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Good Piece in the Post on the State of the Economy Print
Sunday, 20 February 2011 09:04
The Post deserves credit for an outstanding front page piece that did a serious analysis comparing how African Americans, Hispanics and whites are experiencing the downturn and view the future of the economy. Its polling had the unsurprising result that African Americans tend to be faring worst in the downturn, but interestingly were the most optimistic about the future.
 
Fox on 15th (a.k.a "The Washington Post") Goes All Out to Push For Its Deficit Agenda Print
Sunday, 20 February 2011 08:47

The Washington Post took its unbalanced treatment of the budget to new extremes today with a whole page devoted exclusively to deficit hawks telling us how we should rein in deficits. The lead piece is by Senator Alan Simpson and Erskine Bowles, the co-chairs of President Obama's deficit commission. This is followed by 5 pieces from deficit hawks.

There was no one pointing out the obvious truths that all budget experts acknowledge:

1) The explosion of the deficit in the last few years was the result of the downtown caused by the collapse of the housing bubble.

2) If the government reduced its deficit any time soon the main result would be slower growth and higher unemployment.

3) The main factor driving the horror stories of an exploding deficit in the long-run is the growth of private sector health care costs. If we paid the same amount per person for health care as people in other wealthy countries we would be looking at huge budget surpluses, not deficits.

 
WSJ Asserts That Deficit Hawks Are Actually Just Hoping To Get High-Paying Lobbying Jobs Print
Saturday, 19 February 2011 11:47

The WSJ told readers that: "in the hopes of gaining a high-paid lobbying position after leaving the Senate, six senators including Mr. Durbin are negotiating a deficit-reduction framework." The piece then went on to explain another deficit hawk who recently left the Senate, former Indiana Senator Evan Bayh, just took a job with a major Washington lobbying firm.

Actually, this is not quite what the WSJ told readers. The paper said:

"responding to public unease about the country's fiscal standing, six senators including Mr. Durbin are negotiating a deficit-reduction framework. They are betting that worries about federal red ink—expected to exceed $1.6 trillion this fiscal year—will put once-untouchable factors, such as entitlement spending and tax increases, into the mix."

Of course the WSJ has no idea what motivates these senators. Are they really responding to public unease about the deficit? How come they aren't responding to public unease about 9.0 percent unemployment? Can the WSJ assure readers that these six senators have not at all considered their career prospects after leaving the Senate and that this is not a factor in their actions?

Since reporters do not know the real motives of politicians, good reporters do not ascribe motives. They report what people say and what they do, they let readers figure out motives for themselves.

 
Why Do "Free Traders" Never Talk About Free Trade When the Losers Are Likely to Be People Like Them? Print
Saturday, 19 February 2011 09:40

David Leonhardt is one of the country's more thoughtful economic columnists who often has insightful pieces in his columns at the NYT. This makes his interview with two economists who recently wrote a book on college costs even more disturbing. He doesn't ask the tough questions.

His interviewees argue that one of the main reasons that college tuition has risen so much more rapidly than other prices is that college provides a service and that productivity growth in services is less rapid than productivity growth in goods production. They explicitly note that a college education is like haircuts in this respect.

The data don't support this case. Below we have graphs for the price increases in haircuts and college tuition since 1997 (as far back as BLS has data for haircuts). The price of haircuts increased by 40 percent over this period, while the price of college tuition increased more than 120 percent. Clearly the service story does not get us very far.

 

                                              Price of Haircuts -- 1997 = 100

haircuts

 

Source: BLS

                                               College Tuition

College

 

If the fact that a college education is a service does not explain its high price then what does? Well, part of the answer is touched on in the discussion: "they don’t face competition from low-wage countries like China." 

This is true, but that is not an accident, this is by design. Trade agreements like NAFTA were explicitly designed to put U.S. manufacturing workers in direct competition with low-paid workers in the developing world. Business executives from companies like General Electric were brought in on the design of the treaty. They were asked what were the obstacles that prevented them from setting up operations in Mexico. The treaty was then constructed in a way to remove these obstacles.

The United States has not adopted the same route with universities (nor hospitals and law firms). Trade negotiators do not invite university presidents to meetings where they explain all the obstacles that prevent them from taking more advantage of the vast potential pool of high quality faculty from the developing world. (The word "potential" is important. The pool would be much larger if university students in places like India and China knew that it would be as easy for them as native born Americans to get jobs as university professors in the United States.) Given the huge gap in living standards, university professors in developing countries would be willing to work for much lower pay than university professors in the United States, just as auto workers in developing countries work for much lower pay than auto workers in the United States.

In short, one important reason that the cost of a college education rises so much more rapidly than other prices is that university professors are largely protected from foreign competition as a matter of conscious policy, unlike most other workers in the economy. Of course this is not the only reason.

It is now common for university administrators to get high 6-figure and even 7-figure salaries. This is partly as a result of the fact they are following the bloat in private sector pay for top executives. In this sense the process through which top executives now run companies in large part for their interests has affected the pay structure at colleges and universities.

There is also the issue that much of the responsibility of college presidents now is squeezing money from the small group of incredibly wealthy people who make large donations to colleges. This is likely best done by someone who is at least marginally in their ranks rather than someone who works for a living. In this sense, the explosion of inequality in the last three decades has fundamentally altered the role of a university president so that it now primarily involves the ability to cater to the ultra-rich. 

 

[Addendum: Several comments claim that there are no restrictions on the hiring of foreign born professors based on the fact that a substantial number of faculty actually are foreign born. This is known as the "Mexican avocado theory of international trade." Under this theory, because it is possible to go the supermarket and find avocados grown in Mexico, we have free trade in agricultural products.

Of course we are very far from having free trade in agricultural products. There are a whole array of tariff and non-tariff barriers that it make it difficult to import items grown in other countries. In the same vein, we do have many outstanding academics in the United States who were born in foreign countries. These academics were able to overcome the hurdles that make it difficult (not impossible) for foreign born academics to work in the United States.

It is not legal, for example, for a university to hire dozens or even hundreds of non-citizens/non-green card holders explicitly because they are willing to work for a lower wage than their U.S. born counterparts. This restriction limits the extent to which foreign born faculty will put downward pressure on the wages of U.S. faculty. This doesn't mean that there is zero competition, just that the competition is deliberately limited by protectionist barriers imposed by the government.]

 

[Second Addendum: I see that my blogpost brought a response from David Feldman, one of the co-authors of the book that was the basis of Leonhardt's interview. He may have missed the addendum added above clarifying the nature of international competition that does occur in academia. The point here should be simple.

This is not a zero/one proposition. There is clearly competition. However, it is also a clear violation of the law for a university or college to dump its faculty and replace them with highly English speakers from India or elsewhere who would be willing to work for 40 percent less. If universities had this option, and offered tuition that was $15k-$20k a year less than their competitors would it affect the market? David Feldman says no, I think it likely would, but to argue that precluding this option is not protectionism is just silly.] 

 
The Washington Post, Whose Parent Company Operates Kaplan For-Profit Schools, Uses the Industry's Line In a News Story Print
Saturday, 19 February 2011 08:51

Did the Washington Post call the imposition of work requirements for TANF an increase in government regulation? Does it call restrictions on funding for Medicaid abortions an increase in government regulation? This is not the framing that the Washington Post typically uses for rules governing access to federal programs. The federal government is giving out the money, it gets to set the rules.

One then has to ask why the Washington Post chose to use this convoluted framing to discuss the Obama administration's effort to impose limits on the schools for which students can get federally subsidized loans. The limits require that to be eligible to receive federal loans through this program, a school would have to maintain a minimal record of placing its graduates in jobs.

This is a measure designed to protect both students, who will be on the hook to pay off their debt, and also the taxpayers who will have given money to the school for no obvious public goal if it does not help graduates get jobs. In the absence of this sort of restriction, schools like the one operated by the Washington Post's parent company, will be profiting at the taxpayers' expense, effectively getting public money for nothing.

In this respect it is worth noting that the regulations would impose no restriction whatsoever on where students could go to school. They would only restrict the schools for which they could get federally subsidized loans. If Kaplan and other for profit colleges think that their schools are good investments for students then there is nothing to stop them from making loans to the students themselves.

It is understandable that the for-profit college likes to frame this issue as one of government regulation, but it is hard to see why an independent newspaper would adopt this framing of the issue.

 
David Brooks Can't Get Access to Budget Documents Print
Friday, 18 February 2011 06:44

That is the only thing that readers of his column can conclude. Or, alternatively perhaps he missed the debate over health care reform during the last two years.

Brooks is very upset that President Obama is not doing more to deal with the growing national debt. If Brooks had access to budget documents he would know that the main reason for the large current budget deficits is the downturn caused by the collapse of the housing bubble.

If he is upset about these deficits he should be angry at the people who failed to warn of the dangers of the housing bubble. Certainly Mr. Brooks belongs on that list since he has a semi-weekly column that often deals with economic issues.

If Brooks had access to budget documents he would also know that the main driver of the deficit over the longer term is health care costs. If the United States paid the same amount per person for health care as any other wealthy country we would have huge budget surpluses, not budget deficits.

One of the goals of health care reform was to reduce the rate of growth of health care costs, which would also lower the deficit in the long-term. Brooks seems to be unaware of this aspect of the debate.

 
Whatever Happened to Deflation? Print
Friday, 18 February 2011 05:53

The Bureau of Labor Statistics reported that consumer prices rose 0.4 percent in January. On closer inspection this should not be any big deal. Core inflation rose by just 0.2 percent in the month. The main driver of the higher inflation was a big jump in energy prices. However even with this jump the overall CPI is only up by 1.6 percent over the last year, a level that all but the most loony inflation hawks would consider acceptable.

Still, it is worth noting that the possibility of deflation seems to have disappeared from the scene. Since this possibility featured prominently in many discussions of the economy in the period immediately following the financial crisis, it probably would be worth some brief mention of its passing.

The issue of deflation has consistently been misrepresented in economic reporting. The economy is suffering from a lower than desired inflation rate, which limits the effectiveness of monetary policy. Given the severity of the downturn we would like a large negative real interest rate (e.g. -6.0 percent). However, nominal interest rates cannot go below zero.

This means that the real interest rate can't fall below the negative of the inflation rate (e.g., with a zero nominal interest rate, the real interest rate would be -1.0 percent with a 1.0 percent inflation rate and -2.0 percent with a 2.0 percent inflation rate). If the inflation rate falls below zero (i.e. we get deflation), this problem gets worse, but the drop in the inflation rate from 0.5 percent to -0.5 percent is no worse than the drop from 1.5 percent to 0.5 percent.

It was also predictable that there would not be persistent deflation in the United States. Wages are sticky downward, which made it unlikely that core prices would actually start falling. Also, the current rise in commodity prices was to be expected as the dollar would drift lower as a result of the U.S. trade deficit and also demand in China and other fast growing developing countries created scarcity for many products.

Anyhow, given how fears of deflation had once featured so prominently in discussions of economic policy it is worth some noting of their passing.

 
Why Does it Take a Jump in Unemployment Claims the Following Week for Reporters to Recognize the Impact of Weather the Prior Week? Print
Friday, 18 February 2011 05:39

Initial filings for unemployment claims were reported as rising to 415,000 last week. This was an increase from 385,000 the previous week (originally reported as 383,000).

The reports on the filings noted the impact of weather in reducing the number of claims the prior week. Because of bad weather the previous week, many unemployed workers did not get to unemployment offices to file claims, which in many cases were closed anyhow.

The result was that the number of claims were lower than otherwise would have been the case due to the weather. However, those unable to file the previous week would file in the next week, raising the number of filings for the most recent week. The reports were able to recognize this weather driven pattern this week when claims jumped, but did not note the impact of weather when claims fell the previous week.

 
The Post Is Confused About Interest on the Debt Print
Thursday, 17 February 2011 06:12

The Washington Post had a front page article highlighted the rising interest payments made by the federal government as a result of its rising debt. It would have been useful to point out that the decision to pay interest to wealthy bondholders is a policy choice, not a fact of nature.

It is possible for the Federal Reserve Board to buy and hold government bonds. In this situation interest on the government debt is paid to the Fed, which then refunds the money to the Treasury, creating no net interest burden for the government. Last year, the Fed refunded nearly $80 billion to the Treasury based on the large amount of mortgage backed securities and Treasury bonds it now holds.

While the Congressional Budget Office projects that the Fed will sell off these assets over the next few years it could opt to buy and hold a large amount of debt (e.g. $3-4 trillion). To prevent inflation when the economy recovers it could raise reserve requirements, the same route that China's central bank is now pursuing to head off inflation in China.

The decision to not have the Fed hold bonds is a policy decision. This policy choice should have been discussed in the article. Having the Fed buy and hold bonds would be one way to avoid imposing a large tax burden on the general public as a result of the countercyclical measures necessary to lift the economy out of this downturn. Readers should be informed about it.

This piece is really an editorial intended to scare readers into supporting harsh measures to reduce the deficit. It makes not effort to place the budget deficits in any sort of historical context and includes scary sounding assertions with no real meaning, such as:

"The borrowing the United States did over the past decade - to pay for the 2001 tax cut, the wars in Iraq and Afghanistan, and propping up the economy during the steep 2009 downturn - is coming due this decade."

There is no way in which this statement makes any sense. Bonds are coming due every month of every year. There is nothing "coming due" this decade that does not come due every decade.

It also would be useful if the Post did not rely exclusively on economists who failed to see the $8 trillion housing bubble as its sources in its economic reporting. 

 

Addendum: It is also worth noting that the ratio of interest payments to GDP is not projected to rise back to its early 90s level until well into the next decade. So the idea that we will be facing an unprecedented interest burden is not accurate. Thanks to Gary Burtless for reminding me of this point.

 
Warren Buffet Is Wrong Print
Thursday, 17 February 2011 06:00

The NYT ran an article discussing disagreements between Republicans and Democrats over the merits of the Financial Crisis Inquiry Commission's report. At one point it quoted Bill Thomas, the Republican vice-chair of the commission, citing Warren Buffet as saying that no one saw the housing bubble.

Mr. Buffet was clearly wrong in this assertion. Some economists very clearly saw the housing bubble. Given the extraordinary departure of house prices from their long-term trend, with no basis in the fundamentals of the market, it is amazing that all economists did not see the bubble. It is even more amazing that no economists seem to have suffered any consequences to their careers from the incredible failure.

The article should have pointed out that Mr. Buffet was wrong and therefore Thomas should not have relied on his statement in making his assessment of the report.

 
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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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