Beat the Press

Dean Baker's commentary on economic reporting


Sick Europe and the Italian Elections

The elections in Italy prompted another round of knowing comments about how Europeans must get over their silly attachment to employment security (e.g. “Europe Stalls on Road to Economic Change”). None of the comments I saw even considered the possibility that the contractionary policies of the European Central Bank (ECB) play any role in Europe’s economic weakness.

The basic story here is fairly simple. While Alan Greenspan lowered the overnight interest rate in the United States to 1.0 percent in the summer of 2003, the ECB never lowered its overnight rate below 2.0 percent. This is in spite of the fact that inflation in the euro zone has been the same or lower than in the United States and the euro zone has consistently had higher rates of unemployment. The story does get more complicated (the Fed’s overnight rate is now 4.75 percent, compared to 2.5 percent in the euro zone), but I would argue that the ECB has consistently been more contractionary than the Fed in its policies. Everyone recognizes that the Fed can stimulate the economy with low interest rates and slow growth with high interest rates, why don’t we think that the European economy works the same way?

It is striking how commentators can make seemingly contradictory claims about Europe’s dire fate with great confidence. The basic story is that Europe’s high wages and labor market protections lead to high unemployment. This is crisis # 1 – too many workers.

Then we find crisis # 2 on the horizon, a surge in the ratio of retirees to workers, which is compounded by Europe’s slow population growth. The essence of crisis #2 is not enough workers. There are economists who will try to rationalize this picture to explain how Europe will be in crisis from both too much unemployment, while also suffering from a labor shortage, but on its face this does seem to be a stretch. (The link runs through high labor taxes discouraging work. The problem with the story is that after-tax wages, not labor taxes, determine willingness to work. The impact of high before tax wages, caused by the labor shortage, should swamp the impact of higher taxes.) In other words, the Europe critics seem to be telling completely contradictory scare stories, without even recognizing this fact.

There is another scare story that some of us have been telling that the Europe critics have largely ignored. This is about the imbalances created by housing bubbles. The United States is just one of several countries that are experiencing inflated housing prices. It is hard to gage how much of the run-up is justified and how much is due to irrational exuberance without some very careful country by country analysis, which I have not done. (For example, Ireland has had among the sharpest run-ups, but it has gone from being a relatively poor European country to ranking among the richest in the last two decades.)

However, the imbalances created by bubbles are easier to recognize. These show up in low domestic savings rates and high current account deficits. The countries that stand out on this list are the United States and Spain, with current account deficits of more than 6.0 percent of GDP, and New Zealand with a deficit of more than 9.0 percent of GDP. These deficits are unsustainable, as virtually all economists agree. The adjustments from large current account deficits to manageable deficits are almost always painful. Typically the adjustment is associated with rising inflation, and then high unemployment as central banks raise interest rates to stop inflation. (Think of increasing annual tax revenue and/or cutting government spending in the United States by $600 billion – the order of pain is comparable.)

The countries on which the Europe critics focus their wrath (France, Italy, and Germany) have small current account deficits or surpluses, meaning they don’t face the painful adjustments that loom for the Spain, the United States, and New Zealand. This means that when the adjustments actually occur, we may have a different assessment of which countries’ economies look good and which ones look bad. Until then, we will have to listen to many more tirades from the Europe critics, whose voices go virtually unanswered in the media.


Immigrants and “Low Wage” Jobs

One of the great absurdities in the debate over immigration policy is the frequently repeated claim that the U.S. economy is generating more “low wage” jobs than can be filled by the domestic workforce. This line has been endlessly repeated in news stories on the issue.

Quick trip back to econ 101: recall the concepts “supply” and “demand.” What makes a job a “low wage” job? In econ 101 world, a job will be a “low wage” job if the supply is high relative to the demand. When there is insufficient supply, then the wage rises. My students didn’t pass the course if they couldn’t get this one right. Econ 101 tells us that there is not a shortage of workers for low wage jobs; it tells us that there are employers who want to keep the wages for these jobs from rising.

Immigration has been one of the tools that have been used to depress wages for less-skilled workers over the last quarter century. Many of the “low-wage” jobs that cannot be filled today, such as jobs in construction and meat-packing, were not “low-wage” jobs thirty years ago. Thirty years ago, these were often high-paying union jobs that plenty of native born workers would have been happy to fill. These jobs have become hard to fill because the wages in these jobs have drifted down towards a minimum wage that is 30 percent lower than its 1970s level.

In response to this logic, the “low wage” job crew claims that if the wages in these jobs rose, then businesses couldn’t afford to hire the workers. It’s time for more econ 101. Businesses that can’t make money paying the prevailing prices go out of business – that is how a market economy works. Labor goes from less productive to more productive uses. This is why we don’t still have 20 percent of our workforce in agriculture.

So the economic side of the debate over immigration is a question about employers wanting access to cheap labor. That part is pretty simple. There are other questions in this debate about human rights and basic decency. It’s outrageous to threaten people with deportation and imprisonment who have worked in this country as part of a conscious government policy. (No one enforced employer sanctions. That was a deliberate decision by the government.)

There is another side to this debate that gets less attention. The fact that immigrants are mostly less-skilled is not an accident. The current “die at the border” policy (so-called because you get the opportunity to work in the United States if you are willing to risk death in a dangerous border crossing) ensures that the flow of immigrants will be primarily less-skilled workers. Workers in developing countries with few employment opportunities might be willing to take this risk, in addition to the risk that they could be subsequently deported if they get picked up for a traffic ticket or some similar offence.

However, an established doctor, lawyer, or economist in the developing world will not try to slip over the border to work off the books in the United States. This fact ensures that the highly educated people who design immigration policy, and their professional colleagues, will not be subjected to the same sort of competition as less-skilled workers.

We could design an immigration policy that encourages highly educated people from the developing world to work in the United States. Such a policy would provide enormous economic gains, while also making income distribution in the United States more equal. While this could create a problem of “brain drain” from the developing countries, it is easy to design mechanisms to ensure that developing countries benefit from this immigration flow as well.

Since professionals are not working under the table (many actually have to be licensed by the government at regular intervals), it would be very easy to apply a modest tax to the earnings of immigrant professionals. This tax could be paid to the immigrants’ home country, so that they can educate 2-3 doctors, lawyers, economists, etc. for every one that comes to work in the United States.

U.S. trade negotiators have not pursued such policies, because trade and immigration policy has been deliberately intended to redistribute income upward. We can debate whether this is a desirable goal for trade policy, but only if the media stops making silly claims about “low wage” jobs.


When Out of Context Is Untrue

A couple of days ago, I gave my standard diatribe about the importance of putting numbers in context, especially budget numbers, which as isolated billions or trillions are virtually meaningless to the typical reader. In some cases, the issue is not just one of being uninformative, it’s also a question of actually being wrong.

In budget reporting, the most obvious case in which out of context is wrong, is when comparisons of the deficit are made through time. There have been many news reports pronouncing the Bush deficits the largest in history based on the fact that nominal deficits (which peaked at $413 billion in 2004) were larger than the size of the deficits in any prior year.

This statement is true, but sufficiently misleading to be wrong. The impact of the deficit on the economy, and the potential debt burden it poses to taxpayers in the future, depends entirely on its size relative to the economy. This is the Bill Gates principle. If Bill Gates chooses to borrow $1 million for some reason, it is not a big deal for him, since he can easily repay this sum. However, if most of us had $1 million in debt, this would be a very big deal for us. It is entirely possible that Bill Gates actually has borrowed millions of dollars for various purposes, but a comparison of our wealth with Bill Gates’ wealth that focused only on his debts, without including his assets, would be ridiculous.

That is effectively what reporters do when they compare budget deficits through time, without comparing them to the size of the economy. The proper measure is to describe the deficit relative to GDP. By this measure, the 2004 deficit did not come close to historic peaks. The unified deficit in 2004 was equal to 3.6 percent of GDP. Ignoring the huge World War II deficits, the country had a larger deficit every year from 1982 to 1986 (peaking at 6.0 percent in 1983) and from 1990-1993 (peaking at 4.7 percent in 1992). In short, the 2004 deficit was nowhere near a record.

Arguably, the appropriate measure of the deficit is the “on-budget” deficit which adds in the money borrowed from Social Security. This brings the 2004 deficit to 4.9 percent of GDP, still well below the peaks of 1980s and 1990s. So, it is simply inaccurate to claim that the 2004 deficit was a record.

(A side point: REPORTERS, not politicians, use the Social Security surplus to hide the deficit. Reporters, or their editors, decide which numbers get in newspapers or on the news. If they think that the on-budget deficit is the right one to report, then it is their obligation to report it. It appears directly in every budget document, so they do not even have to do the arithmetic.)

There are many other, less political, uses of numbers where out of context is wrong. A comparison of baseball salaries, or movie revenue, that doesn’t adjust for inflation is meaningless. If the time-span is only a couple of years, this is not a really big deal, but the $80,000 that Babe Ruth was paid in 1929 would be close to $1 million in today’s dollars. Reporters should adjust for inflation, and their editors should take them to the woodshed when they don’t. There is no argument on the other side.


Firing the French

The reporting on the battle over a new law in France that would make it easier to fire young workers has been especially weak. The coverage has included numerous assertions that making it easier to fire workers will reduce the unemployment rate. (The story goes that firms will more readily hire new workers, if they know that they can fire them later, if they find it necessary.)

In fact, the evidence on this point is extremely weak. There has been considerable research within the profession trying to demonstrate the link between labor market protections (like restrictions on firing) and higher unemployment, and most of it has come up short. David Howell, John Schmitt, Andrew Glyn, and I have done several papers examining this evidence.

In fact, one result that most economists familiar with the literature would be quick to acknowledge is that there is no clear link between the strength of employment protections and unemployment. Some of the countries with the strongest protections (e.g. Ireland and Austria) enjoy very low unemployment rates. Most of the literature simply finds no relationship between the strength of employment protections and the unemployment rate.

In fairness to the reporters who cover this issue, I put the blame here primarily on the economists. They are very quick to present their views, without pointing out that they are not supported by the evidence. My own view of high European unemployment (also not well-supported by evidence) is that the biggest factor is the European Central Bank’s (ECB) restrictive monetary policy. It is not easy to show a simple link between high interest rates and unemployment (the relationship is somewhat complex – exactly what the true believers about the negative impact of employment protections would say), but no one disputes the fact that if the Fed had followed policies that were as restrictive as the ECB, then the U.S. would have a considerably higher unemployment rate. So, I would say that it would be appropriate to at least get a little agnosticism into these articles.

There is one other point that really should not be in dispute – other things equal, employment protections are GOOD. People value security in their life. They buy insurance for their home, their life, their health, obviously if they can get insurance that they will not be hastily dismissed from their job, this is a good thing. If there are large costs, in the form of higher unemployment or lower productivity, then this insurance may not be worth the cost. But this conclusion depends entirely on the terms of the trade-off, an issue where the evidence is very weak, as noted earlier. In other words, the contempt expressed by many reporters for employment protections belongs on the editorial pages, not news stories. By the way, according to the OECD, the productivity of French workers is 7.0 percent higher than the productivity of U.S. workers.


Getting Numbers Right: An Essential Part of Good Reporting

Having escaped from ten years of doing the Economic Reporting Review (ERR), I’m beginning “Beat the Press,” with the single topic that took up the most cyberspace in ERR -- putting numbers in context. The point is that it is the reporter’s responsibility to use numbers in ways that make their articles as informative as possible to the reader. This means putting them in a context that will make them meaningful to the typical reader.

For example, reporting that a new federal transportation bill will cost $285 billion over the next six years (approximately the actual expenditure) provides virtually no information to the typical reader. Almost no one has any idea of how large or small this figure is in terms of the federal budget, or the implied tax burden from this level of spending. On the other hand, if the reporter had taken two seconds to use a calculator, she could have told readers that the expenditure is equal to approximately 1.7 percent of projected federal spending over this period. This information would immediately give readers a sense of the importance of this expenditure. (Arguably, the better measure would be as a share of discretionary federal spending – it’s approximately 4.6 percent of projected discretionary spending. This information can be quickly obtained through the CEPR Budget Calculator.)

As it is, we know that the public is hugely misinformed about the federal budget. Most people hugely overestimate the share of spending that goes to areas like TANF (the main cash welfare program) and foreign aid. Millions of people believe that the budget can be balanced by cutting these programs or eliminating some pork barrel projects that got special attention. The reality is that most of the obvious pork is pretty trivial in the context of the whole budget, and even taken together, a mass slaughter of pork barrel projects would not go very far towards eliminating the deficit. (I’m no fan of pork. I just don’t want people to be misled about it importance in the budget.)

We can deplore the general public’s ignorance about the budget, but is it really any surprise when all they ever see are numbers that would be meaningless to anyone who is not a budget wonk?

This is one that really should be mom and apple pie to reporters. After all, why present numbers that mean nothing to readers, when it is so easy to present numbers that actually provide information? I have never found a reporter who argued this point with me, and I have persuaded several to explicitly endorse it. For example, Dan Okrent, the New York Times first public editor, wrote a very nice piece (Numbed by Numbers, When They Just Don't Add Up, 1-23-05) which pointed out how meaningless it is to the typical reader to see a big number with lots of zeros. I printed a piece in the Columbia Journalism Review later in the year that made the same point (The Numbers Game, April 2005) and their copy editor volunteered to me that this seemed like a total no-brainer.

So, the question I will start this new blog with is, if everyone agrees that it makes much more sense to put numbers in context (especially budget numbers), and it is so easy to do, why don’t reporters do it?

I’ll throw in a few more points on this one later in the week, including an explanation of why it so important.