Economic Policy Makers Do Not Know Which Way Is Up
One of the reasons that the United States and much of the rest of world remains mired in near recession conditions is that many involved in the policy debate are completely confused on even the most basic facts of the downturn. The Washington Post exemplified this sort of confusion in a frontpage article last week that labored over the problem of savings being so high. The article offered a variety of explanations and talked to several exports about the problem of “households … squirreling away cash.”
The problem with the article is that people actually are not saving excessively. In fact, contrary to the premise of the article, the saving rate remains unusually low, not high. The saving rate in the second quarter of 2012 was 4.0 percent. By comparison, it averaged 8.3 percent in the 60s, 9.6 percent in the 70s, 8.6 percent in the 80s. Even with the stock-market-driven consumption boom of the late 90s the saving rate averaged 5.5 percent for the decade as a whole.
This is not a debatable point where we will have Keynesians giving one line and conservative economists giving another. This is data that is available to anyone who takes a moment to look at the Commerce Department’s website (Table 2.1, Line 35).
This is also not a trivial issue. Consumption is roughly 70 percent of GDP in the United States. Whether or not savings is above normal, and therefore consumption is below normal, is central to our understanding of the economy. In fact, it might well be the single most important piece of information about the economy today, yet the reporters and editors of one of the country’s most influential newspapers are 180 degrees wrong on the topic.
Unfortunately the Post is not alone in this confusion. There are many accounts in the business press about consumers holding back as a result of concern about the state of the economy.
The same is frequently claimed about investment. The story is that businesses are still so uncertain about the future that they are unwilling to take a risk by investing more money. Yet, if we look at the data from the Commerce Department, investment in equipment and software is almost back to its pre-recession level measured as a share of GDP (Table 1.1.5, Lines 1 and 11). It was 7.9 percent of GDP in 200; it was 7.4 in the second quarter of 2012, the most recent quarter for which data are available.
Given the huge amounts of excess capacity in many sectors, this is actually an impressive level of investment. This is certainly not consistent with the story of firms who are hoarding cash and scared to go out on a limb.
In the case of housing we continually hear stories asserting that the housing market is depressed. However if we look at the data on existing home sales the recent annual rate of 4.8 million is more than 20 percent above the 3.9 million average of 1993-1995, the last years before bubble generated exuberance began to drive sales.
The same story applies to house prices. Inflation-adjusted house prices are even or above their long-term trend, according to the Case-Shiller national index. We would only expect a further rise in house prices if we expect the bubble to re-inflate. There is no obvious reason we should expect a new bubble and even less to want one.
These basic irrefutable facts are absolutely central to our understanding of the economy yet most public debate starts from premises that are completely wrong on these and other issues. But there is no accountability; there is no consequence for being wrong.
We are so far lost in economic debates that we are not even at the point of arguing whether the earth goes around the sun of vice-versa. We can’t even agree that the sun rises in the east.
This matters hugely because there is no possibility of changing policy if people don’t have a clue as to the nature of the economy’s current problems and how policy could be changed to make things better. In this sense the confusion hugely benefits the elites. After all, they are fat and happy.
The elites might feel sorry for the tens of millions of people who are unemployed or underemployed or fearful of ending up in this situation, but that is not a problem that directly affects them. And, since many of the possible solutions could pose risks to some of their wealth, they are happy to tell the vast majority who are less fortunate that they will just have to tough it out.
There is not an easy solution to this situation. It would be great if people could get in the habit of looking at the data directly and thereby avoiding the confusion created by economists and economic reporters, but most people do not have time to familiarize themselves with economic statistics.
The alternative is to pressure the media and to go after the reporters, columnists, and news outlets that make a habit of getting things wrong. If just one of the incompetents could be given the boot for not knowing which way is up, it is likely to have a big impact on the rest.
After all, these people care first and foremost about keeping their jobs. If getting the basic economic facts wrong could make reporters unemployed, according to economic theory, many more would get the facts right.
Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The End of Loser Liberalism: Making Markets Progressive. He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues.