Beat the Press

Dean Baker's commentary on economic reporting


Cooking Unemployment Data to Make the U.S. Look Better

Laurent Guerby made a post on the prior topic about European-U.S. unemployment comparisons, I was just at a conference sponsored by the OECD where exactly this issue came up. The basic point is that proponents of the U.S. model want to add people in employment training programs and disability roles in Europe to their official unemployment rates for purposes of international comparisons.

This seems bogus on several grounds. First, the employment training programs are obviously heavily subsidized by the government (often 100 percent), but there are many situations in the U.S. where jobs enjoys substantial government subsidies. The EITC peaks at more than 35 percent of wages, throwing in work related child care benefits can easily push the subsidy to more than half of the wage. At what point do we say that the job is simply concealing unemployment, a 60 percent subsidy?, an 80 percent subsidy?, or does it have to be 100 percent? Furthermore, what if the government paid the full wage, and the person did absolutely nothing, but we didn't call it a training program? Then is the person unemployed? Suppose we can keep a person from looking for work by paying for their school and a small stipend (or a low interest loan). Should this person be counted as unemployed?

I don't think that there is a consistent definition under which people in European training programs can be counted as unemployed which would not require people in other subsidized employment (both in Europe and the U.S.) from being counted as at least partially unemployed. (Subsidies also don't have to go through the government. Prohibitions on age discrimination mean that younger workers subsidize the purchase of employer provided health insurance for older workers.) In short, this seems like a bogus measure of unemployment.

Similarly, if we grant that the people on Europe's less strict disability programs are at least somewhat less able to work on average than the non-disabled, then the question becomes the determination of disability. There is no basis for saying that the U.S. definition is the correct one, and it is an entirely reasonable decision on a society's part that they would be willing to pay more in taxes so that people who have some impediment that makes it difficult to work, do not have to work. It is reasonable to have a more strict standard as well, but no one made the U.S. Congress god, so that its rules should be the universal standard of who is disabled.

There is a reasonable question to be asked about the overall sustainability of a given situation, but if the comparison is with the Nordic countries, the U.S. loses badly. They have small budget deficits or surpluses and current account surpluses. The U.S. has a large budget deficit and clearly unsustainable current account deficit.

On the other side, the U.S. prison population (2 million) is approximately 1 percent of our working age population (15-65 for international purposes). Also, our official data probably overstate the employment rates by about 1.5 percentage points because people who are likely to be unemployed do not respond to the survey. (The coverage rate for young black men is about 70 percent.) My colleague John Schmitt recently did a “paper” on this.

In short, I think it's great to try to look at the unemployment/employment data more closely when making international comparisons, but I'm not convinced that a closer look improves the relative standing of the U.S.


Is Bernanke Promoting Inflation?

There is an interesting aspect to the recent rise in the inflation rate that the media have not really explored. The biggest factor in the higher than expected May measure was a jump in rent. (The two rental indices, owners’ equivalent rent and rent proper, account for nearly 40 percent of the core consumer price index [CPI].)

One explanation for more rapid increases in rents is that people who cannot afford to buy houses, due to higher mortgage rates, are now looking to rent. The Census Bureau’s data on vacancy rates gives us evidence to support this position. Rental vacancy rates have fallen by almost a full percentage point from their record high 10.4 percent in the first quarter of 2004. At the same time, the vacancy rate in ownership units has increased from 1.7 percent to 2.1 percent over this period. (There are twice as many ownership units as rental units, so the overall vacancy rate is basically the same over this period.)

Insofar as this story is true, it implies a very interesting dynamic. We have the Fed raising interest rates to combat inflation. This effort leads people to switch from homebuyers to renters, thereby placing upward pressure on rents. Since rents appear in the CPI, and home sale prices don’t, this switch raises the measured rate of inflation, which in turn puts pressure on the Fed to raise interest rates even more. The unraveling of the housing bubble can create these sorts of vicious circles.

Great Political Caricature, Courtesy of David Brooks

In his New York Times column today, "Changing Bedfellows", David Brooks did a far better job describing the nanny state conservatives’ framing of economics than I could ever hope to do in my book. Of course, he ostensibly was saying how the world actually is, rather than how the nanny state conservatives want us to see it.

According to Brooks, we have the populist nationalists who argue against immigration and trade, and want to ensure workers’ security through Social Security and national health care insurance. This group includes Pat Buchanan, Lou Dobbs, Al Sharpton and Kevin Phillips.

On the other side, we have the progressive globalists, who want to expand trade and allow immigration in order to promote economic growth. This group includes Hillary Clinton, Mark Warner, John McCain and Rudy Giuliani.

It’s great caricature – a perfect example of the framing that I criticized in my book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer [cheap plug]. While the conservative nanny state crew wants us to see the political breakdowns this way, this picture is completely inaccurate. In reality, the “progressive globalists” are scared to death of international competition. This is why they do nothing to eliminate the barriers that prevent doctors, lawyers, accountants and other highly paid professionals in the United States from being forced to compete with their counterparts in the developing world.

The “progressive globalists” believe that international competition should be reserved for less-skilled workers. They don’t want their friends and campaign contributors to suffer the same fate as textile workers and autoworkers. It would be nice to just once see a more honest discussion of trade policy from a columnist in the Times, Post, or any other major media outlet.


Is Alan Blinder a Protectionist?

Washington Post columnist E.J. Dionne is a decent person, whose views on many issues I share, but his column today is almost a caricature. It perfectly demonstrates why liberals/progressives are so lost on economic policy.

Dionne notes the collapse of good-paying jobs in the auto industry, the manufacturing sector, and increasingly other sectors due to trade and outsourcing. He then cites a recent article by Princeton University professor and former Fed Vice-Chairman Alan Blinder (identified as “no protectionist”) warning that the trend toward declining wages due to competition with the developing world is likely to spread to more sectors in the future. The implicit question that Dionne then poses is “how can we maintain middle class living standards without being hoary protectionists?”

The answer of course is that Alan Blinder, Bill Clinton and the other “free traders” referred to in the article are in fact protectionists. They just don’t own up to it. The competition that our manufacturing workers face from low-paid workers in the developing world is the result of trade policies that were explicitly designed to place them in competition with workers in the developing world. Trade pacts like NAFTA did not just reduce tariff barriers (these were already low) they established a whole set of rules that made it very simple and secure for U.S. corporations to set up manufacturing operations in developing countries and to ship their products back to the United States.

Instead of placing U.S. manufacturing workers in direct competition with low-wage workers in the developing world, our trade negotiators could have designed trade pacts that placed doctors, lawyers, economists and others in the highest paid professions in direct competition with workers in the developing world. This would mean standardizing licensing and education requirements so that smart kids in Mexico, India, and China could train to work as doctors in the United States just as do kids in New York or Los Angeles. (We can tax the earnings of professionals from developing country professionals working in the United States. Sending this revenue back to the country of origin would allow them to train 2-3 professionals for every 1 that works in the U.S., thereby reversing the “brain drain.”)

This pattern of trade would have two effects. First, there would be enormous gains from trade as the price of medical care and other services provided by highly paid professionals plummeted, raising living standards for all but those in the directly affected professions. Second, this pattern of trade would lead to increased equality rather than increasing inequality.

But, the designers of U.S. trade policy (both Democrats and Republicans) chose not to go this route. While they profess to be free-traders, they are in fact protectionists when it comes to the jobs of people in the highest paying professions. Until people like E.J. Dionne can recognize such basic facts, it will be difficult to design economic policies that benefit broad segments of the population.


Joe Six-Pack’s Stock Portfolio?

“Experts” get away with saying almost any nonsense they like when it comes to talking about the stock market and the economy, but I think that we may have hit a new high today. A Times article today quotes Mark Cliffe, global head of financial markets research at ING Group in London, saying that the U.S. stock market has fallen 5-6 percent this year. The expert adds that if it falls another 5 percent, it could affect consumer spending and “‘Joe-Six’ could start to cut back his stock portfolio.”

Okay, there could be a wealth effect from lower stock prices on consumption, but this usually takes some period of time. Furthermore, wasn’t the purpose of supply-side tax cuts (as in President Bush’s tax cuts) to increase saving? In other words, we are supposed to believe that less consumption is bad when it happens because the stock market falls, but good when it is due to a tax cut. (More savings MEANS less consumption.)

But part 2 of this quote is the real fun -- Joe Six-Pack’s stock portfolio? First, even in the era of 401(k)s only about half of the population hold any stock at all, even through their 401(k) accounts. The median stock ownership among the people who own stock is less than $30,000. So, what is the economic consequence of a large portion of the people who own $15-$30k of stock selling off a quarter or a third of their stock? As best I can tell, just about zero. Why does the NYT print such nonsense? Does the reporter think about what he is writing?