Beat the Press

Dean Baker's commentary on economic reporting


Beat the Press is on the Move

Beat the Press is moving to a better neighborhood. From this point forward you can find it at The American Prospect's website at:

Of course, if you want to keep reading the old posts, stay right where you are.


Cheap Tip

Last quarter the markets were surprised by a stronger than expected number for personal consumption expenditures in March. I commented that the surprise was surprising because March personal consumption expenditures were embedded in the first quarter GDP data that had been released the prior week.

Here’s a chance to look for more surprising surprises. The consensus number for June personal consumption expenditures is an increase of 0.4 percent. My arithmetic puts the figure at over 1.0 percent. There is always the possibility of a substantial upward revision to the April and May data, but absent a large revision, June expenditures should come in much higher than “expected.” Will the markets be surprised?


Can You Say "Lower Profit Margins?"

Apparently the reporters at MarketWatch can’t. An article noting the uptick in labor compensation reported in the second quarter Employment Cost Index reported that Fed Chairman Ben Bernanke said that higher labor costs need not lead to inflation, if they are offset by rising productivity. Well, in the very next sentence Mr. Bernanke also said that higher labor costs could be offset by lower profit margins:

"Whether faster increases in nominal compensation create additional cost pressures for firms depends in part on the extent to which they are offset by continuing productivity gains. Profit margins are currently relatively wide, and the effect of a possible acceleration in compensation on price inflation would thus also depend on the extent to which competitive pressures force firms to reduce margins rather than pass on higher costs."

But that part didn’t make it into MarketWatch. Thanks go to my friend Jared Bernstein for this tip.

House Moves to Boost Defenses Against Martians

The House came up with the brilliant idea of linking the partial repeal of the estate tax with raising the minimum wage. In the words of West Virginia Representative Shelley Moore Capito, this linkage made sense because, “the sustaining of small businesses by keeping their vital assets will allow those making the minimum wage to continue working. This is a jobs bill.”

I’m sorry, this is nuts. Only a tiny percentage of small businesses will ever be liable for the estate tax and it is paid out after they are dead. It has no obvious effect on how they would operate their business. It is hard to see how cutting the estate tax will save even a single minimum wage job.

How could a reporter just put these words in print and not talk to an economist to get a comment on this statement? Surely any economist, regardless of their political leanings, would explain that a district in West Virginia is represented in Congress by a crazy person.

The Deflation of the Housing Bubble Continues

The weak second quarter GDP numbers were driven in part by the housing sector as noted in the NYT. See also the separate piece on the housing market. In addition to the GDP data, the Commerce Department also released data on vacancy rates for the second quarter. The vacancy rate for ownership units hit a new record.

Cheap tip for the months ahead -- watch for credit card debt to soar. People who can't borrow against their homes, now that prices have stopped rising, will turn to credit cards. It isn't pretty, but that's what desperate people will do to hold onto their homes in a collapsing bubble.


The Inverted Yield Curve and Other Economic Fads

Remember the inverted yield curve and the hoola hoop? A few months back, the prospect of an inverted yield curve was seen as an ominous warning sign of bad times ahead. An inverted yield curve was supposed to signal an upcoming recession. This seems worth mentioning now because the yield curve is becoming seriously inverted as long-term rates have edged downward, even as short-term rates remain relatively high.

For those who have better things to do with their time, an inverted yield curve refers to a situation in which short-term interest rates are higher than long-term interest rates. This reverses the normal course of events – typically investors expect to get a higher rate of return if they agree to lock up their money in a long-term bond or time-lock account rather than keeping it in a checking account where they can get immediate access. A few months back, as the Fed was raising short-term interest rates, without much increase in longer term rates, many market analysts raised the prospect that the yield curve would become inverted and that the economy would therefore sink into recession.

This discussion made for painful reading. There is no mysterious incantation that leads an inverted yield curve to do any special damage to the economy. The actual story here is rather simple. Inverted yield curves almost always (I say “almost” in case I missed one) come about because the Federal Reserve Board raises short-term interest rates in an effort to slow the economy and raise the unemployment rate. Sometimes the Fed goes too far and throws the economy into a recession. It is not the inverted yield curve that causes the recession; it is the fact that the Fed raised interest rates by too much. Whether the short-term rate stays 0.1 percentage point above or below the long-term interest rate cannot possibly make any difference when it comes to the probability of a recession.

With the 10-year Treasury bond rate hovering at 5.0 percent and the Federal funds rate at 5.25 percent, we might expect the inverted yield curve folks to be warning of impending disaster. However, this line is apparently no longer in fashion, or at least not in the business pages of the country’s major newspapers.

My other favorite recent fashion in economics dates back two years. In the summer of 2004, bond yields (interest rates) regularly fell on reports of higher oil prices. This was confusing to me since I’m an old-school type that tends to think that higher inflation is associated with higher interest rates, and higher oil prices mean higher inflation.

The economic fad of 2004 held out the opposite chain of causation. According to this story, rising oil prices pulled money out of consumers’ pockets, thereby slowing the economy. Since the economy was already slowing, the Fed would feel less need to raise interest rates.

This one never made much sense (don’t investors still care about the real return they get on their money?), but the story frequently appeared in the NYT and other papers. It also seemed to explain bond price movements at the time. Fortunately, this fad seems to have disappeared without a trace. Oil prices have shot through the roof in the last two years, and interest rates are …….. much higher. I am not surprised.

Adjust for Inflation -- Minimal Demand on Minimum Wage Reporting

Reporters should always use inflation adjusted numbers when making comparisons of dollar values at substantially different points in time. A dollar is worth much less today than it was 20 or 30 years ago. While most readers may know this, they do not typically have ready access to the consumer price index tables, so they will not generally be able to adjust the numbers themselves.

Reporters, who write news stories for a living, do have the time to adjust numbers for inflation and should routinely do so in their news stories. This means that when an article tells readers that a bill in Congress will raise the minimum wage to $7.15 an hour in 2007, from 5.15 an hour at present, it would be helpful to tell readers that this is equal to approximately $5.32 in 1997 dollars, the year the last minimum wage hike took full effect. This means that minimum wage workers would get about a 3.0 percent increase in real wages from 1997 to 2007, if this bill was approved.


Medical Tourism: The Response to Protectionism

If we use protectionist barriers to artificially prop up health care prices in the United States, then people go overseas for health care. It's extremely wasteful (it's much cheaper and better for people's health to have the medical procedures done here), but that is what happens when you have protectionism.


Confusion on “Free Trade”

Several comments and e-mails on my last post on trade expressed confusion about restrictions on highly educated foreign workers in the United States. (There was one complaint about repetition – as long as the press repeats the error, I will repeat the complaint.)

These restrictions take two forms. The first is formal licensing restrictions. The highest paid professionals, like medicine, law, dentistry, and accounting all have licensing requirements. These requirements present a confusing patchwork (in most areas, each state has its own requirements) that makes it extremely difficult for foreign professionals to get licensed to practice their profession in the United States.

If we applied the same rules to these professions as “free traders” did to manufacturing, we would set a single national standard in each profession that would be based exclusively on legitimate health and safety considerations, just as the W.T.O. and other trade pacts require in the case of safety standards for manufactured goods. These standards would be fully transparent and the tests would be administered throughout the world (by U.S. certified officials) so that smart kids in India, China, or Mexico could as easily become certified to practice medicine or law in the U.S. as kids raised in New York. People who do not support this standardization of licensing requirements are protectionists, not free traders.

The second point relates to rules for hiring foreign workers (including those on H1B visas) more generally. If a university or newspaper wants to hire a foreign professor or journalist, it must claim that there were no qualified U.S. citizens (or green card holders) for the job. It cannot just say that it wanted to hire a foreign worker for a lower wage than U.S. workers demand, in the same way that Wal-Mart buys foreign-made clothes because they are cheaper than U.S. made clothes.

As a practical matter, this restriction is not tightly enforced. However, no one has tried to establish Wal-Mart universities or newspapers where they completely staff the institutions with foreign workers, who might be every bit as qualified as their U.S. born counterparts, but willing to work for half the wage.

I will pre-empt one silly response. The number of foreign reporters, university professors etc. who are trained to U.S. standards (including fluency in English) might be relatively limited today, but that is because they do not have an open door to work here. No one built textile factories in China to export to the U.S. until they knew that they had an open door for their exports. Similarly, you will not see millions of Chinese/Indians/Mexicans etc. train to work as reporters and university professors in the United States until they know the door is open to them. Again, real free traders support opening this door. Those who oppose opening the door (a group that includes the top trade negotiators in both the Clinton and Bush administrations) are protectionist. Let’s see how long it takes the reporters (who benefit from protectionism) to get the story straight.

I have a fuller discussion of this issue in the "Doctors and Dishwashers" chapter of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, which is available as a free e-book.

Is the Housing Bubble Bursting?

The latest numbers certainly show a slowing. Existing home sales are down by 10 percent from their peaks last year. Prices have stabilized on a year over year basis (down slightly after adjusting for inflation), and inventories are building. It is worth noting in the latest report that the inventory of unsold condos stood at 8 months of sales in the June report.

Also, it is important remember that the existing homes data refers to sales closed in June. Since it typically takes 6-8 weeks to close a contract, the June sales are most showing information about contracts signed in April and May.

The WTO is Not Free Trade

It would be nice if reporters were forced to read what they write before it appears in the paper. What do they mean when they say “free trade?”

What makes increasing patent and copyright protection (an essential part of recent U.S. trade agreements) free trade? These are government granted monopolies. Isn’t that obvious? Yes, they serve a purpose in providing incentives for innovation and creative work, but ALL forms of protection serve a purpose, that doesn’t mean that they are not protectionism.

Also, it really is infuriating that reporters cannot recognize the protectionism that sustains relatively high salaries for professionals and reporters. If we had free trade for doctors, lawyers, accountants, etc. we would have standardized licensing requirements so that smart students anywhere in the world would have the same opportunity to train and get a job in these professions in the United States as a kid born in New York. Any economics reporter who thinks we have this situation now should be fired on the spot. Obviously, they have no idea what they are talking about.

Also, if we had free trade in reporters, I could start a newspaper and start filling its staff with smart, energetic reporters from developing countries who would be very happy to work for much lower salaries than the current staff. If we had free trade, I would not have to claim that I could not find a qualified citizen for these jobs. I could just say that I hired reporters from the developing world because they would work for less. This is illegal now and as a result, reporters earn higher salaries than would otherwise be the case. Again, if an economics reporter cannot understand how they benefit from this protectionism, they are not qualified for their job.


The Washington Post Doesn’t Believe in Market Incentives

I was going to give this one a pass, since it’s a column in the Post Outlook section, not a news story, but even opinion pieces should be able to pass the laugh test.

The basic point of the piece is that the public and media are wrong to be concerned about the fact that researchers who do research and report findings, as well as the regulators who assess them, often get money from the drug companies that stand to make billions. The article assures us that these people are dedicated professionals, committed to bettering human life, who would not let money affect their behavior.

It’s great to know that the Washington Post would be willing to print a diatribe arguing that individuals act out of concern for society rather than for monetary gain – first socialist tract I’ve seen the Post since I’ve been in town.

Of course, if anyone really believed what the column argues, then we should just take the money out of drug research altogether. If the scientists are high-minded individuals who only act out of their desire to better humankind, then we can just give them standard government salaries and set them to work developing new drugs. There is no need for patents and the multi-billion dollar rewards that can go to lucky patent holders. I haven’t seen the piece arguing this position in the Post Outlook section, and I doubt that I will.