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Home Publications Blogs Beat the Press The Washington Post Gets It Wrong on the Economy, Again

The Washington Post Gets It Wrong on the Economy, Again

Saturday, 06 October 2012 07:18

The Washington Post once again reminded readers why so many people are praying for the day that the paper shuts its door. Its lead editorial touted the September jobs report as though this was great cause for celebration.

The piece begins by saying that President Obama asked to be evaluated based on the economy's performance, it then tells us:

"Friday’s employment report gave Mr. Obama a reason to crow. Having hit a high of 10 percent in October 2009, the jobless rate fell in September to 7.8 percent, the level it was when Mr. Obama took office amid a historic wave of job losses. More important, it fell even as the labor force grew; previous rate declines partly reflected worker discouragement. The percentage of adults with a job rose from 58.3 percent to 58.7 percent, wages by 0.3 percent."

Huh? It took us almost 4 years to get to an unemployment rate that is still higher than at any point in the last recession and equal to the peak in the 1990-91 recession and the Post thinks that President Obama has reason to crow? In fact, most of the improvement has been due to people dropping out of the labor force. Even with the jump in September, at 58.7 percent the employment to population ratio stands much closer to its low of 58.2 percent reached last summer than the pre-recession peak of 63.3 percent. (The picture is slightly better using an age-adjusted EPOP, as Paul Krugman constructed, but the story is very much the same.)

No one expects an economy to remain permanently depressed. The fact that we are still seeing unemployment rates and other measures of labor market weakness that are consistent with a severe recession almost 5 years after the recession began is really really bad news. If the Post applied the same performance standards to teachers as it does to our economic policy makers, no teacher in the country ever would have been fired for not being competent. 

Much else in this column is annoyingly wrong. For example, the piece tells us that wages rose 0.3 percent in September. Yes, this was after two months of essentially zero growth. The monthly data are extremely erratic. (Doesn't anyone there know this?) Over the last year the average hourly wage has increased by 1.8 percent, roughly enough to keep pace with inflation, meaning that workers are getting none of the benefits of the economy's productivity growth.

It then does another pitch for supporting the bailout of its rich Wall Street friends:

"Unemployment probably would have been worse but for some of Mr. Obama’s policies, such as the financial-sector rescue, a government-funded auto industry restructuring and, yes, many elements of the $814 billion stimulus package he pushed through Congress over much Republican opposition. That’s a fact, even if only the auto bailout is popular enough for Mr. Obama to tout in the campaign."

Don't you love the "that's a fact" line? Wow, a fact in a Washington Post editorial!

Don't worry, the world is not coming to an end. This is a Washington Post fact, not a real world fact. To get the Washington Post's fact, they assume that the banks were allowed to collapse and then no policy was ever put in place to pick up the pieces. The government just lets the economy stumble along in depression indefinitely, Herbert Hoover on tranquilizers. I'm not kidding, here's the paper to prove it.

Suppose as an alternative, we let the market deal with the Wall Street banks (i.e. put them into bankruptcy) and then we responded by reorganizing the banking system and flooding it with liquidity. In principle that could get the economy back on its feet and we would have eliminated the enormous albatross presented by Wall Street in a one fell swoop. Would we still have recession level unemployment and a sputtering economy? The Post has no answer to that question. They would rather that people not even think about such alternatives.

There is one other especially annoying inaccuracy in the WAPO editorial. It tells readers that:

"Neither investment nor business confidence — Mr. Obama’s other two benchmarks — have fully rebounded. The former remains about $100 billion below its pre-recession quarterly peak of $1.7 trillion."

Serious people separate out structures from equipment and software. The reason is that the building of structures has a separate dynamic. We had a boom in non-residential construction before the downturn. This meant both that the pre-recession levels were unusually high and also that we had considerable overbuilding that would depress demand for years later. We continue to have very high vacancy rates in most categories of non-residential real estate. This means that builders will not undertake construction no matter how much confidence they have in the economy.

On the other hand, if we look at the equipment and software component of investment we see that it is about $20 billion, or 1.5 percent, higher than its pre-recession level. That's not great, but given the large amounts of excess capacity that still exist in many sectors of the economy, this is pretty good. In other words, the story about business confidence holding back investment doesn't seem to have much basis in reality.

Now that is a fact.



Comments (15)Add Comment
The Great Depression Went on for a Decade
written by Paul, October 06, 2012 9:28
"No one expects an economy to remain permanently depressed."

Our current Great Recession could have gone on indefinitely since we never had government spending on the scale of WWII. Allowing Wall Street banks to collapse would clearly have prolonged the agony. Japan's recession has gone on for 20 years.
written by skeptonomist, October 06, 2012 10:10
Total private investment bounced back rapidly after hitting bottom in mid-2009 (FRED: GPDIC96). But after the stimulus total government spending and investment went down and continue to go down (FRED: GCEC96). It is mostly local government which is responsible for poor employment growth. This contraction is obviously anti-Keynesian, but local governments themselves do not have the ability to run up deficits. Conservatives may be partially correct in claiming that government is too large, but it was state and especially local government that grew after about 1950, not the federal government.

It is unrealistic to expect private business to recover faster than it has been doing. Private investment does not recover instantly and has never increased at a rate that could bring it back to long-term trend from the current level in a few years. As in the Great Depression, the problem is not slow recovery of business, it is the depth of the hole the economy reached in the downturn. Local government and housing will stop contracting eventually and then the recovery will accelerate, but it will still be a long time before full employment is reached unless there is massive intervention by the federal government.

This scenario would not look much better if the banks had been taken over rather than bailed out, but as it is there is a major threat of another financial bubble and crash before recovery is complete. As a matter of fact, the late housing bubble started well before recovery from the 2001 recession was complete.
WSJ is just part of the bigger echo chamber
written by Bill Heffner, October 06, 2012 10:12
Surely you are aware that virtually all of the media is touting "stronger recovery" as a result of this unemployment report, with its "biggest drop in umemployment since 2009."

As you point out that while most of the drop in the number has been due to people dropping out of the work forse, this one is claimed to be due to job creation, despite the fact that only 114,000 jobs are reported as having been created. Despite that number some 873,000 people are reported a newly employed and no one is batting an eyelash at the discrepancy. Nor is anyone commenting on the report that no one dropped out of the labor force.

These numbers are utterly bizarre, and yet the media simply picks the one it likes and crows about it.
Japan's Agony Has Been Hugely Overstated
written by Dean, October 06, 2012 10:41

Japan's unemployment rate mostly been under 5.0 percent and is currently 4.5 percent http://www.imf.org/external/pu...R&grp=0&a=
We should have the same agony.

Also, if there was something that would have prevented us from taking efforts to re-inflate the financial system after a collapse it would be wonderful if someone could say what it is. Argentina did if very quickly and I don't think that our policy people are all that much more incompetent than theirs.
written by SteveSposato, October 06, 2012 11:02
I'm not suggesting that you too are smoking something but almost. Readers, wishing for the demise of the Post? The Post's standards for decades have been somewhere just north of the National Inquirer but hardly far enough North to bathe in any fresh air. But one can hardly wish for the Posts demise -- "closing its doors" -- without wishing for the whole media establishment to go with it including and especially Fox but also CNN, the NYT, NPR, you can take your pick. The establishment has been telling Americans what we need to know since forever. The only difference this time, with the exception of the Post which apparently hasn't gotten the memo, except in inimitable Post fashion in this one article, is that they have finally realized the monster they have created in the right wing Republican Party and have started to act and report accordingly. Asking for a serious discussion of the economy from these people is really too much. No one would even know what to make of it; too serious, too much detail, too intellectualized, if not worse.

BTW, thanks so much for making a difference with your blog.
don't get point about share of productivity growth
written by paul, October 06, 2012 11:35
"Over the last year the average hourly wage has increased by 1.8 percent, roughly enough to keep pace with inflation, meaning that workers are getting none of the benefits of the economy's productivity growth."

I don't get how the "average" tells you much about distribution (of productivity gains). Is there some simple relationship between distributional inequality, wages and inflation?
why would real wages rise when unemployment is above equilibrium?
written by pete, October 06, 2012 12:04
This is weird thinking...the Keynesian model is that the costs of production, like labor, are too high relative to demand. Using monetary policy, the idea is to generate a price inflation which drives down real wages, allowing firms to profitably hire more workers and make more stuff. Alternatively, fiscal policy can increase demand directly, similarly causing an inflation in output prices, again making firms profitable with existing nominal wages. Thus, the "productivity gains" in this "recovery" of course are flowing to capital...that's the whole point of Keynesian econ. Note that exactly the reverse happened at the beginning of the recession, corporate profits nose dived...i.e., labors share of income increased. And that's exactly why the labor movement did not originally approve of Keynesian solutions. And long before that of course Marx was aware of the damage that inflation in general could do to labor.
written by Ron Alley, October 06, 2012 12:22
Skeptonomist is accurate in his statement about lost jobs in state and local government.

We have seen 300,000 teachers dismissed since the onset of the Great Recession. How about the Department of Education increasing aid to the states earmarked for rehiring those teachers?
Not Keynes
written by Calgacus, October 07, 2012 2:47
fiscal policy can increase demand directly, similarly causing an inflation in output prices, again making firms profitable with existing nominal wages.

Pete, that's not the Keynesian idea. That's the sort of idea that early (& later) critics of Keynes who didn't understand him thought he was saying. The Keynesian idea is that output "inflates", at the (about the) same price, not output prices.

And long before that of course Marx was aware of the damage that inflation in general could do to labor. Marx's descendant, who did not acknowledge his ancestor - J M Keynes, was well aware of this too.
@ Pete
written by A Populist, October 07, 2012 9:55
Pete:  re: "the Keynesian model is that the costs of production, like labor, are too high relative to demand"


If I were so bold as to oversimplify and paraphrase Keynes, I would say this:  "The level of aggregate Demand is too low to employ the supply of Labor".

I don't want to speak for Keynes, but I think that is closer!

I would characterize the economic problem, as one where the supply of labor is excessive, even as production is mostly sufficient to meet (current) Demand.  As productivity (Labor Efficiency) increases, this puts more people out of work, which is a continuing drag on Demand (unemployed workers stop spending), which reduces overall employment - a vicious cycle - or at least contributing a big drag on the economy.

One solution: If we can stimulate Demand (government spending) until we use up all the available labor, then (due to a better bargaining position for labor), wages can finally rise, relative to the profits taken by Capital.  This rise in income among those who (up to now) are constrained from consumption by low wages, will cause an increase in Demand, which (hopefully) will negate the need for further stimulus at that point.

The way I see it, the problem is, that a "small" stimulus (while helpful), never "gets us over the hump" to full employment.  That is what those who argue against Keynesian stimulus (saying it is "never-ending") are missing:  If the stimulus is large enough, (and Labor is allowed to get to, and stay in relatively short supply), then private sector (consumer) Demand, can replace the government stimulus, which can then be discontinued.

Another solution:  Raise the minimum wage.

Now, one "problem", is that productivity (Labor Efficiency) is ever-increasing.  So, either consumption must be ever-increasing, or higher Unemployment is inevitable - unless you pay workers enough to save, and then leave the work force, and still survive.

In contrast to the suggestion that labor is too dear,  it is clear that labor is priced too cheaply.  If Labor (at the lower end), is priced higher, then those at the low end could afford to pay more taxes, save for retirement, retire early, and make room for younger workers.

The idea that low wages increase overall employment is a false error of composition.  Yes, lower wages make one nation more competitive with  another.  However, the solution to high worldwide Unemployment due to increased Productivity and stagnant Demand, is NOT to "export more to each other by lowering wages".  Yet that is the prescription offered by our "elites".

I would further argue, that artificially low wages, are holding back productivity, since it reduces incentives to trim labor costs (through automation, etc).  Low Labor cost, is also a distortion, since it externalizes the Labor cost of (say) Wal-Mart, onto the rest of society in terms of taxes, Medicaid - you name it.  If Wal-Mart workers can't afford to pay their share of taxes:  someone else must do so. Is it sustainable to pay people at the low end, less than it costs to: save for retirement, educate kids, feed a family, get medical care, etc?  I don't think so.

This income inequality is killing our world economy.

Oh, and the idea that low profits are dragging down the economy?  Absurd.  GDP is not terrible, and profits are great.

Profits aren't the problem - lack of customers, excess capacity, and excess workers are the problem.
pretty clear that industry has captured the labor movement etc.
written by pete, October 07, 2012 10:58
These responses reveal that indeed the capture has been complete. Since firms benefit most relative to labor from arbitrary inflation and fiscal policy, it makes sense for them to embrace this, and convince others that it somehow helps labor. And I did say profits were rising, as they should from their negativity at the beginning of the recession. Look, 40 years of unconstrained money have led to huge gains for capital and little for labor. I don't think the evidence could be any clearer.
written by A Populist, October 07, 2012 12:33

Re: "These responses reveal that industry capture of labor movement has been complete".

I would say that industry capture of our *government* has been complete, and that bargaining power of Labor has been eroded by chronic over-supply of Labor (and lack of Demand).

Your assertion that firms (capital) benefit more from inflation than Labor, is completely unsubstantiated.

The chronic high Unemployment is a result of putting American workers in direct competition with low-wage workers from China, as well as weakening the bargaining power of American workers by busting unions, and failure to increase consumption to compensate for increases in Productivity.

Regarding 40 years of unconstrained money leading to gains for capital?  Actually, we have had huge money growth for the past 70 years.  Yes, it has accelerated in the last 15 or more years - and the manner in which the money supply has been expanded (0% loans for the Wall Street gamblers) certainly has made our economy more distorted and dysfunctional.

But to single out monetary expansion as the single important change in the last 40 years which affects our economy (and workers) is myopic.

Productivity growth, shipping jobs overseas, and a lack of sharing the benefits of productivity with the workers, have messed up the economy.

And regarding your previous comments about Keynesianism and profits: 

"Using monetary policy, the idea is to generate a price inflation which drives down real wages, allowing firms to profitably hire more workers and make more stuff. Alternatively, fiscal policy can increase demand directly, similarly causing an inflation in output prices, again making firms profitable with existing nominal wages."

If you think that is how Keynesianism is supposed to work, I think you are projecting "supply-side" perspectives onto Keynesian thought.  The whole idea of Keynesian stimulus, is that, in a world requiring both Supply and Demand, that the whole problem, is a lack of Demand.

Your example of monetary policy is wrong.  The idea of monetary policy, is to make it cheaper to invest and consume NOW vs the future.  The purpose of this is NOT to increase profit margins, but to increase Demand for physical goods, and thus more jobs (and thus more Demand from new workers).  I would agree that there are huge problems with monetary stimulus at the Lower Bound (where we are now), in particular when that money is used to increase Supply or efficiency - which further distorts the balance between Supply and Demand.  (If the stimulus went to consumption, the effect would be more constructive).

Which brings us to fiscal stimulus.  No, contrary to what you say, fiscal stimulus is NOT intended to help the economy by increasing prices, and thus improving "profitability".  (Again, I think you are projecting a philosophy that "Supply is always the problem" onto Keynesians - which is a total mischaracterization.  If you want to criticize Keynesian models, you first must understand them.)

Firms are presently profitable, with spare capacity. All they need are customers, and they will hire workers.  They already have cash, so cash will not make them hire workers.

Here is a major point:  Fiscal stimulus is NOT intended to increase Demand by "increasing prices", as you seem to believe.  Rather, it is to increase Demand, by actually increasing the need for more actual goods and services, at existing prices.  If the only effect is to raise prices, and not to stimulate jobs through increased Demand for physical goods and services, then the fiscal stimulus has failed.

As for the winners and losers due to price inflation?

Well, whether Labor gets a bigger or smaller share of the pie, is based entirely on the bargaining power of workers, which is related to Unions, laws, and (most importantly) whether labor is in shortage, or excess.

In that sense, workers wages will rise faster than inflation if they have bargaining power, slower if they don't.

The net losers from price inflation are typically holders of capital, who are not (for the most part) the workers.

But if the economy remains slow due to lack of Demand, then that slow economy wastes our Labor resources, and the Nation as a whole loses big-time.  A bigger pie helps everyone.  And, to make a bigger pie, we need more Demand.
sorry, stocks have done really well since 1972
written by pete, October 07, 2012 1:09
when the inflation rate rose from average 2% to 4%...
while wages ain't done so well, merely keeping up with inflation according to Dean, i.e., real wages are flat....

capital is exactly where to be in inflation. housing, firms, etc...do very well in inflation...
written by A Populist, October 07, 2012 1:50
OK, I guess you are only interested in analyzing inflation vs how well capital and labor have done since 1973, and how that correlates with inflation. Got it.

No need to look at any other time periods which tell the opposite story, like the 40's, 50's and 60's. Got it.

No need to look at any other factors in the real economy. Got it.

1972 is a nice turning point....
written by pete, October 08, 2012 12:52
This is a nice turning point because up till then with smaller government (other than wwii) and constrained money, 1968 was like peak income equality. Since then, increases in G, regulations, unconstrained money, etc., and whaddya get? Increased inequality! Ta da! No one seems to have heard of captive government. If you pass it, they will capture it.

I hardly hear progressives ask to return to the 50s! Are you saying segregation was good for labor? Certainly the unions and trades in the north were pretty racist, and maybe that helped protect them from cheaper labor.

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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.