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David Wessel Tells Morning Edition that Ben Bernanke Doesn't Know What He Is Talking About Print
Friday, 10 September 2010 05:18

Wessel did not use exactly those words, but he told listeners that the only option that the Fed still has to boost the economy is to buy more long-term bonds. In 1999, when he was still a professor at Princeton, Bernanke wrote that, in similar circumstances Japan's central bank should deliberately target a higher inflation rate in the range of 3-4 percent.

This was an idea that was originally proposed by Paul Krugman and has more recently been suggested by Greg Mankiw, President Bush's top economic advisor, and Olivier Blanchard, the chief economist at the IMF. It would be interesting to know how Mr. Wessel determined that this idea is not a possible policy option.

 
The Washington Post Reports One Side of Football Scores Print
Friday, 10 September 2010 04:52

That's right, the Dallas Cowboys scored 14 points. In a separate game, the New York Giants got 9 points. This is what the Post's sports section would look like if it reported on football the same way the business section reports on trade.

An article on a Steelworkers' complaint against China for unfairly subsidizing its clean energy industries concluding by reporting that:

"Undersecretary of Commerce for International Trade Francisco Sanchez noted that the overall numbers showed 'very bright spots' for U.S. exports to fast-growing Asian and Latin American nations. He added that exports throughout major southeast Asian nations were up 40 percent this year amid strong regional economic growth."

The employment impact on trade is determined by the trade balance, as Mr. Sanchez presumably knows. The trade deficit with most developing countries has been worsening over the last year. For example, the trade deficit in goods with India was $2.8 billion through July of 2009, the deficit with Thailand was $6.4 billion. The corresponding numbers for 2010 are a deficit of $6.0 billion with India and $7.4 billion with Thailand. In other words, the trends are going the wrong way, the United States is losing more jobs because of trade, not fewer.   

 
David Brooks Tells Us to Just Sit Back and Accept Double-Digit Unemployment Print
Friday, 10 September 2010 03:53

In another fascinating piece of creative economics David Brooks tells us: "we can get distracted by short-term stimulus debates, but those are irrelevant by now." Okay folks, just get used to 9.6 percent unemployment, Mr. Brooks says that there is nothing can be done.

The column is chock full of observations that most people did not know, probably because they are not true. For example, Brooks tells us that if more people follow the recommendation of Michelle Obama and go into teaching and service occupations then it will make the country poorer.

That's an interesting thought. Would the country be worse off if most teachers came from the top quartile in their classes rather than further down the ladder? I certainly did not know this.

As for other service occupations, the country certainly could have used more competent and honest economists. We are losing more than $1.4 trillion a year (@$19,000 for a family of four) due to the recession caused by the collapse of the housing bubble. If we had more competent economists, then the bubble never would have been allowed to grow to such dangerous levels. We can call this $19,000 in lost output a year the "incompetent economist tax." (By way of comparison, toward the middle of next year the incompetent economist tax will exceed the size of the 75-year projected shortfall in the Social Security trust fund.)

Competent economists could make us richer in other ways. For example, we spend close to $300 billion a year on prescription drugs. These drugs would cost roughly one-tenth as much if patent monopolies did not allow drug companies to sell their drugs at prices far above their competitive market price. Competent economists could develop more efficient mechanisms for financing prescription drug research, thereby saving us hundreds of billions of dollars a year.

Even Mr. Brooks' key concern, a lack of people going into engineering, could be addressed in large part of a bit of competent economics. Manufacturing in the United States is at an enormous competitive disadvantage because of the over-valued dollar. If the dollar is 30 percent over-valued, then it means that we are effectively providing a subsidy of 30 percent for imports and imposing a tariff of 30 percent on exports. As people who understand economics know, the over-valued dollar is the main reason that we have a trade deficit.

If we got the dollar down, then our manufacturing industry would be much more competitive. This would make careers in engineering more attractive relative to the alternatives. Then we would have more people entering engineering and David Brooks would be happy.

 
Krugman Wrong on Japan's Demographics and Stagnation Print
Thursday, 09 September 2010 05:02

BTP doesn't ordinarily focus on blogs, but Paul Krugman's blog is widely read, and most of us expect him to be right, so it is a big deal when he gets an important point wrong. This morning he told readers that part of the explanation for Japan's decline in per capita income relative to the U.S. is due to its aging population. He argues that his has led to a drop in the percentage of working age people in the population, which has led to a drop in per capita output.

A quick trip over to the OECD's data base tells a somewhat different story. While the ratio of working age people to population did fall in Japan over this period, we also see a rather dramatic decline in average hours worked per worker. Average annual hours per worker dropped by 7.0 percent from 1992 to 2008.

This indicates that there was no shortage of potential labor in Japan over this period. If Japan had pursued policies that generated demand, there is no reason to believe that its workforce would not have supplied the necessary labor, inspite of the decline in the percentage of working age people in the population. In other words, Japan's economy was demand constrained, not supply constrained.

This doesn't mean that there are not circumstance under which Japan's population could become supply constrained, it's just that these circumstances did not exist in the stagnation of the last 18 years. This is sort of like a baseball team that is reduced by injuries to 23 players on its roster (rather than the usual 25), which gets beat 24-2 as a result of an awful performance by its starting pitcher and the early relievers. It may matter at some point that the team only has 23 players to draw upon, but that would not have been the issue in this particular loss.

This point is important because there is a whole industry devoted to scaring the public about the demographic changes that the United States is now experiencing. While these changes will certainly affect the economy, they will not be the main determinants of living standards. The success or failure of economic policy will dwarf the impact that projected decline in the ratio of workers to retirees will have on well-being.  

 
House Prices and Income Print
Wednesday, 08 September 2010 04:47

David Leonhardt has an interesting piece on house prices but ends up making a serious logical error. He argues that house prices typically keep pace with income, meaning that they have risen more rapidly than inflation. He bases this assessment on the fact that the portion of income that has been devoted to to housing has remained constant over roughly the last 80 years.

There is a logical problem in this analysis. In principle, the issue is the movement of a the price of a house of the same quality, not the amount that people actually spend on housing. If the price of a house of the same quality rises in step with income, and the share of income devoted to housing remains constant, then this logically implies (i.e. there is no way around the conclusion), that the quality of housing has not increased over this period.

This would mean that the homes that people are buying today are no bigger or better than the homes that people bought 80 years ago. This contradicts an enormous amount of data and common sense. It is unlikely that anyone would seriously argue this case. Therefore, we can conclude that house prices have not kept pace with income growth. 

 
Real Interest Rates Please Print
Thursday, 09 September 2010 04:10

The NYT has a front page piece on how low interest rates are hurting people who live on their saving. While interest rates are low, it would have been worth noting that the inflation rate is also very low. This is important to take into account in this sort of discussion, since the inflation rate had typically been higher in prior decades.

The real interest rate, the interest rate minus the inflation rate is the true return to savers. If the interest rate is 3 percent and the inflation rate is 3 percent, then the real value of a person's savings would erode by by 3 percent a year, if they spent all of their interest. Currently the inflation rate is close to 1 percent, which means that the real value of savings is only be reduced by 1 percent annually if a person spends their interest.

Real interest rates are low at present, which is a deliberate policy, but just reporting on the nominal rates presents a distorted picture of the situation facing savers.

 

 
Are Tax Cuts to Business a Jobs Program? Print
Wednesday, 08 September 2010 04:34

NPR told its listeners that they are this morning in its top of the hour news segment. It described President Obama's proposal to allow businesses to have 100 percent expensing of new investment as a "jobs program." In fact, the vast majority of the investment that will qualify for this credit would have taken place in any case. 

I am petitioning NPR to have my plan for tax cuts to Dean Baker labeled as a jobs program.

 
Is a 1.7 Percentage Point Decline in the Unemployment Rate Substantial? Print
Wednesday, 08 September 2010 04:26

The NYT says it isn't. The context is a discussion of President Obama's new stimulus program. The article tells readers that the word "stimulus,"

"has taken on negative political connotations since the original roughly $800 billion recovery plan and subsequent additions have failed to push unemployment down substantially."

According to the Congressional Budget Office the stimulus has reduced the unemployment rate by between 0.8 and 1.7 percentage points. This clearly was not enough to get the economy back to full employment, but arguably it was still substantial. People would likely view the economy very differently today if the unemployment rate was over 11 percent.

Arguably, the major cause for disenchantment with the stimulus was the fact that it was hugely oversold. The Obama administration badly underestimated the severity of the downturn and claimed that the stimulus would be sufficient to bring about a recovery.

 
$50 Billion in Infrastructure Spending Is Equal to 1.4 Percent of the Federal Budget Print
Tuesday, 07 September 2010 04:19
It is also equal to about 4 percent of the $1.2 drop in annual demand (@ $600 billion in lost consumption and $600 billion in reduced construction) due to the collapse of the housing bubble. These would be items worth including in discussions of President Obama's latest infrastructure proposal for those wanting to know the impact it will have on the budget and the economy.
 
Japan's Declining Population Means a Smaller Supply of Labor Print
Tuesday, 07 September 2010 04:07

It appears to be a standard ritual to cite Japan's declining population as an evil in all discussions of things Japanese. Today the NYT refers to the declining population as one of the factors making life bad for young workers.

Actually, a declining population is likely a plus for young workers. It means less competition for employment than would otherwise be the case. Falling population should also lead to improvements in the quality of life that will not be picked up in conventional economic measures. For example, its transportation system will be less heavily utilized, allowing people to reduce the time spent traveling to work and for other purposes.

 
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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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