Brooks and Marcus on PBS News: Getting Just About Everything Wrong on the Economy (see correction)
|Saturday, 03 August 2013 05:35|
The PBS Newshour won the gold medal for journalistic malpractice on Friday by having David Brooks and Ruth Marcus tell the country what the Friday jobs report means. Brooks and Marcus got just about everything they said completely wrong.
Starting at the beginning, Brooks noted the slower than projected job growth and told listeners:
"Yes, I think there's a consensus growing both on left and right that we -- the structural problems are becoming super obvious.
"So when the -- this recession started a number of years ago, you had 63, something like that, out of 100 Americans in the labor force. Now we're down, fewer than in [the employment to population ratio is now 58.7 percent] -- than when the recession started. And so that suggests we have got some deep structural problems. It probably has a lot to do with technological change. People are not hiring -- companies are not hiring human beings. They're hire machines."
It's hard to know what on earth Brooks thinks he is talking about. There is nothing close to a consensus on either the left or right that the economy's problems are structural, as opposed to a simple lack of demand (i.e. people spending money). This is shown clearly by the overwhelming support on the Federal Reserve Board for its policy of quantitative easing. This policy is about trying to boost demand. A policy that the Republican Chairman, Ben Bernanke, has repeatedly advocated to Congress as well. This policy would not make sense if they viewed the weak demand for labor in the economy as being the result of structural problems. So clearly Brooks' consensus excludes the Fed.
It also is worth noting the other part of Brooks' story, that instead of hiring workers firms "hire machines," is completely contradicted by the data. Investment has actually slowed in the last couples of years. (Non-residential investment is up by just 2.4 percent from its year ago level.) This means that firms are not hiring machines, or at least not as rapidly as they had in prior years. Also the rate of productivity growth has slowed sharply from the pre-recession period. In the last three years productivity growth has averaged less than 1.0 percent a year. This compares to more than 2.5 percent a year from 1995 until the recession in 2007. This means that machines are displacing workers much less rapidly than in a decade when we had much lower unemployment.
Productivity in the Non-Farm Business Sector, 1995-2013
Source: Bureau of Labor Statistics.
"It [weak job growth] probably has to do with a skills shortage, that as technology increases, skills have got to keep up and skills are just not keeping up. ...
"And so these are deep structural changes. And I think there's a consensus growing that something really fundamental has shifted in the economy. And I wouldn't say anybody in the political arena has much of a set of solutions the way they did in the progressive era, the New Deal era, even the Reagan era, that are commensurate with the size of this problem."
If this claim were true it would mean that there are substantial segments of the labor market where we are seeing labor shortages. That would mean that workers in some occupations would be seeing rapidly rising wages. We should also see industries or occupations where the length of the average workweek is increasing rapidly. Employers would be trying to get the workers they have to put in more hours, since they can't find additional workers. In these industries/occupations we should also see a high ratio of job openings to unemployed workers. There are no major areas of the labor market where we see this evidence of labor shortages. In other words, Brooks is just making this up out of thin air.
Ironically there were some people earlier in the downturn who were making Brooks' argument, most notably Minneapolis Federal Reserve Bank President Narayana Kocherlakota. Kocherlakota predicted, based on this structural view, that the quantitative easing policy being pursued by the Fed would lead to an explosion of inflation. Now that this prediction has been shown clearly wrong, Kocherlakota has reversed his view and is now a strong advocate of more stimulus.
Brooks could have pointed to far more support within the economic profession for the sort of view he laid out two or three years ago. As a growing mountain of evidence has shown this position wrong, there is a growing consensus in the opposite direction. The economy's problem is simply that it needs a large source of demand to replace the demand lost when the housing bubble collapsed.
Marcus then chimed in, reinforcing Brooks' assertions:
" ... And so that just gives you a measure of the dauntingness. And you look not just at -- everybody looks at 7.2 percent [the actual rate is 7.4 percent], the new unemployment figure. It is down a little bit. But let's take a look at the total unemployment picture, the discouraged workers, the less -- or the people who have just stopped looking for work, the people who aren't working as hard as they would like to, as many hours as they'd like to.
"That's 14 percent of the labor force. I think David's totally right when he talks about how we need to sort of get to some really structural solutions. And the thing that's so disappointing is that we're looking at a political system that doesn't seem capable of achieving that."
This prompted Judy Woodruff, the moderator to say:
"Well, how do you get to structural solutions? The president had a recommendation this week for changing the corporate tax rate. He said this could -- this was one way to create jobs for the middle class."
Brooks jumped in:
"Well, that's a good thing. I mean, changing the corporate tax rate -- our corporate taxes are too high. They're unrealistic. They're internationally uncompetitive. We should change them. And he wants to take some of the money that would be produced by cutting those taxes and shift it over to infrastructure, and that's also needed."
Actually the share of corporate profits paid in taxes in the United States is below the average for the OECD, even though our marginal tax rates are the highest. (Loopholes allow companies to evade taxes.) President Obama actually did not propose to raise revenue from cutting tax rates as Brooks implies. He proposed a revenue neutral tax reform. Any spending to create jobs would mean a larger deficit.
"A lot of it [President Obama's latest economic proposal] was recycled from proposals he had previously done, but it offered something that Republicans in a rational world ought to have accepted, a lower corporate tax rate, which would be terrific for business and the economy and for job creation, and some short-term spending."
There is actually no evidence that this plan "would be terrific for business and the economy and for job creation." There are studies that show that a tax reform that eliminated distortions created by the tax code would have a modest positive long-term effect, but there is no research showing that it would lead to the sort of boom that Marcus' comment implies.
Both Brooks and Marcus then discussed the importance of entitlement reform, by which they mean cuts to Social Security, Medicare, and Medicaid. Apparently Brooks and Marcus have not been paying attention to the slowdown in health care costs that has been widely discussed in the news.
As a result of the slower projected health care cost growth, entitlements are now projected to be a far smaller share of the budget than had previously been the case. For example, in their 1999 long-term budget projections CBO projected that Medicare and Medicaid spending would be 7.7 percent of GDP in 2023 (Table 1). In the most recent Budget and Economic Outlook CBO projected that these programs would cost just 5.7 percent of GDP in 2023.
It is difficult to envision a "entitlement reform" that would have produced larger cuts than the 2.0 percentage points of GDP ($320 billion a year in today's economy or more than $4000 for an average family of four) that has resulted from the projection of slower health care cost growth. In other words, if Brooks and Marcus interest in entitlement reform was in reducing government spending, we have already seen larger projected reductions in spending than they likely could have accomplished with their ideal reforms.
This might lead some observers to conclude that Brooks and Marcus believe that cutting Social Security and Medicare is an end in itself as opposed to something that needs to be done to benefit the economy. In any case they certainly have no evidence to support their assertions on this topic.
It really is amazing that the PBS Newshour would rely exclusively on two people who obviously have no economic knowledge whatsoever to discuss the state of the economy and relate the meaning of the new employment report to its viewers. If they insist on having people like Brooks and Marcus on panels discussing economic issues they should at least make sure that the panel includes someone with knows economics.
Correction: Obama is proposing that he will have increased revenue from his tax cut in the short-term, even though it will be revenue neutral in the long-term. He wants to use the short-term revenue to pay for jobs programs, so Brooks is right on this one. Thanks to Robert Salzberg for pointing this out to me.