Beat the Press

Dean Baker's commentary on economic reporting

5/05/2006

Are Wages Rising?

Like everyone else, the media have been confused on this basic question, with the main data sources providing very different answers. Last Friday, the Bureau of Labor Statistics (BLS) released the employment cost index (ECI) which showed a sharp slowing in the rate of nominal hourly compensation growth in the first quarter to an annual rate of just 2.4 percent. This is well below the rate of inflation, which, depending on the course of gas prices, will be in the range of 3.0-4.0 percent for this year.

On Thursday, BLS released productivity data, which showed that hourly compensation was rising at an annual rate of 5.7 percent for the same quarter. Further complicating the picture is the employment report that BLS released this morning showing wages rising at a 4.7 percent annual rate over the most recent three months (compared to the prior 3-month average).

The picture is not quite as confusing as this may appear. First, the quarterly compensation data from the productivity report should be ignored. There are enough random factors on both the compensation side and the hours side that this number is essentially worthless. For example, this data shows hourly compensation rising at a 10.0 percent annual rate in the 4th of 2004 and at just a 1.3 percent annual rate in the 2nd quarter of 2005. Compensation growth in the world is not so erratic.

It is worth taking the annual data that shows hourly compensation increasing by 3.8 percent over the last year. This is probably a good start.

The slowing of compensation growth in the ECI turns out to be entirely attributable to a sharp slowing in benefits growth. The pattern of benefit growth in the ECI is also extremely erratic. This is due to the timing of firm’s payments to pension funds and insurers, it has little to do with the benefits actually received by workers. If we just look at the wage component of the ECI, we find a modest uptick in wage growth to a 2.8 percent annual rate in the first quarter, although the pace of wage growth over the last year at 2.4 percent is down from the 2.7 percent rate in the year to March 2005.

Finally, the average hourly wage series in the employment report is now showing an extraordinary acceleration in wage growth. Much of this is driven by a 0.5 percent increase reported for April. The monthly wage data is erratic and the April jump will likely be partially reversed by slower than trend wage growth in coming months, but it is hard to avoid the conclusion that there has been an acceleration of wage growth in this series. At the beginning of 2005, the average hourly wage was rising at close to a 2.5 percent annual rate. It is probably rising at rate between 3.5-4.0 percent now. Such a figure would be consistent with the compensation data in the productivity report.

The are some technical differences in the way that the ECI is constructed that could explain its divergence with the hourly wage series (the wage data usually track closely). But, I would bet on the average hourly wage series at this point – the gradual acceleration (partially dismissing the April number) is consistent with a picture of a tightening labor market that is finally allowing workers to share in some of the productivity gains of the last five years.

5/04/2006

Correction: Productivity Growth Clocks in at 3.2 Percent

I plead guilty to the same sort of sloppiness I have noted elsewhere. Earlier this week I commented on the coverage of Commerce Department's release of data for March on consumer spending and prices. I then noted that the consensus forecasts for first quarter productivity growth appeared to be too high. I based this on the fact that the hours data reported in the monthly employment reports indicated that hours were growing at close to a 4.0 percent annual rate in the quarter. As it turned out, hours growth was reported as 2.5 percent. What went wrong?

Well, the hours data that go into the published index in the employment reports are for production and non-supervisory workers in private non-farm employment. That means that the index excludes the impact of changes in employment and hours for production and supervisory workers. (There are also some private sector workers who are not in the business sector, for example workers in non-profit universities or hospitals.) Since the vast majority of workers (@80 percent) fall into the production/non-supervisory category, I got lazy and assumed that the change in hours for this group of workers would be pretty much the same as the change in hours for all workers in the non-farm business sector.

As it turned out, this was wrong big time. While non-production supervisory employment rose by 664,000 from the fourth quarter to the first quarter, employment of supervisory workers actually fell by 80,000. (This is an interesting story, which I may return to in future notes.) Anyhow, the moral is to do your homework. I didn’t do it as thoroughly as I should have (all this data was publicly available), and therefore I was wrong.

Corruption in the Pharmaceutical Industry: Why Is Anyone Surprised?

The New York Times has run many excellent articles over the years describing various forms of corruption in the pharmaceutical industry. (The latest describes the battle over monitoring the prescribing practices of individual physicians.) The one thing missing from these articles is any economic analysis.

Every person who has suffered through an introductory economics class has heard the story about how government intervention in the market leads to corruption. Economists always rant above how trade protection or various forms of government regulation inevitably lead to gaming of the system and rent-seeking behavior. If we expect to see such corruption when a tariff or quota raises clothes prices by 15-20 percent, why wouldn’t we expect to see such corruption when drug patents raise prices by 200 percent or more?

Calling government protection a “patent” or defining it as an “intellectual property right” does not change the economic model one iota. The sort of incentive for corruption from protection is the same, except the magnitudes are many times larger. For this reason, the predictable result of the government granted monopoly known as a drug patent is that drug firms will lie about their test results, conceal evidence of harmful effects, use illicit political influence to get drugs approved by the FDA and purchased by government agencies like Medicaid, make payoffs to doctors for prescribing their drugs, make payoffs to generic manufacturers to prevent competition, etc.

The Times has performed a valuable service in documenting many instances of these abuses over the years. However, the media needs to expose the underlying problem in the incentives created by the patent system so that we can have a serious debate over the best mechanism for financing prescription drug research.

Open Borders Versus Die at the Border: Can’t Experts See the Difference?

I just heard economics commentator Chris Farrell on Marketplace talking about the United States open border immigration policy, under which ambitious hardworking immigrants can freely enter the country. Excuse me, but what planet is this guy on?

Open borders mean that a Mexican doctor, an Indian lawyer, a Brazilian economics commentator can come across the border in any form of transportation they like, and work wherever they like, at whatever pay they are willing to accept.

The United States does not have this policy or anything like it. It has a policy that sharply limits legal opportunities for working in the country. The policy is that if you are willing to risk death in a dangerous border crossing and risk facing deportation at any time, then you can work in some sectors of the economy illegally.

Doctors, lawyers, and economic commentators in the developing world are not willing to take these risks. Furthermore, the businesses that hire such people are not willing to risk the legal and political consequences of wholesale violation of immigration laws. This means that people like Chris Farrell don’t have to face the same competition from immigrants as less-skilled workers. If he did, Marketplace would have a far more competent commentator on economic issues.

5/03/2006

Sweatshops in Jordan

Steven Greenhouse had an excellent piece in today's New York Times about sweatshops in Jordan that manufacture apparel for export to the United States. This industry has been developed largely as a result of a trade agreement that Jordan signed with the United States in the late nineties. The article describes slave-like conditions, as foreign workers routinely have their passports confiscated by factory owners so that they cannot freely leave. According to the article, workers can be forced to work up to 48 hours straight, are routinely ripped off for their pay, and are beaten if they complain.

Two aspects of the article raise especially interesting questions. First, the article indicates that the apparel jobs have gone almost exclusively to foreign (largely Bangladeshi) workers. It is unlikely that the trade agreement was sold in Jordan based on the jobs that it would create for guest workers. The benefits to Jordan’s economy from this trade would be very limited.

Second, the Jordan trade pact actually included language on labor standards, unlike other trade deals of the last fifteen years. The conditions reported in this article suggest that this language has not had much impact on actual labor conditions.

Cash Out Refinancing and the Housing Crash

At the risk of damaging my standing as one of the leading proponents of the housing bubble argument, I would take issue with the assessment of a Washington Post article. The article reported that the percentage of people refinancing homes with mortgages that are larger than the original mortgage (in other words, pulling equity out of their home) hit a 16 year high in the first quarter.

The article rightly notes that people cannot use their homes as banks indefinitely, and that this process depends on continually rising house prices. This is all fair enough, but there is a key issue that is missing in this analysis. The main reasons to refinance are to save money on interest by taking advantage of lower interest rates and to pull equity out of your home by taking out a larger mortgage.

Well, mortgage interest rates are back up to levels not seen since 2002. This means that few homeowners can save money by refinancing at a lower interest rate. Those looking to do so almost certainly already refinanced at some point in the last 4 years. With this reason for refinancing disappearing (total refinancing is down by more than two-thirds from its 2003 peak), the only people who refinance are the ones who want to pull equity out of their home.

So, the refinancing story may not be evidence of the bursting bubble, but there is plenty of other evidence. Noteworthy on this list are record high vacancy rates for ownership units and the downward trend in existing home sales and mortgage applications for home purchases. The sky is still falling.

5/02/2006

Stock Market Tips

I was struck by the reporting on the increases that the Commerce Department reported for March consumer spending and the personal consumption expenditure deflator (PCE). Both figures were presented as being higher than expected. It seems that the financial markets were surprised by the news, since the yield on 10-year treasury bills rose by 6 basis points.

I am surprised by the surprise because the spending and price data released on Monday was not new information. It was actually imbedded in the first quarter GDP data that was released on Friday. The Commerce Department needed to include March data for both consumption and inflation in order to compile GDP data for first quarter data. This means that anyone who cared could have pulled out the previously released data for January and February (which is subject to revision) to calculate the numbers that would appear in the March release.

I have occasionally done this myself when I had no better use of my time. Unless the first two months data are revised by a large amount (unusual, but not impossible) it is possible to know almost exactly what the data for the third month will look like before it is officially released.

Given the six and seven figure salaries that stock market analysts earn, it seems absurd that they would ever be surprised by data that could be known in advance with simple arithmetic. I guess this shows that there are still good-paying jobs for unskilled workers.

(Tip for this week: productivity growth will be close to 2.0 percent. The reason is a reported first quarter surge in the number of self-employed workers will lead to hours growth at close to a 4.0 percent annual rate.)

Reporting on Social Security and Medicare: Better, but not Good

The reporting on the release of the annual Social Security and Medicare trustees reports was better this year than in the past, but still not very informative. Most reports did not include the context that would have made the information understandable to most readers/viewers.

In the case of the Social Security report, there was less mention of the scary sounding multi-trillion dollar shortfall projections that are meaningless without being placed in any context. (The 75-year shortfall projected by the Congressional Budget Office [CBO] is equal to 0.4 percent of GDP over this period, approximately 40 percent of the size of the post September 11th boost to the defense budget.) Much of the reporting still portrayed the projected 2040 date of the trust fund’s depletion (2052 according to CBO) as a looming crisis demanding prompt action, implying that Congress needs 34 year lead time to deal with a problem that was dealt with in 8 months back in 1983. Given the size and uncertainty surrounding the projected shortfall, it is difficult to make a serious case that action on Social Security is urgent.

In addition to distracting attention from more pressing problems, my concern over hasty action on Social Security stems from the widespread ignorance about the state of the program and its potential impact on future well-being. Even the trustees relatively pessimistic assessment of the future implies that real wages will be almost 50 percent higher by the 2040 projected depletion date (real wages will be almost 80 percent higher in the CBO projections). The idea that our children or grandchildren will impoverished by higher Social Security taxes is absurd on its face, but the public has been so scared by demagoguery on this issue, that tens of millions of people have precisely this fear. My preference is to defer action until the media has done its job of educating the public. If that takes 34 years -- that’s okay by me.

Of course the real danger to future living standards is the projected increase in health care costs that is threatening the Medicare program and government budgets more generally. This is a private sector health care problem, not a problem with the Medicare program. The projected increases in health care costs imply that the annual cost of health care for workers between the ages of 55-64 will be almost $18,000 a year (in 2006 dollars) by 2026. This is a crisis that demands our attention. Unfortunately, this projected explosion in health care costs rarely is noted in the media, even as they report the dire implications for a program like Medicare.

5/01/2006

What’s the Problem With Less Crowding?

It would be reasonable to think that a densely populated island with exorbitant land and housing prices would be happy to alleviate its crowding problem. That’s not the thinking at the Washington Post.

The Post had an article this morning noting the surprising fact that the number of obstetricians in Japan is declining along with its dropping birth rate. The article notes that Japan’s population is currently shrinking, and that if current trends continue, its population will fall from over 127 million to just 100 million by 2050. The Post then describes this drop in population as a “problem.”

Well, fewer people, rising capital labor to ratios (and therefore higher wages), less crowding, and less pollution is not a problem in any economics I know. Maybe the Post will explain its reasoning in some future article, but for now, this front page story simply doesn’t make sense.

NPR Misses the Story on Dividend Tax Cut

NPR had a report this morning on the debate over extending the lower tax rate on dividends. The report correctly pointed out that the vast majority of this tax cut will go to the richest 1 percent of the population. It also noted the ambiguity of the evidence showing any substantial link between lower dividend taxes and increased investment and growth. However, the report neglected to point out that the vast majority of stockholders do not benefit from the cut in the dividend tax rate.

The reason is simple. Most stockholders hold most or all of their stock in retirement accounts. These accounts accumulate money tax free as long as the money is in the account. When a worker retires and pulls money out of the account, the money (all of the money) is taxed as ordinary income. This is regardless of whether the money in the account came from wages, dividends, interest or capital gains. (The tax is paid in advance with Roth IRAs, but holders of these accounts also get no benefits from the tax cut.)

I have discovered that many people are confused on the impact of this tax cut and that many holders of retirement accounts believe that they benefit from it. In fact, I remember arguing at length with an economics reporter from a major city paper who was convinced that he was getting a tax break on the money in his 401(k). It is very simple to point out that holders of retirement accounts do not benefit from the dividend tax cut. At least then the public would know who gains from this tax cut. It’s too bad that NPR listeners will remain ignorant on this point.

4/30/2006

Money for Nothing

Eduardo Porter had a very good piece in the Times this morning on the huge run-up in the foreign exchange reserves of developing countries. The basic point is that these reserves are held in short-term deposits that typically pay little or no real return. In poor countries that have great need of capital, diverting money to foreign exchange reserves has a large opportunity cost.

The fact, that developing countries feel that they need such large reserves is a testament to the failure of the international financial system. If the system were working well, they would have no more need of reserves at present (relative to their GDP) than they did twenty years ago.

We did a short paper on this topic a few years back. It is good to see the issue finally drawing more attention.

John Kenneth Galbraith, 1908-2006

The passing of John Kenneth Galbraith is a real loss. His works made major contributions to public debate over the entire post-World War II era, and continue to have an impact. The New York Times had a mostly fair commentary today on Galbraith’s life and work. (Brad DeLong does a good job pointing out the ways in which it is not fair.) The Post apparently did not learn the news in time for the Sunday edition, or alternatively it had not prepared an obit in advance.

Any assessment of Galbraith’s life invariably includes the comment that his work had more influence outside of economics than within the profession. This is unfortunate for the economics profession. While we can benefit from mathematical modeling and new econometric techniques, I believe that Galbraithian insights will ultimately prove far more important in advancing our knowledge of the economy and society.