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News for the Wall Street Journal, Countries Tend to Grow Faster When Coming Out of Recessions! Print
Monday, 23 June 2014 09:25

When economies have lots of excess capacity and idle workers, as is the case following a recession, they tend to grow very rapidly. When they are near their potential level of output growth tends to be slower.

This is why the United States economy was able to grow at a 5.6 percent rate in 1978 or a 7.3 percent rate in 1984. In both cases the economy was operating far below its potential so it had lots of room to grow simply to get back to potential. Once it reaches potential, an economy can only grow at the rate of labor force growth plus the rate of productivity growth.

If the Wall Street Journal understood this simple fact it might not have tried to imply that Japan faces some economic disaster because it is projected to have a lower rate of growth in 2015 than the other major western economies. Japan's economy is much closer to its potential than most of the other economies on the list.

Japan's unemployment rate is under 4.0 percent. And the percentage of prime age people (ages 25-54) who are employed is now 81.9 percent, 1.3 percentage points above the pre-recession level. By comparison in the United States employment among prime age workers is still down by 2.5 percentage points from pre-recession levels at 76.4 percent. Given this difference in where these economies are in relation to their potential output it would be very surprising if the U.S. economy were not growing more rapidly.

The piece also implies that a low growth rate is a major problem. Economists usually look at per capita GDP, that is why they generally think that Denmark is wealthier than Indonesia. Japan's population is shrinking at the rate of roughly 0.1 percent annually. By contrast, the U.S. population is growing at a rate of 0.8 percent annually. This means that, on a per capita basis, the 1.0 percent growth projected for Japan is equivalent to 1.9 percent growth in the United States. That is roughly the long-run potential growth rate that many analysts now project for the United States.

Putting Big Numbers in Context: It's Not Hard Print
Monday, 23 June 2014 04:38

The Washington Post had a piece discussing a proposal to increase access to child care. The piece told readers the proposal would cost $20 billion a year. It then added this could:

"be financed through a 0.2 percentage-point increase in payroll taxes, which advocates say equals $72.04 a year for the average female worker."

While the $20 billion figure likely would mean little to most Post readers since few have much sense of how large this is relative to the budget or their tax bill, most readers likely have a clear idea of what a 0.2 percentage point increase in the payroll tax means. This simple addition to the article conveyed essential information to readers that would have been missed if the article had only reported the $20 billion figure.

Now why can't news stories do this all the time?


Addendum: I see from comments that the calculation here almost certainly refers to the earnings of the median female worker and not the average. Thanks for catching this.

Patent Monopolies Cause Corruption: #56,897 Print
Monday, 23 June 2014 04:25

Every economist knows that when you put a 20 percent tariff on imported clothes it leads to inefficiency and corruption. For some reason they don't seem to know that when you give out patent monopolies that can raise prices by 2000 percent or more above the free market price that it leads to big-time inefficiency and corruption.

Reality is working hard to teach economists. Today the Washington Post had an article reporting on how many hospitals appear to be profiting from a program that allows them to buy drugs at a discount from the patent protected price. The program is ostensibly designed to provide drugs to low-income people.

This sort of program would of course be unnecessary if drugs were sold in a free market. There would be no reason to establish complicated discount systems if drugs were selling for $5-$10 per prescription, as is generally the case for generic drugs. This would require an alternative mechanism for financing drug research, but folks who have heard of the National Institutes of Health know that alternative mechanisms exist. (Yes, NIH mostly does basic research, but that it a policy choice not a fact of nature.)

Coal Mining Is Responsible for 0.6 Percent of Employment In Kentucky Print
Sunday, 22 June 2014 08:32

The Washington Post noted Kentucky Senator Mitch McConnell's efforts to block President Obama's new proposal for reducing carbon dioxide emissions by closing coal plants. It told readers:

"coal is a major source of energy and jobs in McConnell’s state and in several others represented by Democratic senators who are seeking reelection this year."

According to data from the Bureau of Labor Statistics Current Employment Situation survey, the coal industry employs 11,600 workers in Kentucky. This is equal to 0.6 percent of total employment (1,862,000). This puts Kentucky in second place to the 4.2 percent share in West Virginia, but in every other state represented by Democratic senators who are seeking reelection this year the share of employment in the coal industry is considerably less than in Kentucky.


Note: The share in West Virginia was corrected. The post originally said 1.6 percent.

Robots and Productivity Growth Print
Sunday, 22 June 2014 08:05

Steve Rattner has a column in the NYT in which he correctly argues that robots should not provide any reason for concern about future labor market prospects. As Rattner correctly points out, robots are just another form of productivity growth. As a general rule, productivity growth allows for rising living standards and more leisure. Rattner is also right to point out that productivity growth has actually been unusually slow in recent years, the opposite of the concern about robots destroying jobs.

Where Rattner goes wrong is in arguing that the gainers and losers in terms of labor market prospects have been determined by technology and globalization, as opposed to policies that have been designed to make some groups winners and some groups losers. This is very clear from examining the list of winning occupations on his chart. The highest, with median pay of $187,200 in 2012, is physicians. (Most other sources put the median pay of doctors at well over $200,000.) Our doctors are paid close to twice as much as their counterparts in other wealthy countries. This is primarily because we have a government policy of protecting them from both foreign and domestic competition.

Similarly people in finance can get enormous pay because the government grants large banks too-big-to-fail insurance, meaning it bails them out when their incompetence puts them into bankruptcy. (The I.M.F. recently estimated the size of this subsidy at $50 billion a year.) The government also subsidizes the industry by taxing other sectors more so that the financial sector can largely escape taxation.

Anyhow, Rattner is right that we need not fear productivity growth but he is wrong to claim that the winners and losers have been determined by the natural course of economic development as opposed to deliberate government policy.


If We Stopped Coddling Doctors Would the Kids Still Be at Home? Print
Sunday, 22 June 2014 07:56

Adam Davidson has an interesting piece in the NYT Magazine noting the rapid growth in the percentage of young adults who continue to live in their parents’ home well into their 20s. The main explanation for this shift is the deteriorating labor market prospects for young people. While the piece does note this fact and has some discussion of the causes, it would be worth going into the latter in a bit more detail.

The country has pursued a set of policies over the last three decades that have the effect of redistributing income upwards. The most important of these at the moment is the high unemployment policy being pursued by Congress. Congress decided that it wanted to rapidly reduce the budget deficit after the 2009 stimulus. This has slowed growth and prevented millions of workers from getting jobs. It has also meant that many workers with jobs are working fewer hours than they would like.

Perhaps most importantly, high unemployment substantially weakens the bargaining power of workers in the bottom half of the wage distribution (these are disproportionately younger workers), so that they end up with lower wages. (See my book with Jared Bernstein, Getting Back to Full Employment.) In short, the decision by Congress to run lower budget deficits has forced millions of young people to move back with their parents.

There are many other policy decisions that have also hurt the wages and job prospects of young people. The decision of the Clinton Administration to have a highly valued dollar back in the late 1990s led to a large trade deficit which is another major cause of high unemployment. The protection of doctors and other highly paid professionals from international competition raises the costs of health care and other services, thereby reducing the real wages of most workers.

And of course the massive government support of the financial sector, in the form of too big to fail services, bailouts, and tax subsidies (other industries are taxed more so that the financial industry can be taxed less), has come at the expense of the rest of the economy which might otherwise be better situated to employ young workers.

Anyhow, the tales in this piece are striking, as many young people continue to need substantial support from their parents at ages where they would have been on their own in prior decades. It is important to recognize the policies that led to this outcome.

Paul Krugman on Savings, Investment, and the Trade Balance Print
Saturday, 21 June 2014 08:17

Paul Krugman may have misled readers of his blog yesterday with the comment:

"the trade balance is a macroeconomic phenomenon, determined by the excess of savings over investment."

As an accounting identity the trade deficit is equal to the excess of national investment over national savings. However it would be wrong to conclude that the U.S. trade deficit is caused by our failure to save enough, especially in the current context where the economy is well below its potential level of output.

To take a simple example, suppose that we all become virtuous savers and reduce our consumption by an amount equal to 1 percent of GDP (@ $170 billion annually). This would reduce demand in the economy by $170 billion. In more normal times we might tell a story where this fall in demand would lead to a drop in interest rates, which would in turn spur additional investment. Lower interest rates should also lead to a lower valued dollar (fewer people want to hold dollar denominated assets at a lower interest rate). The lower valued dollar would lead to more exports (our goods are now cheaper to foreigners) and fewer imports (foreign goods are now relatively more expensive than domestically produced goods).

In this story, the end result is that we have the same level of output with higher levels of investment and net exports replacing the lost consumption. We have a somewhat higher level of national savings (the increased investment partially offset the rise in savings) and a lower trade deficit.

That would be the standard story of how a savings-investment balance determines the size of the trade deficit. However, no one can tell this story in today's economy. If everyone started saving more as described above, it would mostly just lead to a fall in output and employment.

The reason is that the adjustment process would not come close to offsetting the loss in demand. With the short-term interest rate already at zero we would see no help there. Long-term rates could fall some, but the reduction in longer term rates would at best have a trivial effect on investment. The dollar may not move at all, both because interest rates will have changed little and also because many countries (yes, China is the biggest) have a policy of targeting the price of their currencies against the dollar. If market forces started to push the value of the dollar down against their currencies they would respond by buying more dollars to keep up the value of the dollar.

In this story, savings will actually rise by considerably less than the initial $170 billion increase in savings because GDP will have fallen. This means that people who had been saving instead find themselves unemployed and spending from past savings (dissaving). The government will also be saving less (running larger deficits), since it is collected less in taxes and paying out more in transfers like unemployment benefits. There would be some reduction in the trade deficit since at lower levels of GDP we buy less of everything, including imports, but for the most part the trade deficit and national savings balance is maintained by lower savings from the reduction in GDP offsetting most of the increased in intended savings.

By contrast, if foreign countries suddenly started buying more of our stuff (say the dollar fell by 20 percent) then we would see an increase in employment and output. This would lead to more savings as formerly unemployed workers get jobs and can now start putting money into the bank. Also government savings increases as increased employment means more taxes and less money paid out in transfers. The net effect is that a lower trade deficit leads to more net national savings.

When considering these accounting identities it is important to keep the stories on causation straight, otherwise you get some really bad policies. Paul Krugman of course knows this and has made the same point many times (here for example), but we must work hard to prevent confusion on the topic.


Note: link fixed, thanks Squeezed Turnip. Also, typo corrected.

Higher Interest Rates Lead to More Investment Print
Friday, 20 June 2014 05:41

That appears to be the central claim of Kevin Warsh and Stanley Druckenmiller in a Wall Street Journal column criticizing the Fed's asset buying program. The central claim appears to be that because asset prices have been rising, companies have been discouraged from undertaking productive investment. While Warsh and Druckenmiller are certainly right that the asset buying program has had limited benefits for the real economy, it doesn't follow that the economy would be stronger without it.

First, they misrepresent the wealth situation when they tell readers:

"The aggregate wealth of U.S. households, including stocks and real-estate holdings, just hit a new high of $81.8 trillion. That's more than $26 trillion in wealth added since 2009."

The sharp rise in wealth since 2009 was due to a sharp plunge in the financial crisis. The notion of a "record" is misleading since the economy is growing we expect wealth to continually hit records. The ratio of wealth to GDP was 4.78 in the first quarter of 2014. By comparison, it was 4.86 for 2006. The Fed's policies have simply brought the ratio of wealth to GDP back to pre-recession levels.

More importantly, Warsh and Druckenmiller seem to turn causality on its head when they say:

"Meanwhile, corporate chieftains rationally choose financial engineering—debt-financed share buybacks, for example—over capital investment in property, plants and equipment."

Low interest rates encourage corporations to invest in stock rather than bonds. If interest rates were higher, then presumably they would do the opposite. Low interest rates (and high stock prices) make it easier to borrow to finance capital investment in property, plants and equipment. It is hard to imagine why they think firms would be investing more, if it cost them more money to make these investments.



NYT Whitewashes German Right-Winger Print
Friday, 20 June 2014 04:03

The NYT ran a piece profiling former IBM executive and Bank of America adviser Hans-Olaf Henkel, who is now head of a German anti-euro party. While it discusses much of his background in business and politics, it neglected to mention his efforts to blame the U.S. housing bubble and financial crisis on anti-discrimination laws. Specifically, he attributed the crisis to the 1977 Community Re-investment Act (CRA), which prohibited banks from discriminating based on the racial compensation of a neighborhood and required them to invest in the areas from which they were drawing deposits.

As Henkel described the problem:

"Mr. Galbraith [University of Texas economist James Galbraith] should familiarize himself Jimmy Carter's "Housing and Community Development Act" where in Section VIII Banks were prohibited the practice of "red lining" which until then enabled them to distinguish 'better living quarters' and 'slums.'"

This tidbit would seem to provide an important insight into Mr. Henkel's background that deserves to be noted in a profile.

As a practical matter, Henkel's claim about the CRA is absurd on its face. Much of the sub-prime lending of the bubble years was done by financial institutions that were not  covered by the CRA to areas that would not be covered. Huge subprime lenders like Ameriquest, Countrywide, and New Century mostly raised their money on Wall Street, not from bank deposits and therefore were not subject to CRA regulation. Furthermore much of the lending was to newly built exurbs that would not be covered by the CRA, which was intended to protect inner city neighborhoods.

The subprime loans were made for the old-fashioned reason, they were hugely profitable. Bankers don't need government bureaucrats to tell them to make money.

Contrary to Neil Irwin, "We" Are Not All Crony Capitalists Print
Thursday, 19 June 2014 13:48

Neil Irwin is trying to implicate the rest of us in his desire to subsidize Boeing and other big corporations through the Export-Import Bank. The Ex-Im Bank provides below market loans to select projects in order to help make sales in both directions. Irwin tells readers the debate over the bank provides:

"A fascinating case study in how modern economies really work, and the ways big business and big government are inevitably intertwined in ways that believers in free markets may not like — but may not be able to avoid. In short, we’re all crony capitalists, whether we like it or not."

Irwin argues that all foreign governments have similar sorts of subsidies for their businesses and that we would be operating at a serious disadvantage if we didn't subsidize our business deals.

There are two points worth noting on Irwin's argument. First, it goes directly against free trade 101. Remember how we call autoworkers and steelworkers Neanderthal protectionists if they support tariffs or quotas to keep their jobs? The argument that is the basis for dismissing these workers' efforts at protecting their livelihoods is the same argument that would be used against the Ex-Im Bank. (Other countries provide subsidies to their auto and steel industry also. In the standard trade models it doesn't matter.)

When Irwin tells us that we have to be crony capitalists "whether we like it or not," why don't we also have to be crony protectors of workers' livelihoods? It seems that there is a very fundamental inconsistency here. When it comes to business interests we are prepared to throw the economics textbook theory in the garbage, but when the question is worker's jobs, that textbook is the bible.

The other point worth noting in reference to Irwin's argument is the logic of the textbook story itself. The logic is that if we lose jobs in the steel or auto industry we will get jobs in other sectors that will offset these losses. This is not an absurd argument, although the new jobs are not likely to help the auto or steel workers. In the case of business as a whole, the argument would be that if we don't subsidize loans to favored businesses through the Ex-Im Bank, then we would sell less overseas. This would lead to a fall in the value of the dollar which would make our unsubsidized exports more competitive internationally and make our domestically produced goods cheaper relative to imports. In principle this market determination of winners and losers is more efficient than the government's designation through the Export-Import Bank.

People can come to different conclusions about the value of the Ex-Im Bank, but it is inconsistent to claim to be a free trader and to support the Bank. Anyone who supports the Bank is clearly willing to have the government subsidize certain businesses. If they claim support for free trade is the reason they don't care about losing auto or steel jobs to foreign competition, they are not being honest.

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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.