also no longer have to run primary budget surpluses since it would be able to avoid payments on its debt for a period of time.

While this break would undoubtedly lead to a short-term hit to the economy as it put its new currency place and worked out patchwork arrangements on trade, it is likely that it would bounce back quickly. The model here is Argentina which went into default in December of 2001. It's economy went into a free fall for three months, then stabilized in the second quarter of 2002. By the fall of the year it was growing rapidly and it continued to grow rapidly for the next five years. It made up all the lost ground before the end of 2003.

It is worth noting that at the time, the I.M.F. and most other "experts" confidently predicted a disaster for Argentina. While there are issues about the accuracy of Argentina's numbers, this has mostly been more a problem in the post-recession period when an over-valued currency and extensive price controls have led to serious economic distortions.

If we want to use the words "tough" and "rational," they would probably better be applied to the strategy of breaking with the euro rather than continuing an austerity policy that promises a level of pain for the Greek period that far exceeds that experienced by the United States in the Great Depression.

In Addition to the Union President, Economists Would Also Call an Increase in Worker Pension Contributions a Cut in Pay Print
Saturday, 28 March 2015 01:02

The Washington Post likely misled many readers in an article on a Republican proposal to cut benefits for federal employees. It noted that the proposal calls for federal workers to increase the amount they pay for their pensions by 7 percent of their salary. It then quoted Richard Thissen, the president of the National Active and Retired Federal Employees Association, as saying that the higher contribution is,"nothing more than a pay cut for federal employees."

This is not just the view of a person representing the affected workers. Virtually all economists would agree that requiring workers to pay more money for the same benefit amounts to a cut in pay. This is not really an arguable point, although the Post's discussion of the topic likely led many readers to believe it is a matter of opinion.

The piece also errors in referring to the proposals of the "bipartisan Simpson-Bowles committee." The commission actually did not make any proposals since its by-laws required that to be approved a proposal needed the support of 12 of the 16 members of the commission. Since no proposal got the necessary 12 votes it is inaccurate to refer to recommendations of the commission. The proposal in question was put forward by the co-chairs and had the support of 10 of the 16 commission members.

Stanley Fisher's Faulty Logic On Higher Fed Interest Rates Print
Saturday, 28 March 2015 00:22

The Washington Post missed the opportunity to correct Stanley Fisher, the vice-chair of the Federal Reserve Board, on his arguments for raising interest rates. An article on the prospect of Fed rate hikes later this year quoted Fisher on the desirability of raising rates so that the Fed would have room to use normal monetary policy (i.e. lower interest rates) if there was a shock to the economy leading to a slowdown. There are two major flaws in this logic.

First, if the Fed delays raising interest rates and allows more job creation and economic growth, we are more likely to see higher inflation. If the inflation rate starts to rise, the Fed could raise the federal funds rate along with it, leaving real interest rates unchanged. If the inflation rate goes to a somewhat higher level, this would provide the Fed with considerably more ability to boost the economy in a downturn with conventional monetary policy since it could have lower real interest rates. (The real interest rate is the nominal interest rate minus the inflation rate.) This would be especially the case if it allowed the inflation rate to rise above its current 2.0 percent target.

In this respect, it is important to remember that the 2.0 percent target is just a number chosen by former chair Ben Bernanke. It is not part of the Fed's legal mandate to promote high employment and price stability.

The other flaw in Fisher's logic is that he is effectively advocating that the Fed deliberately slow growth now so that it will have more ability to speed growth later. This is a rather peculiar argument, sort of like committing suicide to ensure that you won't be killed. Would it make sense to say, slow growth by a total of 1.0 percentage points over the next two years to ensure that the Fed has enough room to lower interest rates and thereby speed growth by 1.0 percentage point in response to a possible future shock? (Fisher undoubtedly would have different numbers.)

It is at least peculiar to argue that we should for certain take a large loss now, in the form of higher unemployment and lower wages for those at the middle and bottom of the wage distribution, in exchange for being better able to respond to a possible loss in the future. Unless the potential gains from the latter action are much larger than the certain losses from raising interest rates, this would be a bad trade-off.


Contrary to What You Read in the NYT, Net Exports Have Been a Drag on Growth in the Recovery Print
Friday, 27 March 2015 08:11

Okay, for the 64,512th time, it is net exports that contribute to GDP, not exports. Apparently this distinction is difficult for people involved in economic policy to understand since they keep making the same mistake.

The point is straightforward. If the United States increases its exports because GM is exporting car parts to be assembled in Mexico and then imported back as a finished car to the United States, it will not be a net job creator. We used to have jobs at assembly plants in the United States. These are being replaced by jobs in assembly plants in Mexico. In this story exports increase, but net exports (exports minus imports) fall. Fans of intro econ know the accounting identity that GDP = C + I + G +(X-M), where the X-M stands for exports minus imports.

This is why the NYT seriously misled readers in an article on the impact of the rising dollar when it wrote:

"the sharp rise of the dollar threatens to undercut one of the principal drivers of the recovery in recent years: strong export growth for American companies."

While exports have been a positive for growth, imports have been an even larger negative. According to our good friends at the Bureau of Economic Analysis (Table 1.1.2), the fall in net exports reduced growth by 0.22 percentage points in 2014. They added the same amount to growth in 2013, but have been a net negative since 2010. Of course net exports will almost certainly be more of a drag on growth due to the recent rise in the dollar, but it is not true that they had previously been a driver of the recovery.

George Will Must Not Think Willie Mays Was a Great Baseball Player or that the Polio Vaccine Was a Big Deal Print
Thursday, 26 March 2015 02:22

That is the implication of his column touting the virtues of inequality. Will seems to think that we could not get people to work hard to master skills or to be great innovators if they didn't have the prospect of earning billions or tens of billions of dollars. But if we look back through history we can identify an enormous number of tremendously talented and creative individuals who did not get fabulously wealthy or even have any plausible hope of getting fabulously wealthy.

Mays was of course well-paid, but adjusting for inflation, his best paychecks would probably be less than one-tenth of the pay of today's stars. And, there is no shortage of great athletes, writers, musicians, and other performers who never even made Willie Mays type salaries. The same is true of inventors. Jonas Salk, the inventor of the first effective polio vaccine, undoubtedly had a comfortable standard of living, but nothing approaching the wealth of a Bill Gates or even Jamie Dimon.

In fact, if we look back to the period of relative equality from the end of World War II to 1980, the economy made far more rapid progress than it did in the next three and a half decades of rising inequality. If the argument is that people need material incentive to do their best work, then Will has a case. If the argument is that people need the motivation of immense wealth to work hard and innovate, then Will is demonstrably wrong.


Note: Links added, thanks to Robert Salzberg.

NYT's Coverage of Japan Is Complicated by a Lack of Understanding of Economics Print
Wednesday, 25 March 2015 06:49

Just when you thought economics reporting could not get any worse, the NYT leads the way. The headline of a news article told readers that "Japan's recovery is complicated by a decline in household savings." The piece reports that consumption is now increasing (barely), but because real wages have not risen, it has led to a decline in household savings. The household saving rate in Japan is now negative. It then tells us that businesses are big savers, but that money is needed to finance the government's budget deficit.

Okay, now if the NYT could find someone who had taken an intro econ course that person could explain to its reporters and editors that if consumers, businesses, or the government spends more money, it will lead to additional income and employment, and additional saving. If the economy is below full employment, its spending is not limited by its current saving. (If it's not below full employment then it doesn't have a problem with a recovery, by definition its economy would have already recovered.)

Anyhow, that's what folks who learned economics would say.

The Economy, Like Arithmetic, Is Not Complicated; Even If Robert Samuelson Does Not Understand It Print
Wednesday, 25 March 2015 04:39

Robert Samuelson (sorry, he's not going to take advantage of my vacation) gets it badly wrong about the economy again. He began his Monday column by telling readers:

"The Federal Reserve is at a crossroads, and it doesn’t know where it’s going."

Really? The Fed doesn't know where it's going? How about Robert Samuelson doesn't know where it's going? 

It gets worse:

"There was a time when we were more confident. We didn’t pay attention to details, because the experts had matters in hand. During the Alan Greenspan era (1987-2006), the Fed was routinely seen as an economic superman. Its surgical shifts in the federal funds rate seemed to stabilize the economy: Expansions were long, recessions rare and mild."

Umm, no. "We" did pay attention to details. We yelled as loudly as we possibly could that there was a huge housing bubble that would sink the economy when it burst. Of course papers like the Washington Post did not pay attention to us because it did not fit their story that the Fed was an economic superman. Such nonsense was the conventional wisdom at the time and the paper did not want to give those who challenged the claim a voice. Now, it wants to pretend that people who understood the basic economics of the housing bubble, and the stock bubble before it, did not exist. 

And Samuelson gives us more error:



It's March 16th, and I Am Out of Here Print
Monday, 16 March 2015 09:51

It's vacation time. I'm off until Wednesday March 25th. And remember, until then, don't believe anything you read in the newspaper.

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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.