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Ummm, It Was the Central Bankers' Fault Print
Tuesday, 03 August 2010 04:36

The NYT had an article on the hostility being directed toward the head of Hungary's central bank. The article implies that such hostility is misdirected, beginning the piece with the comment: "it’s not easy being a central banker in Europe — especially during the biggest economic crisis in a generation"

This comment is sort of like saying that it's not easy to be head of BP, especially in the middle of the largest oil spill in the history of the world. The reason that we are having the economic crisis is because of the failure of Europe's central bankers to notice the huge housing bubbles that were distorting economies throughout Europe and much of the world. If Europe's central bankers had been doing their job competently they would have acted to rein in these bubbles before they grew large enough to endanger the economy. Instead, they were obsessed with reaching their 2.0 percent inflation target.

The Exclusion of Foreign Born Doctors: Where are the Free Traders? Print
Tuesday, 03 August 2010 04:10

The media have played a huge role in fundamentally misrepresenting trade policy and thereby larger economic policy. As a result, the public is quite confused on key economic issues.

This is brought home in an article today about a study showing that foreign-born foreign-trained doctors perform slightly better than doctors who were born and trained in the United States. The article notes in passing that an extensive set of tests required for licensing make it difficult for foreign doctors to practice in the United States. The number of foreign medical residents who can enter the United States is also tightly constrained.

This suggests that the United States could get many more highly qualified foreign doctors if it eliminated these barriers so that they only ensured the quality of training. (It is easy to design mechanisms to ensure that the physicians' home countries benefit from having their doctors' practice in the United States, so this need not be a concern.) 

Remarkably, this point is never raised explicitly as an issue of trade and economics in this or other articles. Trade policy is usually only discussed in the context of trade agreements such as NAFTA (which are wrongly labeled "free-trade" agreements) even though the barriers that prevent foreign professionals like doctors from practicing in the United States cost our economy tens or hundreds of times as much as the money at stake in these agreements.

The failure to seriously discuss trade in the media leads the public to have the misleading view that less-educated workers, like those in manufacturing, can't compete in the modern world economy, while the most highly-educated workers have the skills and ability to prosper. In reality, the most highly educated workers prosper because they have the political power to limit the number of Chinese, Indian and other foreigners who are allowed to compete with them, unlike manufacturing workers.

If there was genuine free-trade in highly paid professional services then doctors, lawyers, and economists would see the same downward pressure on their wages as autoworkers and textile workers. The gains to the economy from lower prices for health care and other services that would result from free trade in highly-paid professional services would be enormous, but it is as hard for most economists to notice these gains as it is for them to see an $8 trillion housing bubble.

NPR Still Has Not Noticed the Housing Bubble Print
Monday, 02 August 2010 05:11

Morning Edition told listeners that the shadow inventory of foreclosed homes will keep the housing market depressed for several years to come. Actually house prices are not depressed. House prices are still 15-20 percent above their trend levels. The housing market will not be back to normal until house prices fall back to a more sustainable level.

This is really getting annoying. NPR completely missed the housing bubble. During its run-up they relied almost exclusively on economists who did not have a clue, many of whom were on the industry payroll. Given the enormous damage that has been done to the country by the collapse of this bubble, can't NPR make a point even now of finding someone who knows something about the housing market? Isn't that what their reporters are paid for?

It's Open Season on Social Security! Print
Sunday, 01 August 2010 19:27

That's right folks, you get to say whatever you want in the media now to further the cause of cutting Social Security. Today on This Week, Cokie Roberts told viewers that:

"You could close this capital or turn it into condos and you could close down every domestic program that we have and you would still have a deficit because of Social Security and Medicare and interest on the national debt."

Well that's not quite right, Social Security is running an annual surplus. The money that program takes in each year in taxes and interest on its bonds exceeds what is being paid out in benefits. It's not clear what Ms. Roberts had in mind when blaming Social Security for the deficit, but it has nothing to do with reality.

Thanks to Gene Devaux who watched so I wouldn't have to.

Unauthorized Copies and Counterfeits: Why Does the NYT Have Such Difficulty Making the Distinction? Print
Sunday, 01 August 2010 18:56

The NYT ran a piece today on a growing tendency for producers of unauthorized copies of merchandise to copy less high end items. The piece uses the term "knockoff" and "counterfeit" interchangeably. In fact, there is a very important and fundamental difference.

A counterfeit item is intended to fool the buyer. Its sales price depends on the buyer believing that they are getting something they are not. By contrast, buyers of unauthorized copies that are not counterfeit understand that they are not purchasing the brand item.

This distinction is important because the buyer is not being ripped off when they buy a knockoff that is not a counterfeit. They are getting what they paid for. This means, among other things, that the buyer cannot be expected to cooperate in efforts to crack down on such sales. The buyer is benefiting like the seller. In the case of an actual counterfeit item, the buyer is being ripped off and can be expected to cooperate with efforts to clamp down on counterfeiters.

This distinction also would be useful in understanding the meaning of the unsourced assertion that: "the counterfeiting industry ... costs American businesses an estimated $200 billion a year." If this is the amount of lost business associated with actual counterfeits, then this would largely be a loss to the economy. People paid $200 billion for items that they did not actually receive.

However, if this represents someone's estimate (a source would be helpful) of the lost sales to business associated with unauthorized copies, then this figure could be consistent with a net gain to the economy. Consumers were able to buy products at lower prices -- often much lower prices -- than would have been possible without the copies. In this case the gains would likely dwarf the benefits from NAFTA or other trade agreements.

NYT Helps to Cover Up for Incompetent Economists Print
Sunday, 01 August 2010 04:44

The NYT had a piece comparing efforts to detect financial crises to efforts to detect earthquakes. This implies that some fundamental new methodology is needed.

In fact, the economic crisis was entirely predictable and predicted by people who understand economics. The more obvious problem is the incentive structure within the economics profession. It provides economists with no incentive to break with conventional wisdom even when it is obviously wrong and provides no sanction against those whose failure to break with conventional wisdom led to disastrous consequences for the economy and the country.

Unless this incentive structure is changed, no improvements in methodology will make any difference at all.

Who Are the "Others?" Print
Saturday, 31 July 2010 13:23

The WSJ has an article today about Senate Banking Committee Chairman Chris Dodd's efforts to promote FDIC Chair Sheila Bair as the head of the new Consumer Financial Protection Bureau. Near the end, it notes the support for Harvard Professor Elizabeth Warren, the leading contender, but then tells readers that: "others worry that choosing someone seen as too activist—a charge leveled at Ms. Warren—could turn public sentiment against from the agency."

This naturally leads readers to wonder about the identity of these mysterious "others." Do they have names? Do they have specific positions relevant to this discussion (e.g. CEOs at Bank of America and Citigroup) or are they just a random cross-section of America?

And what does it mean that activism will "turn public sentiment from the agency?" It is believable that the financial industry will be upset about the agency if they block many of their initiatives, but do we really think this would spark a mass uprising?

If only we knew who these mysterious others are then we could ask them such questions. But as it stands --- it's all so mysterious.


Hat tip to Gary Therkildson.

The Post Again Uses Xenophobic Fears to Push Its Deficit Agenda Print
Saturday, 31 July 2010 08:38

The Washington Post simply cannot let go on its deficit obsession. The day after a new GDP report indicates that the unemployment rate will remain near double-digit levels long into the future, the Post's lead editorial warns people that something really bad could happen ten years out if we don't deal with the deficit. As is their way, the Post never discusses the situation honestly. It begins by telling readers that:

"increasingly, 'the public' [in "publicly held debt] means foreign governments and investors."

Why does it matter that foreigners hold government debt? Why would anyone care? There is an issue about foreign ownership of U.S. assets, which means that future income on these assets will flow abroad rather than to people in the United States, but this is as much or more of an issue of foreigners holding private assets like U.S. stocks and bonds. Furthermore, foreigner's acquisition of U.S. assets is tied to the trade deficit and the value of the dollar. If the Post is upset about foreigners holding too many U.S. assets than it should be editorializing for a reduction in the value of the dollar. Hasn't anyone on its editorial board taken econ 101?

The Post fails to mention the two factors that are driving its deficit/debt horror story. First is the debt that is being accumulated simply due to the downturn. I guess since they don't seem to have access to government data at the Post's editorial board they don't know about the high level of unemployment and the severe recession driving up deficits. The prospect of these deficits creating a high interest burden for future generations can be largely eliminated if the Federal Reserve Board just bought and held the bonds used to finance this deficit.

If that seems implausible, there is a good example of exactly this being done on a small island nation called "Japan." Over the last 15 years, Japan's central bank has bought up an amount of government debt that is almost equal to Japan's GDP. As a result, Japan's interest burden is less than 2.0 percent of GDP (@ $290 billion a year in the U.S.) even though its ratio of debt to GDP is close to 220 percent. In spite of this massive intervention by the central bank, Japan continues to be plagued by deflation, not inflation.

The other factor driving the deficit projections is the projected explosion of U.S. health care costs. If the U.S. faced the same per person health care costs as people in other wealthy countries we would be looking at surpluses, not deficits. However, the Post -- as a bastion of deficit chicken hawkism -- doesn't like to talk about health care reforms that would threaten the interests of the pharmaceutical industry, insurance industry and other powerful groups. They just want to cut programs like Social Security and Medicare that benefit ordinary workers.
Wealthy Countries May Become Less Crowded and the NYT Wants Us to Be Scared Print
Saturday, 31 July 2010 08:24

The NYT reported on new projections from the Population Reference Bureau showing continuing increases in population in the developing world and slow or negative growth in wealthy countries. Low birth rates in the wealthy countries are projected to lead to a rise in the ratio of retirees to workers. The NYT described this prospect as "sobering."

There is no obvious reason that people in wealthy countries should be concerned about the prospect of a rising ratio of retirees to workers. This ratio has been increasing for a century. The projected increase in the elderly dependency ratio is largely offset by a decline in the number of dependent children. At the worst, the rise in the dependency ratio will offset some of the gains in wage growth associated with rising productivity, as has been the case in prior decades. So, it is not clear what the NYT wants readers to find "sobering" about this news.

The article also implied that a large jump in the share of GDP going to Social Security and Medicare is due to the aging of the population. Much of the cause of the projected increase in spending on these programs is the projected increase in per person health care costs. If per person health care costs in the United States fell to the levels in Germany or Canada, the share of GDP devoted to these programs in 2050 would be little different from what it is at present.

Final Demand and the Inventory Cycle Print
Friday, 30 July 2010 15:17

Economics seems to be the science of forgetting. All the great truths that were pounded into our heads when we grad students, or even undergrads, seem to be missing from the thinking of those making pronouncements on the economy and economic policy.

For example, the housing wealth effect, a well-established economic doctrine firmly rooted in the center of the discipline, seems to have disappeared from most discussion of consumer spending patterns. The basic point -- that a dollar of additional housing wealth leads to 5-7 cents in additional consumption each year -- explains both the consumption boom at the peak of the bubble and the falloff in consumption in the wake of its collapse. Instead of noting the huge amount of lost housing wealth and recognizing the drop in the consumption and rise in the saving rate are permanent, economists and economics reporters are looking at consumer attitudes and hoping that greater optimism will lead to a new spending boom.

In the same vein, it is remarkable how little attention a very classic inventory cycle has received in explaining the changes in GDP over the last five quarters. The basic story is that firms were shedding inventory as fast as they could in the 4th quarter of 2008, with the rate of decline increasing into the first quarter of 2008. Although inventories continued to decline in the second quarter, they declined at a slower rate, which meant that inventories added to growth. Eventually firms stopped cutting inventories and began rebuilding. In the most recent quarter they were adding inventories at a very rapid pace, $85.9 billion a year.

With the latest figure, the inventory cycle has come to an end. I don't have a crystal ball telling me the rate of inventory accumulation in the next few quarters, but it is unlikely that it will be much higher than the current rate. This means that inventories will provide little boost to growth in future quarters, making GDP growth look like final demand growth and that is not very good.

While GDP growth has been erratic over the last four quarters, final demand growth has been much less so. It has been consistently weak, averaging just 1.2 percent. In the most recent quarter it was 1.3 percent. So unless we have some good reason for final demand growth increasing (state and local cutbacks, the end of the housing tax credit, and the phasing down of the stimulus all push the other way), we can expect very slow GDP growth for the next several quarters and rising unemployment.



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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.