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Home Publications Blogs Beat the Press An Arithmetic Lesson for Steven Pearlstein

An Arithmetic Lesson for Steven Pearlstein

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Sunday, 04 March 2012 09:00

Washington Post business columnist Steven Pearlstein often has thoughtful things to say about the economy; not today. He has one of those charming "pox on both your houses" pieces in which he even-handedly denounces the left and the right.

The denunciation of the right is fine. Complaints about economic harm from high taxes and over-regulation are utter nonsense as we all know. (We have low taxes and business-friendly regulation already.) It's the attacks on the left that defy arithmetic and logic.

He begins the piece by touting the economy's 3 percent growth rate in the fourth quarter and recent job creating pace of 200,000 a month. Then he tells readers:

"There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more."

Okay, let's assume that the growth rate remains ate 3.0 percent, which is somewhat higher than most forecasts. Currently the economy is operating at about 6 percent below its potential. Potential growth is around 2.5 percent annually according to the Congressional Budget Office. This means that we will make up our shortfall at the rate of 0.5 percentage points annually. That puts 2024 as the year when we again reach potential GDP.

Taking the jobs side of the picture, the economy is currently down by around 10 million jobs from where it would be had we continued on our pre-recession job growth trend. We have to create roughly 100,000 jobs a month to keep pace with the growth of the labor force. This means that if we create 200,000 jobs a month, then we are cutting into this shortfall at the rate of 100,000 jobs a month. That gets back to full employment in 100 months or 8 and a half years.

Hey, who can call this a depression?

The substance is perhaps even more irksome than Pearlstein's arithmetic problems. He complains:

"It is true, for example, that with additional borrowing and spending, we could rehire laid-off teachers and police officers. That would certainly boost employment in the short term, reduce class sizes and make us all feel safer. But the reality is that, even if the economy were to improve as a result, it would be many years before tax revenues return to where they were at the height of the bubble. At some point, spending by state and local governments will have to be brought down to match the level of taxes that their voters are willing to pay. The notion that once unemployment falls below 6 percent everyone will join hands and finally put the fiscal house in order — well, that’s nothing more than political fantasy."

If Pearlstein ever paid any attention to the people who is criticizing, he would know that they advocate federal support for these services at the state and local level. The federal government can of course borrow very cheaply and cover the cost of this aid when the economy is in a downturn. When the unemployment rate returns to more normal levels, contrary to what Pearlstein seems to imply here, state and local governments will have the necessary tax revenue to pay for these services. (That is not true everywhere, but there are always growing and declining regions of the country.)

Pearlstein then goes on to trumpet spending on improving infrastructure, education, and research and development, all investments that will have long-term payoffs. Maybe there is someone on the left who does not support aggressive spending in these areas, but I challenge Pearlstein to find this person.

Finally, it is incredible that in a piece focused on the need to restructure the economy, Pearlstein does not once mention the value of the dollar. The fundamental imbalance in the U.S. economy is its large trade deficit. This will only be corrected by a sharp decline in the value of the dollar against the currencies of our trading partners, something that Pearlstein has written about frequently in other columns.

It certainly would have been worth mentioning this point here. When the dollar does fall to more competitive levels, the United States stands to gain 4-5 million manufacturing jobs. This will have an enormous impact on re-balancing the U.S. economy.

Comments (4)Add Comment
Depression, 21st Century style
written by Robert Salzberg, March 04, 2012 9:40
   Depressions should be defined as a long term decline in real median wages.  Real wages declined in America over the last decade and low wage compensation has been declining for decades.  The minimum wage 44 years ago was 44% larger in buying power than it is today.

   Wage growth matched productivity growth from WWII until around 1980 when Reaganomics began to dominate American policy.
...
written by Fred Brack, March 04, 2012 7:38
Thanks, Mr. Baker! I came to your blog immediately after reading Pearlstein's column, knowing you would refute him soundly and relieve my frustration.

Pearlstein has his story, and he's sticking to it -- data, facts, evidence be damned! Story-telling is how we humans tried to make sense of the world before the Age of Science, before data, facts, evidence. Story-telling lives on because of its allure and its power.

You, Mr. Baker, can only do your best to refute false stories. And for that we fans of yours are grateful.
retired professor of economics
written by Richard Hattwick, March 05, 2012 6:26
Very comprehensive and nicely done. However, I was surprised that you did not throw in a line about the option of borrowing from the FED and included the fact that interest paid on loans from the FED come back to the Treasury. You occasionally do so. You are one of the few blogging economists who do so. And I urge you to keep doing so. Think of it as an on-going battle on your part to create awareness of a valuable policy option. Keep up the good work!
The American federal government does not need to borrow money
written by Tyler, March 05, 2012 9:03
Any country with its own currency does not need to borrow money.

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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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