Beat the Press

Dean Baker's commentary on economic reporting

4/21/2006

“Protectionist,” a Four Letter Word?

In many economic policy debates, the worst possible adjective is “protectionist.” All right thinking people know that protectionism is bad. According to the economic in-crowd, only ignorant and reactionary people support protectionism measures. (The Post gives a nice example of this thinking in a piece explaining how the IMF will act to prevent protectionism in an economic crisis: “IMF Calls for Cooperation Ahead of Imbalances Meeting.”)

The image of hoary protectionism lurking on the horizon can be very effective for powerful interests seeking to push their agendas, but it has nothing to do with real world economic policy. The United States has all sorts of protectionist barriers, the most important of which apply to professional services like physicians’ services and lawyers’ services. These barriers take the form of licensing requirements that are deliberately designed to make it more difficult for foreign professionals to practice in the United States.

If the United States was interested in free trade in professional services, it would have worked to standardize licensing requirements so that a student living in India or Mexico could as easily prepare to meet the requirements as a student in New York or Los Angeles. (The U.S. could have higher standards, but they would have to be transparent and meet legitimate health and quality concerns, just as the W.T.O. requires with other regulations.)

The United States did not standardize licensing procedures for doctors and lawyers because the people who make trade policy are protectionists – they want to ensure that doctors and lawyers continue to earn high salaries. They only want to make autoworkers, textile workers and other less-skilled workers compete against workers in the developing world.

The arguments about how protectionism is harmful to the national and world economies are every bit as true when doctors and lawyers are protected as when autoworkers and textile workers are protected. (In fact, the harm is greater – protectionism for doctors adds $80 billion a year or more to the country’s health care bill.) Remarkably, all the people who express great concern about the prospect of economic damage from protectionism in the auto and textile sectors say nothing about the harm from protection for doctors or lawyers.

I don’t know whether the selective protectionism of the “free traders” is due to dishonesty or simply bad economics, but reporters should be able to treat the issue more seriously. There are no free traders in policy positions in the United States, and the media should not allow those who favor protection for highly paid professionals get away with calling themselves “free-traders.” They should also not let anyone get away with making the ridiculous argument that the country will somehow suffer great harm from protection in the auto or textile industry, while totally ignoring the harm that it is currently suffering from protection for doctors and lawyers.

Inertia, Budget Reporting and Starving Children

I had earlier promised to give my explanation for the fact that articles on the budget fail to put budget numbers in a context that would make the millions, billions and trillions meaningful to readers. While laziness is part of the story, the bigger factor is simply inertia, why change? Reporters may agree that it would be very simple and more informative to express budget numbers as percentages of total spending or dollars (or cents) per person, but this is not how their papers did it last year. Including this information is a change, and doing things differently can put you on the spot. In short, since no one put budget numbers in context last year, no one will do it this year.

There are forces that overcome inertia. For example, if inaccurate or incomplete reporting was giving readers a bad impression of Microsoft or the pharmaceutical industry, their lawyers and lobbyists would be haranguing reporters and editors on a daily basis, demanding a change in practice. While the media does occasionally stand up to powerful interests (the New York Times has regularly produced outstanding stories exposing abuses by the pharmaceutical industry, for example), it will give in when it is wrong. In other words, they will not persist in bad reporting that hurts the interests of Microsoft or the pharmaceutical industry.

The same is not true of bad budget reporting. As I argued earlier, this budget reporting has serious consequences. People hugely overestimate the shares of the budget that go to programs like Temporary Assistance to Needy Families (TANF) or foreign aid. Surveys find that people believe that 20-30 percent of the budget goes to these programs. In reality, the shares are 0.6 percent and 0.1 percent, respectively.

As a result of this misconception, voters are far less likely to support additional spending in these areas, and often support candidates who propose cutting such programs. Given their understanding of the budget, resistance to further spending is reasonable. After all, if we’re already spending 30 percent of the budget on TANF or foreign aid, and we still have so much poverty in the United States and so much hunger in the developing world, why would anyone think that spending even more would improve the situation. (I am aware that people choose their “facts” to support predispositions, but I think this can only explain a small portion of the widespread ignorance about the budget.) In short, the widespread misconceptions about these programs are a major obstacle to increasing funding.

Of course there are organizations (policy and advocacy groups) that do try to promote increased spending on programs like TANF and foreign aid. While they may not pack the same punch as the pharmaceutical industry, they probably could effectively push for more informative budget reporting if they pressed the case with reporters and editors. Why don’t they take up this cause? They didn’t do it last year. Inertia is the most important force in politics.

4/20/2006

How Big Is China?

This is not a grand existential question; I am referring to the size of its economy. According to most news reports, China’s GDP is approaching $2 trillion, rivaling Germany for the #3 ranking in the world, behind the United States and Japan. In fact, this figure grossly understates the size of China’s economy. It is already far larger than Japan’s economy and is likely to surpass the size of the U.S. economy in less than a decade.

The error is simple. The standard number reported for China’s GDP is based on a “currency conversion” measure of GDP. This method takes China’s GDP, calculated in its own currency, and then converts this number into dollars, using the official exchange rate. However, China’s currency is hugely under-valued, so this method provides a very poor measure of the value of goods and services produced in China each year.

The method preferred by economists for most comparative purposes is a “purchasing power parity” measure. This measure adds up GDP by using the same set of prices for all the goods and services in all countries. In other words, it applies the same price to a bushel of wheat or a haircut in China as to a bushel of wheat or a haircut in the United States.

According to the CIA’s World Factbook, China’s purchasing power parity GDP in 2005 was $8.2 trillion. This compares to a U.S. GDP of $12.5 trillion. Adding in Hong Kong’s GDP puts the size of China’s economy at $8.4 trillion in 2005, just over two-thirds the size of the U.S. economy.

China’s economy has been growing at the rate of 8-9 percent a year, and most projections assume that it will maintain this rate of growth for the near future. If China’s economy grows at the rate of 7 percent annually, its GDP will be approximately $16.5 trillion in 2015, almost the same as the projected $16.8 trillion GDP for the United States (both numbers in 2005 dollars). At 8 percent growth, China’s GDP will be $18.1 trillion in 2015, and at 9 percent growth it will be $19.9 trillion.

There is considerable inaccuracy in international comparisons of GDP, but the basic point is that China’s economy will be approximating the size of the U.S. economy in the near future, and under plausible growth assumptions, will soon be considerably larger. This has important implications for the position of the United States and China in the world. I will allow others to work through those implications, but we have to start by recognizing how big China actually is.

4/18/2006

Surprising News on Mexico at the Washington Post

Readers of the Washington Post might have been surprised to read that since the passage of NAFTA, “Mexico’s gross domestic product has ballooned, multiplying nearly seven-fold, from $108 billion in 1993 … to $748 billion in 2005” (“Mexican Deportee’s U.S. Sojourn Illuminates Roots of Current Crisis,” 4-17-06:A1). This amounts to a world record 17.5 percent average annual rate of growth in the 12 years since NAFTA was implemented.

Readers should be surprised to read this in a front page story in the Washington Post because it is not true. Mexico’s economy has not “ballooned” since NAFTA. According to the IMF’s most recent World Economic Outlook, Mexico’s GDP grew by just 40.2 percent over this period, an average annual rate of 2.9 percent. This translates into per capita GDP growth of 1.3 percent a year. This is weak growth for any country, but it is especially weak for a developing country. (Mexico sustained per capita GDP growth of almost 4.0 percent annually from 1960-80.)

This mistake was not just a typo; it was an important theme in a front page article. It raises the obvious question of how such a fundamental error was able to get by the Post’s editors and whatever fact-checking process the paper has in place. It is especially disturbing that the error happens to coincide with the strong editorial position that the Post has taken in support of NAFTA.

It is implausible that anyone at the Post deliberately inserted such a ridiculous misrepresentation of Mexico’s economic record to support the paper’s editorial position. But it is plausible that the favorable predisposition of Post editors toward NAFTA made them less likely to catch such a blatant error. The Post has never run a piece that has highlighted Mexico’s weak economic performance in the post-NAFTA years, so most Post readers are probably unaware of the gloomy track record of Mexico’s economy during this period. It is reasonable to assume that the Post editors are equally ignorant of the basic facts about Mexico’s economic performance.

It is certainly possible that NAFTA is not the cause of Mexico’s weak economy over the last 12 years. Perhaps its economy would have grown even less without NAFTA, but it is not possible to have a serious discussion of the issue until the basic facts are on the table. I look forward to the Post’s article on Mexico’s economy in the post-NAFTA era.

Budget Deficits and Current Account Deficits

A New York Times story on Iceland provides a good opportunity to discuss the asymmetry in reporting on government budget deficits and national current account deficits. While news of the budget deficit routinely appears prominently on the front pages (in addition to occupying considerable space on editorial and op-ed pages) discussion of the current account deficit is generally relegated to the inner pages of the business section. Since the long-term impact of the two on the economy is comparable, there is little justification for the difference in treatment.

This is another Econ 101 story. A budget deficit is supposed to be bad because it pulls money away from other more productive purposes. Specifically it is supposed to raise interest rates and thereby crowd out private investment. (The deficit hawks have a hard time telling this story at present, with real interest rates in the U.S. at near post-war lows.) The result is slower growth and a poorer country in the long-term. There is also a secondary concern, that when the annual deficit and/or debt grow sufficiently large relative to GDP, lenders could begin to question the government’s creditworthiness and then demand very high interest rates. This would have serious consequences for investment and growth.

A current account deficit means that the United States is selling off assets (e.g. stocks, bonds, real estate) to foreigners. As a result, in the future, income from these assets will go to foreigners rather than people in the United States. In other words, the United States will be poorer, just like with a budget deficit. There is also a secondary concern, that when the annual current account deficit and/or foreign debt grow sufficiently large relative to GDP, lenders could begin to question the country’s creditworthiness and then demand very high interest rates. This would have serious consequences for investment and growth.

Okay, I shouldn’t have used the exact same words to describe the nature of budget crises and current account crises. The latter will typically take the form of a plunging currency, leading to higher inflation (import prices rise when the currency falls, leading to higher prices generally) and higher nominal interest rates. The result is likely to be a recession, with several years of stagnation and high unemployment (e.g. the East Asian financial crisis in the 90s). A budget crisis is likely to be resolved with sharp cuts in spending and/or large tax increases, also likely to lead to a period of stagnation and high unemployment. (The discussion of both deficits must be filled with numerous caveats, which I am leaving out for brevity.)

While there are good grounds for concerns about the U.S. budget deficit, the current account deficit is considerably larger and is growing rapidly. The unified budget deficit for 2006 is projected at 2.6 percent of GDP (4.0 percent of GDP, including the money borrowed from Social Security). By comparison, the current account deficit is 6.2 percent of GDP.

The Iceland story is an occasion to mention the current account deficit because Iceland presents the most extreme case of a rich country with a large current account deficit. Its deficit was almost 15 percent of GDP last year. New Zealand comes in second at 9.0 percent, followed by the United States and Spain, both at just over 6.0 percent. Iceland appears to finally be hitting the wall – its currency fell by 15 percent in the last year according to the article. This is pushing inflation up, with interest rates rising as well.

The same factors that are causing problems for Iceland, most importantly diminished capital outflows from Japan and possibly China, are likely to also cause problems for the other big deficit countries in the not distant future. When this happens, the media will have to explain why it devoted so little attention to the growing current account deficit and the crisis that would almost certainly be implied by its reversal.

4/17/2006

The “Theft” of Health Care by Immigrants: Does It Matter?

The New York Times ran a front page story on Sunday that could have been a case study of why it is essential to put budget numbers in context. The article, “Medicaid Rule For Immigrants May Bar Others,” explains how new rules intended to prevent illegal immigrants from getting Medicaid may also prevent many eligible beneficiaries from getting assistance. The problem is that many low income people don’t possess the necessary documentation (e.g. drivers licenses or birth certificates) needed to receive Medicaid under the new rules.

The key flaw in an otherwise excellent article is the brief reference to the potential budget savings from the new rules. The article reports that the Congressional Budget Office projects the savings as $220 million over five years and $735 million over ten years.

Many readers may have been misled into thinking that this is real money. The projected savings are equal to 0.0015 percent of projected spending over the next five years and 0.0022 percent of projected spending over the next decade. Or, in Brad DeLong’s formulation, of the $49,800 per person that the federal government is projected to spend over the next five years, the new rules are projected to save approximately 73 cents.

The context here is crucial, because it tells readers that this rule is not about saving taxpayers money. The cost of Medicaid benefits improperly provide to illegal aliens is trivial. People may still be upset that immigrants who are not in this country legally are getting health care benefits from the government, and therefore support this crackdown. But it is important for them to realize that this measure will have no visible effect on their taxes or the government’s finances. Most Times readers probably do not realize this fact simply because they have no idea how unimportant a savings of $220 million over five years is.

4/16/2006

Immigration: Die at the Border and Open Borders

I want to follow up quickly to a couple of notes on my posting where I referred to the “Die at the Border” policy. I was not arguing for open borders. I don’t think that anyone who has given the issue serious thought advocates open borders, since a literal open border policy would almost certainly imply an inflow of hundreds of millions of people in the next couple of decades.

My point is that we don’t have open borders; instead we have very serious limitations on immigration. Immigration is restricted both by the danger of the border crossing and the prospect of deportation due to a random encounter with law enforcement (e.g. a traffic ticket). These threats ensure that most immigrants will not be well-educated, since well-educated people in the developing world will not take these risks to work in the United States.

This means that less-skilled workers in the United States have to worry about competition from undocumented workers, while the people who design and debate immigration policy (economists, lawyers, reporters) don’t have to worry about professionals from developing countries slipping over the borders and undercutting their wages. The implication of the current immigration policy is that the people who design and debate it are largely its beneficiaries, since they can get low cost home repairs, bargain restaurant prices, and cheap nannies.

We can debate whether this is good immigration policy, but we first have to acknowledge the policy in place. The reason that most immigrants are less educated is not because of any shortage of more educated workers willing to immigrate to the United States, it’s because our policy acts to exclude them.

As far as the evidence of the link between immigration and the declining wages of less-skilled workers, I can point to the papers by Borjas, Katz, and Freeman, but I confess to being more influenced by what I take as the stylized facts. If immigration was being driven by a shortage of people willing to take certain jobs, then we should expect to be seeing sharp increases in the relative wages of the occupations that have large shares of immigrant workers. In other words, we should have expected to see sharply rising wages in construction, restaurant and hotel work, as employers raised wages in a desperate effort to attract more workers. In fact, we see the opposite. Wages in these industries/occupations have fallen sharply relative to the wages of more skilled workers.

In a similar vein, accepting the view that the minimum wage has little impact on employment implies a belief that the demand for labor is relatively unresponsive to changes in wages. (In other words, a 15 percent hike in the minimum wage has little effect on the number of workers that firms are willing to hire.) Those of us who believe that the minimum wage has relatively little impact on employment, have a difficult time explaining how a large increase in labor supply will have little impact on wages. (If the demand for workers does not respond much to changes in wages, then it would take a large decline in wages to keep fully employed a workforce that has grown substantially due to immigration.)

Finally, a note on the immigration/wage studies – none of the studies seem to have examined the possible effect of immigrants on local housing markets. (I am prepared to stand corrected, if someone knows of such a study.) There are substantial differences in housing costs and the rate of rate of growth of housing costs across cities. For example, between 1980 and 2005, shelter costs rose by 181.3 percent in Los Angeles (4.2 percent annually), while they rose by just 133.4 percent (3.4 percent annually) in Detroit. (This is taken from the CPI shelter index.) This is a difference of 0.8 percentage points a year. Of course, Los Angeles has seen a large inflow of immigrants, while the Detroit area has seen a much smaller inflow.

Shelter accounts for 30 percent of family expenditures on average, and a considerably larger share for low-income families. If shelter costs rise more rapidly in cities with large immigration flows, then this would imply lower real wage growth, given the same nominal wage growth. This could have a substantial impact: in the LA-Detroit comparison, the difference in the growth of shelter costs would translate into a difference in real wage growth of 0.2-0.3 percentage points annually, for the same nominal wage growth.

A serious study would have to look at a large set of cities, and ideally at the housing actually occupied by lower income households, since there are likely different rates of housing inflation for different types of housing. However, given the importance of housing in consumption baskets, and the differences in price trends across cities, this could be an important part of the picture.