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It Doesn't Matter that Oil is Priced in Dollars # 78,254 Print
Tuesday, 01 February 2011 17:54

The NYT told readers that:

"A stronger euro blunts the effect of rising prices for oil and other commodities, which are traditionally priced in dollars." Actually, it does not matter at all that the oil and other commodities are priced in dollars, the point is that the euro has gone up in value. If the euro were to rise in value against other currencies then people in the euro zone would pay fewer euros for their oil even if oil was priced in euros.

In this story, the dollar is simply the medium of exchange. Oil is not fixed in price in dollars, the price of oil is fluctuating in dollars and all other currencies. The only question that matters is the value of the euro relative to other currencies, it doesn't matter which currency is the basis for the purchases.

The piece also includes the interesting comment that:

"German wages have not started rising to alarming levels yet, Mr. Chaney said, 'this is something that is on the radar screen.'” It is likely that most people would not be alarmed by the plausible rate of growth for German wages in the near future. The people who would find such wage growth "alarming," are likely a very small subset of NYT readers or people in Europe and the United States.

Housing Market: Ever Hear of It? Print
Tuesday, 01 February 2011 06:01

Yeah, it's a little known market that involves every household in the country and is valued at more than $16 trillion. According to some accounts, it had something to do with the recession.

It seems the media still don't really know much about the market, otherwise we would have seen news articles on the Census Bureau's report on vacancy rates for the 4th quarter. The report showed a substantial drop in vacancy rates from both the last quarter and the fourth quarter of 2009. While vacancy rates are still at historically high levels, this is the first clear decline from the peak vacancy rates reached in 2007. Under the theory that prices are affected by the balance of supply and demand, we should not expect to see house prices finally stabilize until the vacancy rate returns to a more normal level. This report suggests that the market is finally moving toward that point, although it still has far to go.

The report also includes data on homeownership, which showed a further decline. Homeownership rates are now below their 1998 level. On an age-adjusted basis (older people are more likely to be homeowners), the bulk of the increase in ownership rates since the 1990-91 recession has now been reversed.

This information about the state of the housing market and homeownership would have been worth some mention, especially since so many politicians seem to view homeownership as being of great importance.


Addendum: It seems that the Wall Street Journal has heard of the Census Bureau.

It is Possible to Fire Tenured Teachers Print
Tuesday, 01 February 2011 05:54
This is a point that would have been worth stating clearly in an article on efforts by many Republican governors to eliminate teacher tenure. In every jurisdiction that has tenure, teachers who are demonstrated to be incompetent can be removed from the classroom and fired. However administrators must take the time to document that a teacher is incompetent before they can be fired. Many school administrators choose not to bother with the effort to remove under-performing teachers.
Math and Economics Are Hard! Print
Monday, 31 January 2011 05:36

That is pretty much what former Obama adviser Steven Rattner had to say in the Washington Post today. In his piece, Rattner told President Obama:

"don't blame the talented economists who were advising you .... Creating jobs is a slow and frustrating process in the wake of a tough recession."

Calling the president's economic advisers "talented" is good for their self-esteem (we know how important that is), but in the real world, their talent as economists must be judged by their performance. Missing the biggest asset bubble in the history of the world (a credential shared by all of the president's economic advisers) doesn't speak well for them. 

However even more important is their failure to generate jobs for the country's workers following the bubble's collapse, which has to be the top priority for economic policy. While job creation might be "hard" other countries have managed to do it. For example, Germany has managed to bring down its unemployment rate from 7.1 percent at the start of the downturn to 6.7 percent today. This was accomplished in spite of the fact that Germany actually had a steeper downturn than the United States.

Mr. Rattner's piece suggests one of the key causes of the administration's failure to generate jobs. Rattner highlights the more rapid productivity growth in the United States over the last decade than in other countries, in particular singling out Germany as country with slower growth.

While faster productivity growth is generally better than slower growth, this is not the case when an economy does not have full employment. In this context, faster productivity growth just leads to more unemployment. One of the key mechanisms that Germany has used to keep its unemployment rate down is work-sharing. This is a program where the government subsidizes firms for keeping workers on their payroll, but working fewer hours than normal.

An expected outcome of this program is lower productivity. The idea is that it is best to keep people employed, where they can still get most of their paycheck, continue to develop their skills, and maintain contacts with their fellow workers. The alternative of having them laid off would mean higher productivity in the short-term, but it could lead to millions of workers joining the long-term unemployed. It is very difficult for these workers to be subsequently re-employed, therefore leading to permanent losses to the economy. Of course a prolonged period of unemployment is also likely to be devastating to the unemployed workers and their families.


Looks Like Lowering the Value of the Dollar Does Reduce the Trade Deficit With China Print
Monday, 31 January 2011 05:28

The NYT reports on how rising prices and wages in China are dampening demand for its exports. The article presents rising prices in China as an alternative mechanism to a revaluation of the yuan (devaluation of the dollar) for reducing the U.S. trade deficit with China.

While the assessment in the article is largely anecdotal, if it is correct then its suggest that those who advocated a higher yuan as a cure to the trade deficit were correct. The NYT and other media outlets had generally presented this as a debatable point. It would have been worth noting that those who argued that trade would not respond significantly to changes in relative prices appear to be wrong.
AP Displays Numeracy Deficit in Social Security Coverage Print
Sunday, 30 January 2011 22:36
A headline of an AP article (featured on Yahoo's website) told readers that: "Social Security posting $600B deficit over 10 years." Actually, the Social Security program is projected to run a surplus in every year of the next decade, adding more than $1.3 trillion to its trust fund, as people with access to the Social Security Trustees Report know.


The NYT Forgot to Mention Greece's Problem With Tax Evasion Print
Sunday, 30 January 2011 09:04

The NYT ran a piece on the difficulty of establishing a business in Greece. This discussion was set against the backdrop of Greece's competitiveness problems and its budget problems. 

It would have been worth mentioning in this context the enormous problem of tax evasion in Greece. The OECD has estimated that close to one third of Greece's economy is underground and therefore not paying taxes. This level of tax evasion both reduces revenue to the government and also encourages cynicism towards the law more generally. If everyone knows that the wealthy do not pay the taxes they owe then it is difficult to argue that truckers, pharmacists or other protected groups should give up the state supports that limit competition and allow them to be better off than the population as a whole.

In this context one obvious reform that has not been included in Greece's austerity packages is a tax amnesty. This could take the form of allowing people to pay several years of back taxes with little or no penalty over a 6 month or 1 year time horizon.

This allows the wealthy to vote with their feet as to whether they believe the country is serious about enforcing its tax code. If they believe that the law will actually be enforced in the future, then there will be a flood of revenue coming into the government. On the other hand, if they think that it will just be more business as usual, then little money will be collected. For this reason, a tax amnesty would have provided a great signal to both Greek society and the EU.

The article also includes the seemingly contradictory assertion that the laws sharply limit the number of lawyers and that Greece "is among the world’s leaders in lawyers per capita." Of course it is possible that the extensive web of regulations in Greece leads to a larger than normal demand for lawyers.

Is the Business Press Prohibited from Talking About Falling Imports as a Cause of Growth? Print
Saturday, 29 January 2011 11:10

Politicians routinely say things that are not true to push their trade agreements. For example, they call them "free trade" agreements (everyone likes freedom) even though they do little to free trade in highly paid professional services (e.g. doctors' and lawyers' services) and actually increase protection in some areas like copyrights and patents.

They also say silly things about exports creating jobs, without pointing out that it is net exports (exports minus imports). If any politician was actually stupid enough to believe that exports by themselves create jobs then he would be advocating imports of hundreds of billions of dollars of goods from Mexico and Canada and then re-exporting them to create jobs. Even the people who hold high elected office don't believe anything that crazy.

Unfortunately the media largely cooperate with the politicians' efforts to push trade deals. Hence they refer to them as "free trade" deals and they rarely point out that anyone talking about job creation from exports, rather than net exports, is being misleading. 

The media seemed to be in the trade agreement promotion mode in its reporting on the 4th quarter GDP report. The second most important factor (after consumption) in the 3.2 percent growth rate reported for the quarter was a 13.6 percent drop in imports. The domestic production that replaced these imports added 2.4 percentage points to growth for the quarter. This fact seemed to go virtually unmentioned in the reporting on the GDP report, as though the media did not want to put the idea in people's heads that lower imports means higher growth.

As a practical matter the fall in imports was almost certainly associated with the slower pace of inventory accumulation reported for the quarter. It is likely that inventory accumulation will rise to a more normal rate in the first quarter of 2011. This will be a boost to growth, however the corresponding jump in imports will be a largely offsetting subtraction.

Can We Take Away Alan Greenspan's Pension? Print
Saturday, 29 January 2011 08:42

Joe Nocera gets most of the story right in his discussion of the Financial Crisis Inquiry's Commission's (FCIC) report today. There was gross negligence, greed, and outright fraud, but none of this would have lead to catastrophic consequences if we didn't have a housing bubble. (For that matter, having a housing bubble driven economy virtually guaranteed catastrophic consequences, even without the financial abuses. Spain, which had a well-regulated banking system and no financial crisis, keeps reminding us of this fact, with its 20.6 percent unemployment. The commission was off on the wrong foot from the outset in looking at the "financial crisis." The real crisis is an economic crisis caused by the collapse of an asset bubble which had been the engine of growth in the economy.)

Nocera blames the mass delusion that house prices could rise endlessly with no foundation in the fundamentals of the housing market. This is absolutely right, but there is a key point missing. We have regulators, most importantly central bankers like Alan Greenspan and Ben Bernanke, who are not supposed to succumb to mass delusions. They are supposed to make their assessments of the economy based on a measured analysis not the hysterical rantings of the deluded masses.

Using simple economic analysis and the arithmetic we all learned in 3rd grade it was possible to recognize the housing bubble as early as 2002. It was also possible to know that the bursting of the bubble would be bad news for the economy and that the news would get worse as the bubble grew larger.

The Fed had enormous power with which to shoot at the bubble. First, Greenspan and Bernanke could have used the resources of the Fed to document the evidence for the existence of the bubble and highlight the consequences of its bursting. Note that this is not about mumbling "irrational exuberance." The idea is to have the Fed's research staff put out paper after paper showing that house prices were hugely out of line with their historic levels with no plausible explanation in the fundamentals. This research could have been highlighted in Congressional testimony and other public appearances by Greenspan and other top Fed officials.

The second step involves the Fed's regulatory power. The deterioration of lending standards and outright fraud in issuing mortgages that is documented in the FCIC report was knowable to regulators at the time. (I knew about it because people from around the country were telling me about abuses by their friends/relatives in the mortgage industry. And, I have no regulatory authority.) The Fed could have used its regulatory authority to crack down on the banks that were issuing fraudulent mortgages and to prod the SEC to go after the investment banks that were securitizing them.

Finally, if steps one and two did not work, the Fed could have raised interest rates. Greenspan has always been dismissive of the idea that higher interest rates could have popped the bubble, noting that long-term rates stayed low in 2005 and 2006 even as short-term rates rose by several percentage points. This is again a silly cop out.

Suppose that Greenspan started a round of rate increases with the explicit target of popping the housing bubble. For example, suppose he announced the first half point rise in the federal funds rate and said that he would continue to raise interest rates until the real value of the Case-Shiller 20 City index fell below its 2000 level. This likely would have gotten the attention of financial markets and had some impact on house prices.

Instead Alan Greenspan, with Ben Bernanke at his side, did nothing. In fact, at several points he seemed to foster the bubble by dismissing the concerns of those who raised questions about the run-up in house prices.

There is a real problem of incentives here. Greenspan and Bernanke would have gotten serious heat from the financial industry if they had done the right thing and shot at the bubble. After all Angelo Mozillo, Robert Rubin, and many other rich and powerful types were getting very rich. On the other hand, they seem to have suffered zero consequence from doing nothing, even when their failure to act had absolutely disastrous consequences.

The lesson here for future central bankers is to keep the financial industry happy and everything will be fine. If that is the case, then we should expect more irresponsible behavior from the industry and possibly more bubbles. The problem is that the cops are on their payroll.

It is not too late -- we could still fire Bernanke and take away Alan Greenspan's pension. Unfortunately, the financial industry is not about to let that happen nor is the business media likely to even let these options be discussed in polite circles.

NYT Abandons Distinction Between News and Editorials to Bash Japan Print
Friday, 28 January 2011 17:43

"As this fading economic superpower rapidly grays, it desperately needs to increase productivity and unleash the entrepreneurial energies of its shrinking number of younger people. But Japan seems to be doing just the opposite. This has contributed to weak growth and mounting pension obligations, major reasons Standard & Poor’s downgraded Japan’s sovereign debt rating on Thursday."

This is the sort of paragraph that one would expect to find in an editorial, not a news article. After all, is this a known fact that Japan "desperately" needs to increase productivity? More productivity is generally good, but the article presents no evidence of its desperation. (Standard & Poor's is famous for giving triple A ratings to hundreds of billions of dollars worth of junk mortgage-backed securities. Based on its track record, the credit ratings agency judgement is worth less than that of a hopeless street drunk.) Furthermore, the evidence in the article actually suggests the direct opposite -- it appears that Japan has surplus labor -- the point of the article is that there are no jobs for young people. 

In other words, if the anecdotes presented in the article are in fact typical, then it seems that Japan has a great surplus of labor. That means that it absolutely does not desperately need to increase productivity nor does it suffer from an aging population. It is of course wasteful to not use any one's talents, but this has absolutely nothing to do with the aging of the population as the article asserts.

The more obvious problem is the lack of demand in the economy. This could be remedied by more government spending. While this may cause the stumbling drunk bond raters at Standard & Poor's to downgrade Japan's debt further, more spending could boost the economy under the economic theory that people work for money. The fact that Japan is not approaching any real limits (as opposed to the drunken delusions of bond raters) is evidenced by the deflation that is noted in the article.

Countries that are reaching the limit of their ability to finance debt suffer inflation, not deflation. In other words, there is every reason to believe that Japan could just spend a large sum of money creating or subsidizing jobs for its young. Its central bank can simply buy and hold the bonds used to finance this spending.  

In this respect, some of the complaints against Japan just seem to be invented. For example, at one point the piece asserts that:

"While many nations have aging populations, Japan’s demographic crisis is truly dire, with forecasts showing that 40 percent of the population will be 65 and over by 2055. Some of the consequences have been long foreseen, like deflation: as more Japanese retire and live off their savings, they spend less, further depressing Japan’s anemic levels of domestic consumption."

Actually, this is 180 degrees at odds with what economists generally predict. The elderly in general have low savings rates, as they spend down the wealth that they have accumulated over their working lifetime. With a smaller share of the population working, the general concern is that consumption is too large a share of GDP. This could lead to inflation, not deflation.

The article also includes the assertion that:

"Calculations show that a child born today can expect to receive up to $1.2 million less in pensions, health care and other government spending over the course of his life than someone retired today; in the national pension system alone, this gap reaches into the hundreds of thousands of dollars."

There is no source cited for these "calculations." Readers may question these calculations since they imply that the difference between current benefits and future benefits will be almost three times as large as the $417,000 combined Social Security and Medicare benefits that middle-income workers in the United States can expect to receive. Since Japan is a somewhat poorer country than the United States, it seems implausible that it can pay out so much more in benefits to its population.

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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.