Beat the Press

Beat the Press is on the Move

2006-08-02T12:33:00.000-04:00

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

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

Cheap Tip

2006-07-30T07:35:00.000-04:00

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?"

2006-07-29T13:17:00.000-04:00

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

2006-07-29T08:56:00.000-04:00

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

2006-07-29T08:37:00.000-04:00

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

2006-07-28T21:35:00.000-04:00

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

2006-07-28T08:43:00.000-04:00

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

2006-07-27T09:31:00.000-04:00

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”

2006-07-26T23:20:00.000-04:00

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?

2006-07-26T06:29:00.000-04:00

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

2006-07-26T06:12:00.000-04:00

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

2006-07-25T07:53:00.000-04:00

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.

Is the Washington Post Editorial Board Angry at the Paper’s Inadequate Reporting?

2006-07-24T05:42:00.000-04:00

A Washington Post editorial this morning criticized efforts in Maryland and other states to force large employers (especially Wal-Mart) to pay for their workers’ health care. The article contrasted these efforts with the approach being followed in Massachusetts, which it asserts is “a state that is trying to responsibly address rising health-care costs.”

This is an interesting assertion. Massachusetts recently passed a law that required all its residents to have health insurance. There were some limited subsidies in the bill plus some restructuring of the insurance market, but there was nothing that would work in any obvious way to control health care costs, or at least nothing that was reported in the Washington Post.

So, if we believe (with the Post editorial) that there were important provisions for controlling health care costs in this bill, then we should be furious with the Washington Post for failing to report on them. Alternatively, we could believe that the Post editorial board is just making things up to support its case.

Cutting Back I.R.S. Enforcement Staff

2006-07-23T08:49:00.000-04:00

David Cay Johnston has a great piece in today's NYT reporting on the Bush administration's plan to halve the number of lawyers who audit estate tax filing. According to the article, these lawyers generate an average of more than $2,000 per hour of work in revenue for the government. This implies, that unless they are paid more than $4 million a year, the government will lose money by laying them off.

Is the Federal Government Going Bankrupt? Maybe it Should Stop Spending Money Publishing Scare Stories

2006-07-22T23:41:00.000-04:00

What would the long-term federal deficit look like if the cost of the country’s health care system continued to explode, so that in thirty years it costs four times as much per person as that of other rich countries? Well, if I had nothing else to do with my time, I might calculate these numbers.

Fortunately, I have a busy life, so I really don’t have a great deal of time for such trivia. Unfortunately, other economists are less busy and do calculate such trivia. Even more unfortunate is the fact that the St. Louis Federal Reserve Board publishes these calculations as though they are serious economics. However, the real problem is that columnists in the Times use this stuff to make the case for cutting Social Security.

The story here is real simple. The U.S. has a broken health care system. If it is never fixed, it will have a devastating impact on the economy. It will also lead to severe budget problems. Any competent economist/ reporter would see these projections as another way of demonstrating the need for national health care reform. They tell us nothing about the budget situation.

Bad Advice on Mortgages from the NYT

2006-07-22T17:45:00.000-04:00

The Sunday Times has an article reporting that many homebuyers who took out adjustable rate mortgages 3 years ago, are now refinancing to avoid higher mortgage rates. The article (actually the accompanying chart) also adds that many are refinancing with negative amortization loans, under which the outstanding principle increases through time. The chart tells readers that this could make sense, as long as house prices continue to rise.

Okay, let's check the numbers here. Three years ago, homeowners were taking out adjustable rate mortgages at rates in the neighborhood of 4.5 percent. Many are now resetting at rates that are 2.0 percentage points higher, or close to 6.5 percent. The article reports that the national average for adjustable rate mortgages is now 6.28 percent. Throw in fees of 0.5 to 1.0 percent and it's hard to find the savings. In other words, simply exchanging adjustable rate mortgages will not in general save homeowners any money.

Now, the point may be that homeowners are pulling more equity out of their home, taking advantage of the strong appreciation in many areas over the last three years. While, contrary to claims in the article, this doesn't save anything in terms of monthly payments (the payment on a larger mortgage will be higher, not lower), the additional cash can postpone a day of reckoning.

However, the risk in this case is really the exact opposite of what the article claims. The article reports that this strategy may make sense if home prices continue to climb. Actually, pulling out more equity can make much more sense if home prices fall. In that case, the mortgage holder is left with a mortgage that exceeds the value of the house. The homeowner can walk away turning over a house that may be worth much less than the amount of money he has borrowed. That might not be pretty, but it is what will happen in hundreds of thousands of cases across the country.

Housing Appraisals: The Accounting Scandal of the Housing Bubble

2006-07-22T10:41:00.000-04:00

Financial bubbles breed accounting fraud. Those of us who warned of the stock bubble in the late nineties were not surprised by the Enrons and WorldComs that surfaced when the bubble deflated. Bubbles make it possible to paper over all sorts of questionable accounting or outright fraud. When the bubble deflates, these practices can no longer be hidden.

The analogous problem in the housing bubble is with appraisals. The basic story is simple. Mortgage issuers make their money by issuing mortgages. Once the mortgage is issued they sell it to someone else (in many cases, the key figure is actually a broker who never holds the mortgage), so they have little interest in accurately assessing the quality of the mortgage. To get a mortgage issued, it is necessary to have a house appraised at a value that justifies the mortgage.

The issuer generally chooses the appraiser. Okay, suppose an appraiser comes in with a low number and the mortgage can’t then be issued? The issuer is very unhappy – no money here. The issuer then finds another appraiser, who will come in with a higher number for the value of the house. Appraisers, being intelligent people, come to realize that they don’t get jobs if they give low appraisals, so appraisers come in with high appraisals so that the mortgages can get approved. Everyone is then happy, until the bubble bursts.

The Wall Street Journal has a good piece on this topic today. It would have been nice if they had run this piece three years ago, before the damage had been done. But, maybe this can help stop the next financial bubble driven train wreck:)

The Problems of Protectionism: Another Prescription Drug Scandal

2006-07-22T09:32:00.000-04:00

In econ 101, we teach that when the government intervenes in a market to keep prices above marginal costs, it will encourage all sorts of undesirable and harmful rent-seeking behavior. This is one reason that all right-thinking economists are strong opponents of tariffs and quotas that can raise the price of things like shoes, shorts, and steel by 20-30 percent above the competitive market price.

Given what we teach in econ 101, it is very difficult to explain why economists are not more concerned about things like patent protection for prescription drugs. This form of protectionism raises the price of drugs by several hundred percent, or even several thousand percent, above the marginal cost of production. Drugs that would sell for $20-$30 a prescription in a competitive market often sell for $300-$500 per prescription when they have patent protection.

When the government creates this sort of opportunity for large rents, economic theory tells us to expect corruption. The NYT gives an interesting account of one way such corruption occurs. A New York doctor was arrested in March for promoting “off label” uses of a prescription drug.

The basic point here is that drug companies have to get the FDA to approve their drugs for specific uses. The FDA assesses the effectiveness and safety of the drug for the purposes that the company wants it to be prescribed. Drug companies can then promote their drug, subject to required warnings, only for the uses that the FDA approves. However, doctors are free to use their judgment to prescribe a drug for other “off label” purposes, if they believe it is appropriate for these purposes.

This is the problem. Drug companies make enormous profits when they sell more drugs at huge mark-ups. While they cannot legally promote their drug for any purpose other those explicitly allowed by the FDA, they can of course dispense information about new research on their drug. Hence the story of the doctor being arrested for promoting off label uses. He was getting large fees from a drug company to give talks about the off label use of its drug.

I know nothing about the issues in this case other than what appears in the NYT article. But, as a believer in the market, when it comes to government bureaucrats trying to restrict such health endangering practices, versus the pharmaceutical companies that stand to make billions, my money is on the pharmaceutical companies. Of course, if economics were an honest profession, there would be many more economists yelling about the inefficiency and corruption that result from patent protection in the pharmaceutical industry, than the losses from a 10 percent tariff on textiles.

Shame and Pain: The "Medicare and Social Security" Line Again

2006-07-20T05:51:00.000-04:00

I believe that the Washington Post has a copyright on combining the words "Medicare" and "Social Security" in a single sentence. Anyone who writes on these issues on their editorial pages always seems to do it.

Again folks, the numbers are real clear. Medicare is a big problem because U.S. health care costs are projected to explode, which means that Medicare costs will explode. The moral is fix the health care system. Social Security is not a problem. The story on aging is not very different in the future than in the past. We are living longer, that has always been true.

I assume that some of the editorial and op-ed writers actually do look at the projections occasionally. This makes you wonder why they are so insistent on ignoring the projections when they discuss these issues.

The Washington Post’s Happy Face Version of the Fed

2006-07-19T10:33:00.000-04:00

There is plenty of room to debate what the Federal Reserve Board’s monetary policy should be, but the necessary prerequisite for a serious debate is the knowledge of how monetary policy works. Readers of the Post would be badly misled on this topic by an article in today’s paper.

The article correctly reports that the Fed adjusts interest rates to prevent inflation from getting too high, explaining that “when inflation is a concern, it raises borrowing costs to cool economic growth, which weakens businesses' power to raise prices.”

Well, not exactly. The immediate target of the Fed’s anti-inflation policy is wages, not prices. In fact, many macro-models have prices being a fixed mark-up over wages, which implies that the only way to control prices is to control wages. The Taylor rule, the standard guidepost for Fed policy, is based in part on the gap between a definition of full employment (the non-accelerating inflation rate of unemployment) and the current level of unemployment.

This isn’t being picky. The point is that the Fed slows inflation by raising the unemployment rate and throwing people out of work, thereby placing downward pressure on the wages of those who still have jobs. Disproportionately, the people who lose jobs tend to be less-skilled workers – manufacturing workers, sales clerks and custodians, not doctors, lawyers, and economists. The people who the Fed throws out of work are also disproportionately black and Hispanic.

People can agree with Fed policy and think that controlling inflation is worth the cost in terms of higher unemployment and lower wages for these workers. However, we should not airbrush the picture. People will suffer for the Fed’s decision to raise interest rates, and it will not be just businesses that have less ability to raise prices.

NYT Discovers "Ghetto Tax"

2006-07-19T05:35:00.000-04:00

The NYT had a good article this morning highlighting a new Brookings report that details how people living in inner city areas often pay far more for goods and services than people living in more affluent areas. The report is worth reading and the NYT gets credit for calling attention to it.

Unfortunately, the report suffers from a serious lack of imagination in its proposed remedies, highlighting greater public-private cooperation in bringing lower cost services to the poor. I have nothing against cooperation, but I always worry that these efforts end up being more of a subsidy to the industries involved than the poor people that they are supposed to help. My model nightmare is the accounts established to receive electronic payments from the government (e.g. disability or veterans benefits) for low income people. They cost the government a great deal in subsidies to the financial industry, and do very little for their intended beneficiaries.

In some cases, I prefer good old fashioned competition. Suppose the government set up postal banking systems (similar to those existing in many European countries) that could provide basic banking services to the poor at a minimal charge. (The government could even contract with a private company to actually provide the service.) This way, people in the inner cities would all have a low-cost option. If they would rather go with the private sector alternatives, then that's fine. The same could be done with car insurance, home insurance, and especially retirement accounts. If the private sector really is more efficient, then they should have nothing to fear.

Drug Companies Gone Wild: Medicare Part D

2006-07-18T05:14:00.000-04:00

The NYT had a very good piece about how the shift of 6 million Medicaid beneficiaries into the Medicare drug benefit program may increase drug company profits in 2006 by $2 billion. According to the article, under the new program the drug companies get to sell the same drugs at higher prices. It doesn't get much better than this!

Monopolies Breed Corruption: Medical Supplies Industry

2006-07-17T05:42:00.000-04:00

The NYT had a good piece this morning reporting on how the medical supply industry pays top hospital executives thousands of dollars for advice on how to market their products. This is what you expect to happen when government patent monopolies allow these firms to sell their products at prices that are several hundred percent above the free market price.

NPR Doesn't Believe in Markets

2006-07-17T05:28:00.000-04:00

NPR had a piece this morning warning of a shortage of agricultural workers in California. It reported that some crops may rot in the field, if farmers there can't get more workers by the end of the summer.

Those of us who believe in markets would suggest that the farmers try raising wages. It is possible that some of the crops being farmed now in California would not be profitable, if farmers had to pay the wage necessary to attract workers in the current market (or if they had to pay the market price for water). In a market economy, that means that the farmers made bad choices on crop choices.

That's unfortunate for the farmers, but that's how markets work. I would like to be able to get a lawyer for $20 an hour, but because we have a lawyer shortage, that is not an option. Maybe NPR will be able to find some folks who understand markets to help with their reporting on economic issues.

Soviet Style History in the New York Times

2006-07-16T22:45:00.000-04:00

Back in the days of the Soviet Union, key facts were often excluded from historical accounts in order not to put the regime in a bad light. The NYT seems to be experimenting with this journalistic style.

Today’s article on the G-8 summit in St. Petersburg included a passing reference that described Russia’s 7-year long economic recovery as “oil-fueled.” Well, the rise in oil prices certainly has helped Russia over this period, but it is probably at least as important that Russia abandoned the economic straightjacket that had been imposed on it by the I.M.F. and then U.S. Treasury Secretary Robert Rubin (with help from his deputy Larry Summers).

Until the summer of 1998, Russia had tied its currency to the dollar. In order to sustain this link, it was forced to raise interest rates to ever higher levels. The over-valued ruble, coupled with high interest rates, was strangling Russia’s economy, bringing growth to a halt. The I.M.F. and the U.S. Treasury both insisted that Russia maintain the link to the dollar at all costs.

This eventually proved impossible, and the Russian government allowed its currency to float and deferred payment on its foreign debt. The pundits and the media pronounced this to be a disaster and insisted that Russia’s economy would crumble. (Read Rubin’s book to get the consensus opinion.)

There was a financial collapse, and Russia’s economy did tumble downward for the rest of the year. But by the beginning of 1999, Russia’s economy began to grow again and has been growing rapidly ever since. In this case, the real danger was the medicine coming the I.M.F. and U.S. Treasury. Once Russia began to ignore their recommendations, its economy performed quite well.

Reassurances on the Housing Bubble

2006-07-15T17:52:00.000-04:00

The Times had an interesting piece discussing the impact of more than $1.2 trillion in adjustable rate mortgages resetting in the next two years. The article points out that many homeowners may find their rates increasing by as much as 2 full percentage points when their lock-in period ends on an adjustable rate mortgage.

The article notes that this increase in mortgage payments may cause serious distress for many homeowners and may even lead some to give up their house, especially if it has lost value since the mortgage was issued. However, the article assures us that the situation will not pose any problem for the mortgage banking industry.

How do we know it won’t pose a problem? Well the industry said so. That pretty much settles the case. After all, if they were seriously worried, the representatives of the industry would no doubt be anxious to have their concerns prominently displayed in the New York Times.

I have written on the housing bubble at length (see our site), but I’ll just give two quick items to unsettle the comfortable. First, to make the case that there is no problem, the article comments that “mortgage industry losses of $110 billion spread over several years would amount to a mere 1 percent of the total national homeowners’ equity of $11 trillion.” I am not sure where the $110 billion figure originated, but loses of this magnitude would certainly take a very serious toll on the mortgage banking industry. The relevant denominator is not the amount of homeowners’ equity, but the net worth of the banks in the sector. Without checking the books, I would be confident that their net worth is considerably less than $500 billion. If losses in the sector go over $100 billion, even spread over several years, then it is virtually guaranteed that you will see some major banks facing serious problems.

The other cause for concern is that economists seem to have a very difficult time seeing bubbles or assessing the impact of their collapse. In September of 2000, not one of the 50 “Blue Chip” forecasters predicted a recession in 2001. The lowest growth projection from this group was 2.2 percent. Given the stock market crash was already in progress, it shouldn’t have required too much insight to see problems down the road. I doubt that the quality of economic forecasts has substantially improved in the last six years.

The Conservative Nanny State: LIVE in NYC!

2006-07-14T08:15:00.000-04:00

I will be giving a talk on my book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, at Demos next Thursday at noon. The talk is free, as is the book, if you want to download it. You can the details on their website.

Big News: Arithmetic Problems at the Council of Economic Advisors

2006-07-13T22:56:00.000-04:00

Economists are supposed to be good at math. It is a great honor for an economist to be appointed as head of the President’s Council of Economic Advisors. For these reasons, it should be big news that the person currently holding this position apparently has problems with simple arithmetic.

According to an article carried by Dow Jones Newswire, Ed Lazear, the current chief of the Council of Economic Advisors, claimed that wage growth “seems to be taking off right now." The article reports Mr. Lazear’s view that workers now seem poised to get substantial real wage gains.

If the article presented Mr. Lazear’s comments accurately, then it missed the real news. Nominal wages are at best just keeping pace with inflation, leaving no room for real wage growth. From June 2005 to June 2006, the average hourly wage increased by 3.9 percent in nominal terms. From May 2005 to May 2006 (the June data is not yet available) the consumer price index increased by 4.1 percent. This means that the real wage fell by roughly 0.2 percent over the last year.

If we focus on just the last three months, nominal wages rose at a 4.5 percent annual rate over the three months April, May, and June compared with the prior three months. This is equal to the annual rate of growth of the CPI in the three months of March, April, and May compared with December, January, and February. In other words, the most recent data indicate that wages may now be just keeping even with inflation.

If wages have slightly trailed inflation over the last year and are just now roughly breaking even, how can President Bush’s chief economist say that wage growth “seems to be taking off?” Mr. Lazear either does not know arithmetic or is not being honest. The fact that he is making a claim so completely at odds with reality should have been big news. (Thanks to PGL for the tip.)

Silliness on the Budget Deficit

2006-07-13T06:48:00.000-04:00

The coverage of the debate over the recent budget numbers has been painful. The arguments on both sides have been far removed from reality. The media should have put in the effort to bring the issue back to earth.

First, the White House’s claim that the recent growth in revenue show that the tax cuts have somehow paid for themselves, by increasing growth, is laughable. If we go back to 2001, before the economy had the benefit of President Bush’s tax cuts, CBO projected the economy to grow by 20 percent between 2000 and 2006. On its current path, growth over this period is projected to be 16.7 percent. (CBO’s growth projections are constructed to average in the effect of recessions, so the 2001 recession should not affect this story. Furthermore, even the White House’s growth projections do not show the economy ever catching up to the path projected by CBO in 2001. In other words, the White House’s economists don’t believe that the tax cuts have had any substantial impact on growth.)

Getting to tax revenue, CBO’s projection of revenue for 2006 was more than 20 percent higher (adjusted for inflation) than the White House’s latest figure. In other words, the economy is behind its pre-tax cut growth path and its way behind its pre-tax cut revenue path. Users of arithmetic know that the tax cuts did not come anywhere close to paying for themselves.

The fact that tax revenues are coming in somewhat higher than expected this year is explained largely by the strong stock market performance last year and the resulting increase in capital gains tax revenue. There is always a large random component to tax collections. Arguing about the budget situation based on these random fluctuations is like drawing conclusions on global warming based on yesterday’s weather.

On the other side, the claim by Democrats that Bush is bankrupting the country are also a bit hysterical. The deficit is larger than it should be, and giving tax breaks to the rich was not the country’s most pressing need, but the current deficit is not that large by historic standards. (By the way, it would be more honest and help the hysteria case if the Democrats started using the on-budget deficit, which adds in the $195 billion borrowed from Social Security.)

The reason why the hysteria on the deficit seems so misplaced is that the current account deficit is so much larger. It was running at an $834 billion annual rate in the first quarter of 2007, nearly three times the size of the unified budget deficit and more than 50 percent larger than the on-budget deficit. Of course, the villain in the case of the current account deficit is the high dollar policy that had its origins in the Clinton-Rubin era. This fact makes the current account deficit less interesting to Democrats, but doesn’t change the extent to which it should concern economists or people interested in doing serious reporting on the economy.

Noble Lies to Promote Korean Trade Agreement?

2006-07-12T23:04:00.000-04:00

The prospect of a new trade agreement with the United States has prompted mass opposition within South Korea, as demonstrated by large and angry protests. The International Herald Tribune (IHT) appears to be rising to the occasion, going all out to push the new pact.

The article includes a variety of facts that are supposed to demonstrate the need for the trade agreement. It begins by noting that South Korea’s growth “averaged a torrid 8 percent a year in the 1970’s and 1980’s, has slowed in recent years.” Wow, they can’t sustain an 8 percent growth rate – disaster looms. In fact, South Korea’s per capita GDP growth has been averaging about 3 percent a year over the last few years. This is very good for a country with European standards of living. (Post NAFTA Mexico would be euphoric if it ever achieved this growth rate.)

The article then reports that Korea’s share of the U.S. export market has fallen to 2.6 percent from 3.3 percent a decade ago. And this is supposed to matter, why?

Then the article tells readers that Korea faces challenges like “a rapidly declining birth rate and an aging population,” Hmmmm, less crowding and longer life expectancies, this is really frightening.

And the kicker – “economists say the country must restructure its economy to keep growing for the long term.” Sure – I would like to find one economist who claims that Korea is about to stop growing if it doesn’t “restructure” in the manner advocated in this article. There are no economists cited in the article who offer this opinion.

The fact is that South Korea is an incredible success story. It went from Sub-Saharan living standards in the 50s to European living standards at present. It succeeded by pursuing policies that defied the conventional wisdom among economists. That’s too bad for the economists who apparently do not understand development. Their ignorance is not Korea’s problem, or at least it is not Korea’s problem as long as they are not able to impose their policies on the country.

Oh yes, the IHT felt the need to call the trade pact a “free trade” agreement.

The "Social Security and Medicare" Syndrome

2006-07-12T05:48:00.000-04:00

Many of the stories on the reduction in the 2006 budget deficit have correctly focused on the fact that the long-term deficit picture still looks pretty awful. However, they have badly misled readers about the reason for the deficit problem. The standard line is that "Social Security and Medicare" costs will explode as the baby boomers retire (e.g. this NYT piece).

This is incredibly misleading. Social Security costs will rise modestly -- the projected increase in SS measured as a share of GDP from 2005 to 2030 is less than the increase from 1960 to 1985. The real culprit in the story, as every serious reporter knows, is Medicare. And the reason that Medicare costs are projected to explode is that the U.S. health care system is broken.

In other words, the deficit stories should be talking about how the exploding cost of the U.S. health care health system will devastate the budget and the economy. People should demand that the reporters get this simple point right and stop telling scare stories on Social Security.

Credit Card Debt Soars in May

2006-07-10T16:07:00.000-04:00

The initial reports on the Fed's release of consumer credit data for May focused on the slow 2.4 percent annual rate of growth reported for the month. This reporting misses the boat.

There are two major components to consumer credit. The non-revolving component is primarily car loans. This component fell at a 2.0 percent annual rate, reflecting weak car sales.

The other component is revolving credit. This is primarily credit card debt. This component rose at 9.9 percent annual rate in May. This is a sharp acceleration from earlier this year, when revolving debt was actually declining.

It is always possible that a single month's data is simply an aberation and will be reversed next month. But if this proves to be the beginning of a trend, then the story goes like this: home prices have stopped rising and may even be declining in some places. This means that people can no longer sustain their consumption with by withdrawing equity from their homes. Therefore, many people are turning to credit card borrowing as a way to sustain their consumption and in some cases to make their mortgage payments. (Many adjustable rate mortgages taken out in 2003 are being reset at much higher rates now.) If this story is true, then the May report on consumer debt is a sign of growing stress in consumer finances.

And, You Can Read More ......

2006-07-10T09:59:00.000-04:00

For those who want to read more of my ramblings, I am guest blogging at the Drum Major Institute this week.

The Washington Post Argues for More High-Skilled Immigrants

2006-07-10T05:24:00.000-04:00

Okay, I tricked you. The Washington Post ran an article reporting that the wages of high-skilled workers in the Washington area are rising far more rapidly than the wages of less-skilled workers. It attributes this fact primarily to technology that has reduced the demand for less-skilled workers.

Those who believe in market forces would see rising wages as evidence of a labor shortage. In other contexts (e.g. nurses, construction workers, custodians etc.) the Post has reported that the country needs immigrants to deal with such labor shortages. Surprisingly, this article did not include any discussion of the need for more high skilled immigrants.

In fairness, the article did conclude with a brief discussion of immigration and its impact on wages. It does not attempt to reconcile the claim that wages for less-skilled workers are being driven down by technology with the claim that the country is sufficiently short of such less-skilled workers, that it desperately needs immigrants.

Let me head off one attempt at reconciling these claims. Some of the jobs frequently done by immigrants at present (e.g. construction work and manufacturing jobs in food processing) used to be relatively well-paying jobs. So it is not true that immigrants simply took the lowest paying jobs that no one else would do.

The NYT Magazine on Immigration

2006-07-09T00:33:00.000-04:00

The NYT magazine had a pretty good piece summing up the state of the academic debate on the impact of immigration on the labor market. I have two quick observations.

The piece, like the literature, largely ignores the impact of immigration on housing costs. This is important, because housing is a large chunk of people’s expenditures, especially those of low wage workers, who are the focus of the discussion. Examining wages across cities and regions provides little insight if we don’t adjust for differences in housing costs, since housing accounts for close to 40 percent of the consumption of low income families.

A casual glance at the data suggests that there is a real issue here. Certainly housing costs have risen far more rapidly in cities with heavy concentrations of immigrants (e.g. San Diego, Los Angeles, Miami) than those with few immigrants (e.g. Cleveland, St. Louis, Detroit).

Second, the article is rather cavalier in its treatment of high end immigration. The author notes in passing that if the country was flooded with immigrant writers then he would get lower pay for his gigs. Well, we could design the policy that way. The article is debating the appropriateness of having less educated workers subjected to more competition from people from the developing world and largely concludes that the benefits to more educated workers are sufficiently large, that the less-skilled should be willing to bear the cost.

Needless to say, if a less-skilled worker got the opportunity to write a piece for the NYT magazine, he/she would come to the same conclusion about opening the doors to more high-skilled immigrants. The article implicitly accepts the idea that writers and other high end workers will never be subjected to the same international competition as low end workers because they have so much political power. This is quite likely true, but let’s be clear about the role of power in this story.

Creative Stories on Wage Growth in the Washington Post

2006-07-08T14:57:00.000-04:00

There was a larger than expected jump of 8 cents in the average hourly wage reported for June. This left some folks scrambling for an explanation. The Washington Post found a creative one, courtesy of “some analysts.”

According to these analysts, the more rapid wage growth in June is partly explained by a change in the mix of jobs, with the economy losing low wage jobs in the retail sector and adding jobs in the relatively high-paying manufacturing sector.

Okay, sports fans, let’s check the numbers. Employment of production workers (the relevant category) in the retail sector reportedly fell by 20,000 in June. Employment of production workers in manufacturing increased by 19,000. This gives a total change in composition of 39,000. This change in composition is equal to 0.042 percent of the total employment of production workers (92,700,000).

The difference in pay between manufacturing workers and retail workers is $4.25 an hour. This means that 0.18 cents of the reported increase in wages in June can be explained by this shift in the composition of employment. Some analysts should be happy that their names did not appear.

The more obvious explanation for the rapid wage growth reported for June was the slow wage growth reported in May. In the economy, the actual pace of wage growth generally does not change very much from month to month. When our surveys show unusually strong or weak growth in a given month, it is more likely due to sampling error than anything real in the economy. The May data showed the average hourly wage growing by just 1 cent. This was almost certainly slower than the true rate of wage growth in May. In effect, the June data was picking up both wage growth in June plus the gap between the true pace of wage in May and the reported rate. Some of us who watch the numbers were not surprised by the big June increase.

The Coin of the Realm

2006-07-07T14:13:00.000-04:00

The Washington Post had an interesting piece about whether it still makes sense for the government to mint pennies, given how much they cost to make relative to their value. The article might have asked the same question about the dollar bill. Coins are in general much cheaper to keep in circulation than bills, and given that a dollar today is worth about as much as a quarter was 35 years ago, it might be time for the switch.

Of course we do have dollar coins, but they rarely circulate. In this respect, it's worth noting that the last two dollar coins both feature women (Susan B. Anthony and Sacagawea [a native American woman who accompanied Lewis and Clark on part of their journey]). These are the only U.S. coins or notes to portray women.

The Washington Post’s Front Page Editorial on Mexican Elections

2006-07-07T08:07:00.000-04:00

The lead headline of the Washington Post this morning was “Mexico Vote Tally Gives Free-Trader a Narrow Victory.” Wrong! Felipe Calderon, the candidate who is now ahead in the vote tally to be Mexico’s next president is not a free-trader. He has supported increasing copyright and patent protection and shown no special interest in removing protectionist barriers that obstruct free trade in the services of highly paid professionals (e.g. doctors, lawyers, accountants).

The Washington Post does not own the term “free-trade.” If they want to identify Calderon by his trade position, they can call him pro-NAFTA. It is more accurate and saves 2 letters.

New York Times Does PR Work for Brazilian Energy Company

2006-07-07T06:03:00.000-04:00

Remember the good old days when newspapers didn’t just unquestioning print what the powerful tell them? (Okay, maybe they never existed.) Anyhow, a Times article this morning reports that Petrobras, the Brazilian energy company, has invested $50 billion in Bolivia.

How does the Times know how much Petrobras has invested in Bolivia? Did their reporter go around and price out the various wells and pipelines that the firm has constructed over years? Maybe the reporter talked to an expert who gave his/her estimate of the amount invested. While both of these are possibilities, the article doesn’t tell us the source of the $50 billion figure, leaving open the possibility that the Times just printed what the company told them.

This matters because, as the article reports, Petrobras is currently engaged in a dispute with the Bolivian government over its efforts to renegotiate royalty agreements. Petrobras’ moral, if not legal, claim is improved, insofar as it has invested heavily in developing Bolivia’s resources.

One reason for viewing the Petrobras claim with skepticism is that Bolivia’s GDP is currently $9.7 billion. This means that Petrobras is claiming to have invested a sum that is more than 5 times Bolivia’s current GDP (that would be more $65 trillion in the U.S.). Such claims should at least come with a source.

Addendum: The reporter apparently did not get the $50 billion figure from Petrobras, or at least not from its website. The website gives a somewhat more plausible figure of $1.5 billion. (Thanks to my CEPR colleague Ben Zipperer.)

W.T.O. Mysteries in the Washington Post

2006-07-03T23:42:00.000-04:00

Economists always like to talk about the ideal situation of perfectly competitive markets. This is the world in which there are vast numbers of buyers and sellers so that no individual buyer or seller can affect the price. In this world, every producer is a price taker. This means that the price is set by the market, and they can sell as much as they want to produce at the prevailing market price.

In the real world, this is not an accurate description of most markets, which have a relatively limited number of sellers. The one market that does seem to fit the competitive story reasonably well is agriculture. Farmers see a price in the market for corn, wheat, soybeans, etc. and they can sell as much as they choose at this price.

Unfortunately, the Post apparently does not believe that agriculture is a competitive market. It reports today that the United States is trying to open up markets in developing countries in order to give U.S. farmers something to offset the loss of subsidies in a new W.T.O. agreement. Sorry, this doesn’t make any sense.

Farmers can already sell all they want in the market today at the prevailing price. It is unlikely that farmers will feel any better if the wheat they sell at $2.50 a bushel is going to Zambia than if it’s going to Pennsylvania.

Perhaps the article meant that by opening up markets in Zambia, and other developing countries, the price of wheat would rise. It doesn’t seem very likely that the new markets would produce any substantial rise in price (the new entrants would be relatively small compared to the existing world market), but this would be a qualitatively different effect than simply an increase in the quantity of wheat sold. It would mean that all of us would be paying more for wheat. This could lead a more efficient world market, but it would also mean higher prices for consumers in the U.S. If this is the intended outcome from an new W.T.O. agreement, shouldn’t the Post be telling its readers?

Xenophobia at the New York Times

2006-07-01T15:53:00.000-04:00

The New York Times editorial page went a bit overboard in its anti-Bush tirade on the budget deficit. The basic point, that the Bush administration deficits are too large, is on the mark. (By the way, they could better make this point using the gross deficit [4.0 percent of GDP], which includes the money borrowed from Social Security, or better yet, just report the change in the ratio of gross debt to GDP.)

If the Times had left the issue there, all of us econ types could happily applaud this push for fiscal responsibility. But our intrepid Times editorial writers felt the need to push further. They tell us that the debt is especially troublesome because 43 percent is in foreign hands and “debt owed to bankers in Beijing, Tokyo and elsewhere could destabilize the dollar and from there, drive up interest rates and prices.” Huh?

Okay, let’s check the bases here. Most foreigners hold government debt for the same reason that investors in the U.S. hold debt, they value its safety, and also expect a decent return. Is there a set of events that will cause bankers in Beijing, Tokyo, and elsewhere to dump their U.S. government debt, which will not also cause bankers in New York, San Francisco and Chicago to dump their debt? Is the Times promoting the image of the patriot banker who holds onto their U.S. government bonds, even as their price falls through the floor? In the interest of the environment, the NYT should save a few trees and not print such nonsense.

Of course not all foreigners hold bonds for their safety and return. Foreign central banks (most importantly the Chinese and Japanese central banks) have bought up vast amounts of U.S. government debt in order to keep the dollar high. Their reason is that a high dollar makes their exports cheap to people in the United States, and export growth was helping to drive their economies.

These central banks will stop buying, and possibly start selling, U.S. debt when it fits their economic strategy. This can be destabilizing for the U.S. economy – leading to higher interest rates and higher prices, as the NYT editorial suggests – but this has nothing to with Bush’s budget deficits. The problem here is simply that the U.S. allowed the dollar to get overvalued.

The main villain here is Robert “strong dollar” Rubin. He was the one who initiated the high dollar policy back in the mid-nineties. Politically, this is great policy. It allows for substantial short-term gains (low inflation and higher living standards for those protected from import competition), at a cost of substantial long-term pain. Bush of course is complicit in this high dollar policy, since he did not move aggressively to bring the dollar down to a sustainable level.

Anyhow, we will pay a large price, possibly in the near future, for this short-sighted high dollar policy. But, the fault here lies primarily with Rubin and Clinton, not the current occupant of the White House.

Getting Tough on Immigrants Seeking Health Care

2006-06-30T15:37:00.000-04:00

To paraphrase my friend Brad DeLong, “why oh why do newspapers have to use meaningless numbers when it is so easy to provide information.” Today’s example is a Washington Post article about a new rule that requires people to show proof of citizenship before they can be covered by Medicaid.

The article includes much useful information and comments from both proponents and opponents of the rule. Then it tells us that the Congressional Budget Office estimates that this rule will save Medicaid $735 million over the next decade.

Great – everyone realize how much money that is? Okay, we know the Washington Post has an educated readership, but virtually none of their readers has any idea how important $735 million over the next decade is to the budget or their pocketbooks.

Let’s suppose the reporters had taken a moment to look at projected spending for this period. CBO projects total spending over the next decade at $33.3 trillion, or approximately $111,000 per person. The potential savings from the tighter Medicare rules comes to approximately $2.50 per person, or 0.002 percent of projected spending over the next decade. In other words, the potential savings will have no visible impact on the budget, the deficit or the public’s tax burden.

My guess is that most people who read the Post article do not recognize this fact. If the spending figure had been expressed as a share of the budget or a per person cost, readers would know this hugely important part of the story. What do newspapers have such an aversion to providing information? (Yes, I did blog on this before in reference to an NYT article.)

If the Politicians Say It, It Must Be True

2006-06-30T06:51:00.000-04:00

That’s the word from the Washington Post when it comes to the WTO negotiations. Today’s article on the prospects for the Doha round asserts that “unlike previous negotiations with similar aims, this set of talks has an ambitious twist: The main goal is to change rules that have put poor countries at a disadvantage in the global marketplace.”
Yes, and we know that because ……

Look, the people structuring the Doha round are politicians. It should not be news that politicians are not always entirely truthful in their public comments. In other words, just because they say that the purpose of the Doha round is to help developing countries, this does not mean that the real purpose of the round is to help developing countries.

The evidence actually shows that the Doha round is likely to do very little for developing countries and will actually hurt some who are net importers of agricultural products. (The removal of rich country subsidies causes agricultural prices to rise, which means that these countries will have to pay more for their imports.) Based on projections of gains, a reasonable person might be led to believe that the main purpose of the Doha round is to assist politically connected grain traders like Archers Daniel Midland.

It would not be hard to redesign global trade rules in ways that actually did offer substantial benefits to developing countries. For example, not requiring them honor rich country patents and copyrights would be a huge boon to developing countries. But such obvious winners for the world’s poor are not on the Doha agenda.

In any case, the simple point here is that reporters should be clear on distinguishing between what politicians say, and what is true. Politicians say that the main purpose of the Doha round is to help the world’s poor. The reporter who wrote this article does not know what the main purpose of the round actually is. Therefore, the article should simply report the claims of the politicians, and identify them as claims, not truth.

The Problem of Rising Wages in China

2006-06-29T22:56:00.000-04:00

The Times had one of the most convoluted articles yet on demographics. Apparently, China’s slowing population growth may lead to a shortage of cheap labor – no kidding the headline is “As China Ages, a Shortage of Cheap labor Looms.”

It wasn’t that long ago that I learned my economics, but back then this was THE POINT of economic development. Countries wanted to have more good paying jobs relative to the size of their population so that people would not be forced to take the bad paying jobs. I am not quite sure what theory of economic development the Times has where a lack of people in low-paying jobs is a problem. (Maybe we can make Times reporters do them.)

Just about everything else in the piece is equally incoherent. It gives us the warning of the rising ratio of retirees to workers. But let’s toss in some arithmetic. China’s per capita GDP is growing at more than 8 percent annually. This means that in a decade, per capita income will have more than doubled. Suppose the tax burden was raised by 10 percentage points to cover the higher ratio of retirees to workers, this would leave the average worker more than 80 percent better off (assuming that income growth is distributed in proportion to current income, a very big assumption). What is the problem?

The article even warns that raising the retirement age may not help because that would mean fewer jobs for young workers. (But, wasn’t the problem supposed to be a shortage of young workers?)

The ratio of confusion to information in this article is extraordinary. It would be good if the reporter and/or the editor could give this issue some more serious thought.

The Post Doesn't Think That Mexican Voters Care About the Economy Either

2006-06-29T06:09:00.000-04:00

Here's the proof.

Do Mexican Voters Care About the Economy?

2006-06-29T05:19:00.000-04:00

The New York Times apparently doesn’t think so. In an article assessing the Mexican presidential campaign in its final days, there is no mention of the economic performance of the current administration. Since one of the two leading candidates is from the same party as the incumbent president, and pledges to continue the same policies if elected, the recent economic record would appear to be relevant.

For those who care about such mundane things as economic growth, the cumulative per capita GDP growth in the first five years of the current president has been approximately 2.0 percent. By contrast, Mexico’s per capita GDP grew 4.0 percent annually over the years from 1960-80. In other words, in 5 years under the current president, Mexico’s economy grew as much as it typically did in 6 months over the period from 1960-80. As a general rule, weak economic growth will mean weak job creation and few gains in reducing poverty, and this appears to have been the case in Mexico.

This weak economic performance probably explains much of the support for the main challenger, Lopez Obrador. As it is, the article contains very little of substance. It can probably be best described as a careful examination of the “swift boat” allegations of Mr. Obrador’s opponents. It would be great stuff for the National Inquirer, but we should expect better from the New York Times.

Good Piece in the NYT on the Evils of Protectionism (drug patents)

2006-06-28T06:11:00.000-04:00

When the government imposes restrictions that artificially raise prices above the competitive market level, economic theory predicts that producers will engage in anti-social rent-seeking behavior to maximize their rents. Drug patents, which raise drug prices by several hundred percent above the competitive market price (sometimes several thousand percent), lead to all sorts of corruption, just as economic theory predicts.

Unfortunately, economists show relatively little interest in this interference with the free market. Fortunately, the NYT shows more interest. It has a good article on doctor run foundations that receive large payments from drug and medical supply companies. These foundations tend to produce research that shows the effectiveness of their donors' products.

What Is $16 Billion to the Federal Governemnt?

2006-06-27T23:13:00.000-04:00

The Times ran an informative article on the Bush administration's new rules requiring states to impose more stringent work requirements on welfare recipients. However, the piece fell short in telling readers the cost of welfare. It reports that welfare is blockgranted at $16 billion annually between 2007 and 2010. It would have been helpful to tell readers that the cost of the program will fall from 0.6 percent of total spending in 2007 to 0.5 percent of spending by 2010. Alternatively, government spending is projected to be approximately $50,000 for every person in the country over the next five years, of this $270 will be spent on welfare.

When Numbers Don't Add Up at the New York Times

2006-06-27T05:53:00.000-04:00

I have complained in the past about reporters' willingness to accept corporate numbers uncritically. My favorite example is the widely reported claim that the compensation of Delphi's unionized workers averaged $65 an hour. This implied a benefits package worth more than $70,000 a year. Anyone believe that?

We have another example from the Times today. Its article on GM's buyout offer to workers reports that getting rid of 35,000 workers will save GM $8 billion a year. Hmmmm, my calculator puts that at a savings of just under $230,000 per worker.

If you think this number sounds a bit high, you would get confirmation by the end of the article. The last paragraph reports the assessment of a stock analyst that GM earnings will rise $1.25 a share for each 10,000 workers who accept the offer. With 565.6 million shares outstanding, this implies additional earnings of $707 million for each 10,000 workers, or $2.47 billion for the 35,000 workers who accepted the buyout. That comes to a more pluasible gain of $70,700 per worker.

I am not an expert on the auto industry and cannot assess how much GM will actually benefit from this buyout (the net gain will depend on whether GM can lose one-third of their workers and still produce the same number of cars, or will have to hire replacement workers), but the $8 billion figure reported in the Times article is obviously ridiculous. Someone involved in the publication of this article should have been able to recognize this fact.

New Homes Sales, the Rest of the Story

2006-06-26T23:10:00.000-04:00

The May data for new home sales came in somewhat higher than expected. It is important to keep in mind that the home sales data record contracts, not completed sales. In the boom period a year ago, broken contracts were rare. Now that prices are weakening in many of the formerly hot markets, broken contracts are becoming common.

To my knowledge, no one keeps data on the percentage of contracts that are broken, but there have been reports from some builders in California and Florida of cancellation rates in the range of 20-30 percent. If the nationwide rate of cancellation is even 5 percentage points higher than last year, it would conceal a sharp falloff in actual sales.

One key measure that gets around this issue is the number of unsold homes. This was 556,000 in May, essentially the same as April's record high of 560,000, and more than 100,000 higher than the inventory of 450,00 reported in May of 2005.

Trade Nonsense in the NYT

2006-06-26T06:03:00.000-04:00

For reasons that I will not pretend to understand, newspaper editorial boards are huge proponents of trade agreements as a remedy to world poverty. They endlessly promote these agreements on their editorial and oped pages. Papers like the New York Times and Washington Post are as likely to print an oped critical of recent trade agreements, as Pravda would have been to print an anti-communist diatribe back in the days of the Soviet Union.

Today’s piece in the NYT is a great example. It touts a new W.T.O. agreement which would raise world income by $54 billion annually. Even better, the piece tells us that the lowest income countries, which have just 1.2 percent of world income, would get 1.9 percent of the gains.

Before anyone celebrates this prospect, let’s have some context. World income is approximately $50 trillion. So, the prospect of $54 billion in annual gains comes to 0.1 percent of world income. If the poorest countries get 1.9 percent of these gains, that comes to just over $1 billion a year. I’m not sure of their list of poorest countries, but if their total population is 500 million, then they will get $2 per capita annually from this deal.

Even this may be an exaggeration. There are many reasons for criticizing these trade models (the assumption of full employment ranks high), but I will only mention my favorite. These trade models all assume that lost tariff revenue is replaced by a lump sum tax.

This can get heavy into econ nerdism, but let me try to make the point simple. In economic modeling, taxes typically lead to economic distortions that reduce output. Tariffs are one such tax. If we reduce tariffs, then by definition, we will be raising GDP in these models.

Of course, tariffs provide revenues to government. If a government wants to make up this revenue (which it must do in the real world) then it must raise some other tax to offset the loss of tariff revenue. In these models, it is assumed that governments offset the lost tariff revenue by raising lump sum taxes.

A lump sum tax means that the government just sucks a specified sum of revenue from the economy. It is of course a fictitious concept. In the real world, governments must impose specific taxes – income taxes, sales, taxes, value-added taxes, etc. However, a lump sum tax is a useful fiction from the standpoint of those promoting these trade agreements, because it does not lead to any economic distortions.

In other words, the economic modeling shows what happens when we replace a tax that leads to economic distortions with a fictional tax that does not lead to economic distortions. Excuse me if I am not impressed.

The Minimum Wage and Doctors’ Pay

2006-06-24T15:29:00.000-04:00

Since there have been some interesting comments on two separate posts from last week, I thought I would pull them together. To get up to speed, NPR ran a piece last week which decried (slight exaggeration) the low pay of doctors. I also commented on the failure of reporting on a minimum wage hike to note the extensive research showing that modest increases in the minimum wage (like the ones being debated) have no significant effect on employment.

The responses have raised issues about the appropriate wages for doctors and people who work at the type of jobs that get the minimum wage. The point that I wanted to make is that these two are linked. The wages of people working at low paying jobs are a cost to doctors, and doctors’ pay is a cost to those earning low wages.

The logic of this is simple. While some wage increases may be absorbed in lower profits, and may also be offset by higher productivity, at least some part of any wage increase will be reflected in the prices of the goods or services that worker produces. This means that, other things equal, if we want minimum wage earners to get more money, then we want doctors to get less. Alternatively, if we join NPR in the drive to raise doctors’ pay, then we want minimum wage workers to get less. This is basic economics/accounting; I doubt that any economist anywhere on the political spectrum would dispute this logic.

To me, the main economic story of the last 3 decades has been that those in high paying professions (e.g. doctors, lawyers, dentists, accountants, economists etc.) have managed to drive up their wages by sustaining and increasing barriers against competition (both foreign and domestic), while less-skilled workers, like autoworkers, textile workers, dishwashers, and custodians have been deliberately placed in direct competition with low-paid workers in the developing world.

The wages in these latter categories have generally been flat or declined over this period, while workers in most of the high-paid professions have seen substantial pay increases (e.g. the OECD reports that the real wages of doctors in the United States increased by 55 percent from 1964-1995 [sorry, it’s not free data, so I can’t link to it]). If this pattern is to be reversed, then the wage increases for workers at the middle and bottom will have to come at least partly at the expense of the real wages of high-end workers, just as the wage gains of high-end workers have come partly at the expense of those at the middle and bottom over the last three decades.

This is all accounting; one can debate the merits of specific policies to reverse the upward redistribution of income, but there really is not much room to debate the accounting. (My favored policy is free trade in professional services, so that doctors, lawyers, accountants and economists can enjoy international competition in the same way as autoworkers, textile workers and dishwashers, see chapter 1 of The Conservative Nanny State.)

NPR’s Sob Story for Struggling Doctors

2006-06-23T05:54:00.004-04:00

NPR did a piece this morning on doctors' pay that leaves you wondering why they get taxpayers dollars. The basic point was that doctors, especially primary care physicians, are struggling. The news hook was a new survey that showed that doctors’ net (after malpractice) pay is not keeping pace with inflation.

The survey showed that average net compensation for all physicians in 2003 was just over $220,000 a year (in 2006 dollars). This is down by 7.1 percent (adjusted for inflation) from the 1995 level. Of course there are big differences by specialty. (The decline in pay is partly explained by a 4.1 percent shortening of the average workweek.) While the survey found that surgeons average almost $300,000 a year, primary care physicians average just $160,000 a year.

The NPR story chose to focus on the latter, highlighting the difficulties of making ends meet. However, instead of finding a typical primary care physician, NPR found a doctor who claims to be making just $50,000 a year, less than one third of the average.

The doctor in the story sounded like an impressive person. According to the piece, she specialized in caring for pregnant women in the inner city. It sounds like hard work for very modest pay. According to the piece, she is being forced to change jobs (taking a position at Georgetown University) because she still has $300,000 in loans from medical school hanging over her head.

This is a good human interest story, but it has nothing to do with the pay of doctors. Why on earth would NPR talk to a primary care physician, who apparently earns less than one-third the average for primary care physicians, to find out about the financial difficulties facing primary care physicians? This would be like talking to an autoworker getting $7.00 an hour to find out about the situation facing the typical UAW autoworker who earns close to $20 an hour. Competent reporters do not do this.

The gist of this story was that we should be paying doctors more. If doctors get more, the custodian getting $7.00 an hour gets less. That’s the way the economy works, one person's income is another person's cost. Maybe there is a case to be made that the average physician can’t make ends meet on $220,000 a year, and the government should intervene to raise their wages. But that case must be made based on the situation of the typical doctor, not some hardworking dedicated physician who works for one-third of the average wage.

Reporting Nonsense on the Minimum Wage

2006-06-23T05:16:00.000-04:00

Suppose that the senators who support a quick withdrawal from Iraq got in the habit of saying that the United States should get out of Iraq because losing 100 U.S. soldiers a day is an unacceptable price for the occupation. Would the media simple report this claim without comment? Or, would they point out that these senators apparently don’t realize that the fatality rate is approximately 2 per day?

My guess is that every story that noted the claim that 100 soldiers a day are being killed would correct this assertion based on an authoritative source on the causality count. The media would probably also run numerous stories that reported on the fact that the proponents of a hasty withdrawal have no idea what they are talking about. This would be good journalism.

The question is why it is not applied to the debate over the minimum wage. Reporters routinely quote claims from politicians opposed to raising the minimum to the effect that it would lead to a large loss of jobs and will slow economic growth. Well, we have evidence on this one. Economists have done numerous studies of the impact of modest increases of the minimum wage, like the one currently being debated. Berkeley economist David Card and Princeton economist Alan Krueger have done some of the most famous studies, but many other economists have approached the topic from different angles (including my colleague at CEPR John Schmitt [sorry, not available on-line]), and nearly all of them have found that the minimum wage has little or no effect on employment.

If talking to experts in the economics profession is too difficult for the country’s top reporters, perhaps some simple arithmetic would be sufficient. The minimum wage bill currently being pushed by Senator Kennedy would raise the minimum wage to $7.25 by 2009. By comparison, the minimum wage was almost $8.00 an hour (in 2006 dollars) in the late sixties. This means that if Kennedy’s bill were approved, the real value of the minimum wage in 2009 would still be more than 10 percent lower than it was in the late sixties, even though productivity will have increased by more than 120 percent over this period.

For those not old enough to remember, the late sixties was one of the most prosperous economic periods in U.S. history. The economy grew rapidly, wages grew rapidly, and the unemployment rate eventually fell to 3.0 percent. Clearly, the minimum wage could not have done too much damage.

The idea that the minimum wage hike being debated would have a substantial impact on employment and growth is absurd on its face. The media has the obligation to point this out – if they don’t, maybe opponents of the Iraq war should start saying that the fatality rate of 100 a day is unacceptable.

Dollars Down the Drain

2006-06-22T08:45:00.000-04:00

The Washington Post reported on former Treasury Secretary, and soon to be former Harvard President, Larry Summers' suggestion that the foreign central banks of developing countries begin to unload some of their huge dollar holdings. As someone who has been writing on this issue for almost five years (see here, here, and here), I am glad to see that it is now getting attention from some prominent economists.

Unfortunately, the article (and perhaps Summers) confuses cause and effect. The article implies that the central banks acquire these huge holdings because of their countries' vast trade surpluses with the United States. It suggests that the banks buy up dollar reserves because they don’t know what else to do with their money.

While there be some holdings due to simple confusion of this sort, this is probably the least important factor in the huge build-up of reserves. Part of the reason is that developing countries do not want to end up in financial crises where they can then be subject to the dictates of the I.M.F., as happened when Summers was running the show at the Treasury Department in the nineties.

However, the main reason is that foreign central banks are consciously trying to maintain the high value of the dollar relative to their currencies in order to sustain their large trade surpluses with the United States. How else could China sustain its under-valued exchange rate, if it did not buy up dollars? In other words, the cause and effect runs in the opposite direction from what is indicated in this article. Foreign central banks have decided to keep their currency under-valued against the dollar, which requires massive purchases of dollars.

This strategy can be an effective way to boost exports, but presumably there are better ways to stimulate demand over the long-term. In any case, it is important to recognize that it is the high value of the dollar that causes the trade deficit, a fact that is largely obscured by the discussion in this article.

Rich Countries Provide $300 Billion Annually in Subsidies to the Pharmaceutical Industry

2006-06-21T15:55:00.000-04:00

You won’t see this headline in the newspapers. You should ask why. Newspapers have repeatedly reported on the hundreds of billions of dollars that the rich countries give to the agricultural industry. (See the Financial Times for the latest example.) While the wording of the headlines, and often the articles themselves, would lead readers to believe that this money is being paid directly from rich country governments to farmers, the vast majority of this money takes the form of higher prices that result from trade barriers of various types.

To those who might say that it doesn’t matter whether the money comes from government coffers or through higher prices to consumers, I will point out that this is not how the media generally treat the issue. The media have never run a story about the hundreds of billions of dollars in government subsidies to the pharmaceutical industry. These subsidies take the form of patent protection – government granted monopolies that raise the price of patent protected drugs by several hundred percent above the free market price. We can also talk about the hundreds of billions of dollars in subsidies to the software and entertainment industry through copyright protection. These subsidies serve a purpose – they provide incentives for innovation and creative work – but that doesn’t change the fact that they are subsidies.

Another type of subsidy that the media don’t discuss is the high wages of doctors, lawyers, economists, and journalists, which are artificially inflated by restrictions on foreign competition. This subsidy would also run into the hundreds of billions annually.

So I applaud the media’s vigilance in calling attention to the market distortions created by protectionism in agriculture. I am just curious as to why they are so oblivious to protectionism in other sectors of the economy.

From the Times Europe Bashing Desk

2006-06-20T08:58:00.000-04:00

The NYT had a piece this morning reporting on how Europe is heavily dependent on coal, despite its "green image." While the article had much useful information, it never mentioned the fact that Europe emits approximately 50 percent as much greenhouse gas per capita as the United States. In the numerate world, this is an important piece of information.

At one point the article discusses how much Europe will have to reduce its emissions if it is to compensate for growing emissions in China and India "to say nothing of the United States." As far as I know, none of the people running European countries are morons, nor are the environmentalists who promoted the Kyoto agreement. If China, India, and the United States do nothing to contain their emissions of greenhouse gases, then whatever Europe does or does not do will be completely irrelevant. There would be absolutely no point in Europe absorbing substantial economic costs in a futile attempt to stop global warming.

The proponents of the Kyoto agreement assume that at some point China, India, and the United States can be persuaded/coerced to reign in their emissions. If this does not happen, few, if any, will insist that Europe continue to try to reduce emissions even when they know it cannot have any qualitative impact on global warming.

Do the Washington Post Editors Know How Markets Work?

2006-06-19T05:44:00.000-04:00

The Post has a piece this morning about the non-enforcement of laws against hiring undocumented workers. The article includes several statements, including one from Homeland Security Secretary Michael Chertoff, to the effect that native born citizens will not do the jobs that are filled by undocumented workers. Believers in markets would say that if wages rose, then plenty of native-born citizens would be willing to fill the jobs.

Interestingly, meat processing is one of the industries discussed in the article. Thirty years ago, this was an industry with relatively high-paying (albeit extremely unpleasant) jobs. It was also relatively highly unionized. Plenty of native born citizens wanted these jobs.

The Times had a much more insightful piece on the same topic. It reports on the growing use of undocumented workers as custodians and how this has been associated with a decline of wages in the occupation.

Wasting Public Funds on Destroying the Planet

2006-06-18T20:55:00.000-04:00

It is remarkable that ostensibly intelligent people can be made to fear the possibility that Europe and Japan will be less crowded places in the years ahead. The Financial Times has an article that reports on a warning from “top fertility experts” over “Europe’s chaotic response to its demographic crisis.”

It is hard to find the evidence for the crisis in the story. The article reports that health care spending as share of GDP is projected to rise from a Europe-wide average of 6 percent at present to 8 percent by 2050. Since the U.S. currently spends 15 percent of its GDP on health care, it is difficult to get too concerned about this prospect.

The article gives the usual hype about the rise in dependency ratios – there will be fewer workers for every dependent. Those who have mastered arithmetic know that the projected increases in productivity swamp the impact of rising dependency ratios on living standards. For example, if productivity growth averages a very modest 1.5 percent annually, by 2050, before-tax wages will be nearly twice what they are today. This means that even if taxes increased by 15 percentage points over this period, workers would have far higher after-tax incomes in 2050 than they do today.

The best way to deal with Europe’s “demographic crisis” would be to teach arithmetic to the top fertility experts and the reporters who cover their press statements.

Interesting News On China

2006-06-18T20:40:00.000-04:00

The New York Times reported on Saturday that China’s central bank is adopting a more contractionary monetary policy in order to slow its economy and reduce inflation. If China's central bank is concerned that inflation is getting out of control, then it would be an ideal time for the country to begin to raise the value of its currency against the dollar.

This would have two beneficial effects from the bank’s standpoint. First, a more valuable Chinese currency will make Chinese exports more expensive. This will slow China’s export growth, and thereby help to slow its economy. The other effect is that a higher valued currency will make imports cheaper. Lower priced imports will help to alleviate domestic inflation by making cheap goods available as inputs into production, and also by allowing workers to consume more without pay increases.

A higher valued Chinese currency will be a mixed story for the United States. On the one hand, it will make U.S. goods more competitive, both in the United States and elsewhere in the world. (I will preempt an inevitable comment. If China goes this route, other countries will also raise the value of their currency against the dollar, as they have done in the past. So we will not just be shifting the place of origin of U.S. imports.) This will be a step towards a more sustainable trade deficit.

The bad side of the story is that higher import prices will add more fuel to inflation. Higher prices goods from China and elsewhere will be yet another factor pushing the inflation rate higher in the months ahead, if China goes this route.

Strong Words on the Fed

2006-06-18T11:26:00.000-04:00

“The Fed chairman may be appointed by the president and confirmed by the Senate, but his real bosses are on Wall Street.” This isn’t the ranting of some crazed radical; it is a line from a column in the Washington Post’s Outlook section, by Richard Yamarone, an investment analyst.

While I probably never would have phrased it so bluntly, I think that Mr. Yamarone is largely correct. It is worth reflecting on this one. The interests of Wall Street investors are not necessarily the same as the interests of the public as a whole. For example, big wage increases, that come out of corporate profits, would be very welcome news to the vast majority of the population, since they depend on wages for the bulk of their income. Needless to say, lower profits are not welcome news on Wall Street.

The fact that we have an arm of the federal government that answers to the special interests on Wall Street, rather than the larger public, should be cause for concern in a democracy.

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

2006-06-16T08:27:00.000-04:00

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?

2006-06-15T04:21:00.000-04:00

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

2006-06-15T03:41:00.000-04:00

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?

2006-06-13T08:48:00.000-04:00

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?

2006-06-12T06:48:00.000-04:00

“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?

Escaping With the Trust Fund

2006-06-02T22:41:00.000-04:00

Folks, I am off for a weeklong vacation. I will not be back at my blogging duties until Monday, June 12th. In the meantime, my colleagues at CEPR, Heather Boushey, David Rosnick, John Schmitt, and Mark Weisbrot will be intermittently filling in.

I should also warn that there may be somewhat more delay before your comments get posted. Comments to the blog are moderated, and I can’t guarantee the pace at which items get posted in my absence.

I am sorry to leave in the middle of a lively debate on the Social Security trust fund. I am sure that there will be no difficulty reaching consensus on this issue in my absence.

Fiction on the Social Security Trust Fund

2006-06-01T13:24:00.000-04:00

Nothing like some comments on the trust fund to get the blogging juices flowing. It is amazing how metaphysical these discussions on the trust fund get. I don’t really see anything very complicated here. I am simply referring to the law as it stands.

Under the law, Social Security can only pay benefits out of the money that it has in its trust fund. Yes, that means it has a separate account from the rest of the budget. If the budget has an enormous surplus, but the trust fund is empty, then no benefits get paid, that’s the law. On the other side, if the government has an enormous deficit, but the trust fund still holds bonds, then Social Security benefits still get paid, that’s the law. I have not commented on whether I like the law or not, I am simply describing the law. (By the way, Medicare is currently being financed in part by the bonds held in its trust fund, and I have not heard a single politician make an issue of this.)

Under the law, there is absolutely nothing that would suggest the bonds held by the trust fund are fictional. They are legal obligations, just like the bonds held by banks and private individuals. As President Bush rightly pointed out last year, they are “sheets of paper.” That is true of other bonds, stock certificates and most other claims to wealth in a modern economy. Maybe there are a lot of folks out there who carry around gold, but for my part, I don’t know of any.

Could Congress change the law? Of course, Congress passed the law and it has the legal authority to change it. My guess is that any Congress that voted to default on the bonds held by the trust fund would be massacred at the polls, but that is just speculation. I will say that I do not know of a single member of Congress who has publicly called for defaulting on the debt.

In any case, if people are trying to understand Social Security’s finances, they should understand what those finances are under the current law, not the law that some oped writer or Washington Post editor would like to exist.

Libeling Social Security

2006-06-01T08:22:00.000-04:00

One of the disadvantages of having a public Social Security system is that people are free to make all sorts of untrue statements about it without facing any consequences. For example, an oped in the Washington Post this morning described the Social Security trust fund as “largely an accounting fiction.” This statement is of course absurd. The trust fund consists of U.S. government bonds, which the government is obligated to repay under the law. There is no sense whatsoever in which it can accurately be described as fictional.

Because Social Security is an agency of the government, the author is free to impugn the soundness of Social Security's financial situation with impunity, and the Post need not fear any consequences from printing this libel. On the other hand, if the author had made similarly untrue claims about the financial status of General Electric or Microsoft, the paper would be quickly greeted with an angry call from some honcho corporate lawyer. The correction would already be up on the website and ready to run in tomorrow’s paper. Maybe privatizing Social Security wouldn’t be a bad idea.

There's Still Good Paying Jobs for CEOs

2006-06-01T05:55:00.000-04:00

Gretchen Morgenson had a good piece in the Times documenting some of the ways in which corporate boards manage to dish out bonuses to CEOs even when they miss performance targets. With all the scandals in CEO pay over the last decade, it is remarkable that this sort of nonsense persists unchecked. Clearly there is a structural imbalance, with top executives being able to pilfer corporate coffers to enrich themselves at the expense of shareholders.

It would be a simple matter (legally, if not politically) to change some of the rules of corporate governance to redress this imbalance. For example, how about requiring that the compensation of packages get sent out for shareholder approval at regular intervals? Suppose the rules also require that shareholder proxies that don't get returned don't count? (The standard practice now is that unreturned proxies are counted as supporting management.) How about also making corporate directors personally liable for not using proper care in setting CEO pay? (See the chapter on corporations in the Conservative Nanny State.)

Inflated CEO pay is not just a question of taking money from shareholders. These outsized salaries set standards that infect pay scales throughout the economy. It is now common to see university presidents pulling down salaries in the high six figures. Even heads of charities often draw salaries in this range. Restoring the balance in pay for corporate CEOs could reverse this recent trend.

Does Henry Paulson Advocate a Large Trade Deficit?

2006-05-31T05:58:00.000-04:00

According to press accounts, Mr. Paulson is an ardent believer in a strong dollar. Regardless of what you think of the budget deficit, the strong dollar IS the reason for the trade deficit.

This is not really a contestable point. No one opts to buy imported goods rather than domestically produced goods because of the budget deficit. They buy imported goods because the strong dollar makes them cheaper. It really is that simple.

Of course, the United States cannot continue to run large trade deficits indefinitely. And the trade deficit is more than twice as large as unified budget deficit (it’s more than 50 percent larger than the on-budget deficit). It might be cause for concern that our new Treasury secretary is a big advocate for enlarging the country’s most unsustainable deficit, but you wouldn’t get this from any of the reporting.

The high dollar policy is also redistributive since it puts downward pressure on prices and wages in the sectors of the economy exposed to international competition (e.g. manufacturing). This hits less skilled workers to the benefit of the highly educated workers in protected sectors of the economy (e.g. doctors, lawyers, accountants and economists).

It would have been worth including comments from representatives of the industrial sector about Mr. Paulson's selection. Incredibly, none of the reporting I saw even raised this set of issues.

Should Anyone Care About Consumer Confidence?

2006-05-30T05:38:00.000-04:00

I have always considered the consumer confidence index to be one of the least valuable releases of economic data. Consumer spending is hugely important for the state of the economy, but the index provides very little information about the direction of spending. The index includes two components, a current situation component, which does track current spending reasonably well (and therefore has little predictive value about the future), and an expectations component which is highly volatile and has very little predictive value.

The Times had a piece on the recent dip in consumer confidence this morning that backs up my view. The article includes a chart that shows the latest reading for the index is near its 2002 levels, when real consumer spending rose at a respectable 2.5 percent annual rate and the savings rate fell by more than a percentage point. In other words, a low consumer confidence index did not seem to have much impact on consumption growth.

The index probably does give useful information about public attitudes, which can make a big difference politically (at present, high gas prices are making many people feel stretched and angry), but it is not telling us much about the direction of consumer spending or the economy.

Washington Post Corrects Mexico’s Post-NAFTA Growth Rate

2006-05-30T05:19:00.000-04:00

It took 43 days, but the Washington Post did finally correct an April 17th news story that had Mexico’s economy growing at a 17.5 percent annual rate in the period since the passage of NAFTA. This is longer than one would hope, and it required much more prodding from my colleagues at CEPR than should have been necessary, but it is still good to see that the paper felt a responsibility to correct such a blatant mistake.

Immigrant Labor and Supply and Demand

2006-05-29T08:35:00.000-04:00

The Times had an article this morning that explained the immigration problem in very simple terms, "this many jobs; only this many visas." As the article reports, there are a huge number of less-skilled jobs waiting to be filled by immigrants, but almost no visas are available for immigrants to come across the border and work at these jobs legally.

To prove this case, the article quotes Stephen P. Gennett, president of the Carolinas chapter of the Associated General Contractors of America (a builders’ trade group), “we have a problem here, a people shortage.”

While Mr. Gennett is undoubtedly knowledgeable about the state of the labor market for construction workers, he also represents an organization that has a clear interest in this issue, they want cheap labor. Ordinarily, the claim that there is a people shortage would imply that wages are rising at an extraordinary rate. (This is the way economists ordinarily think about markets – shortages mean higher prices.) This means that there is a quick way to verify Mr. Gennett’s claims about a people shortage: see if wages in construction have been rising at an extraordinary rate.

A quick trip to the Get Detailed Statistics section of the Bureau of Labor Statistics website tells us that inflation adjusted wages for construction workers have actually fallen about 5 percent since 1980, a period in which productivity has increased by more than 70 percent. So, we have wages falling in spite of a labor shortage – not where I learned my economics.

Labor is a cost to employers, and they would all like to get their labor as cheaply as possible. The Times would like to hire reporters for $25,000 a year. While there are plenty of smart people in places like India and China who would be happy to work for the Times at this wage (and could do a very good job), reporters and other higher paid professionals are powerful enough lobbies to largely foreclose this option. But, let’s be clear. There is no more a shortage of workers for low-paid jobs than there is a shortage of workers for higher paid jobs. The difference is simply that the workers who perform less-skilled work have less political power to protect themselves against the efforts of employers to get low cost immigrant labor.

Do Trade Agreements Have to Be "Free"

2006-05-27T23:18:00.000-04:00

I am continually amazed by the apparent need that reporters feel to describe the trade agreements negotiated by the U.S. government as "free trade" agreements. (See the Times article on the Colombian elections for the current target of my wrath.) What possible additional information do reporters and editors believe that they are conveying by including the word "free?"

As I have written elsewhere, these agreements do not free all trade -- there are still substantial obstacles facing Colombian doctors, lawyers, and other professionals who would like to sell their services in the United States. This agreement also increases protectionist barriers by stengthening patent and copyright protection. (Even if you think these protections are good, they are still forms of protection.) So, why don't these reporters just save themselves a word and more accurately describe these pacts as simply "trade agreements."

Right Wing Law and Economics: Free Market Economics at NPR

2006-05-26T05:55:00.000-04:00

National Public Radio had a piece this morning about how some think tanks committed to "law and economics" (applying economic principles to the law) were hosting seminars for judges. The segment asserted that these think tanks, which purportedly receive large contributions from the tobacco industry, the oil industry, and other industry lobbies, are committed to free market economics.

This should have been one of those paid public relations spots that helps NPR pay the bills. The tobacco industry does not want to be held responsible for things like marketing to children or concealing evidence of the danger of cigarettes. The oil industry doesn't want to be held accountable for the damage that oil does to the environment.

Since when is the effort to avoid being accountable for the damages you cause free market economics? If I burn down by neighbor's house (accidentally), and then argue in court that I shouldn't have to pay for rebuilding, is that free market economics? According to NPR it is.

American Idol Special: Was the Vote Kosher?

2006-05-25T09:26:00.000-04:00

First, Beat the Press extends its congratulations to Taylor Hicks, the new American Idol. Now, for the serious question, was the vote fair?

The issue here has to do with the voting mechanism. As we know the vote took place through phone-in voting. (People could also text message in their favorites). The problem is that the enthusiastic response by Idol fans often left the phone lines busy. For example, the Washington Post Idol wrap-up reported that a special on-line speed dialing service was able to get through with less than one-quarter of its calls. If most calls don’t get through, then the votes recorded for each contestant will end up being roughly the same, regardless of how many people intended to vote for them.

This can be seen with a simple example. Suppose the system accepts 10 calls a minute for each contestant (they had separate phone numbers). Now suppose that Katharine McPhee had 1000 calls and Taylor Hicks had 2000 calls. Since the system will only accept 10 calls a minute, both contestants will be recorded as having 600 votes (60 minutes times 10 calls a minute), even though Taylor had twice as many people call in to vote for him.

Now, as a practical matter, the vote count will never end up exactly the same. Some people may be a bit quicker with their calls, perhaps the percentage of text messagers in the vote will affect the recorded outcome, but the point is that the vote count will be largely determined by the mechanics of the system, rather than the numbers who vote for each contestant.

This would explain the incredibly close three way race between Taylor, Katherine, and Elliot, a week ago. The system let in almost exactly the same number of calls from all three. It would also explain the cliffhanger two years ago when Rueben Studdard edged out Clay Aiken. Any time when the system gets flooded, the vote counts will tend to converge.

Folks, this isn’t about hanging chads determining which of America’s political dynasties will place their scion in the White House. This is the American Idol. The people must have confidence in the system.

Can We Buy New Home Sales Data?

2006-05-25T06:03:00.000-04:00

The Commerce Department’s data for new home sales in April showed a 4.9 percent increase from March. Many news reports took this as evidence of the continued strength of the housing market. A bit of caution is appropriate here.

First, monthly data are always erratic. This should be a mantra for anyone trying to track the economy. If a particular data source shows data that are out of line with other data we have on the economy, then it was probably driven by some quirk in the data.

Second, the new home sales data show contracts signed, not actual sales. The difference is the number of contracts that are cancelled. A year ago, when buyers thought that prices were going through the roof, cancellations were relatively rare. Now there are reports of cancellation rates in the neighborhood of 20-30% in some markets. This means that completed sales may actually be dropping, even if contracts are rising.

There is evidence for this proposition in the April report. The inventory of unsold homes rose 2.9 percent in April and now stands at a record high of 565,000 houses, 27 percent above the year ago level.

Problems With Venezuelan Numbers

2006-05-24T17:17:00.000-04:00

It appears that Mexico is not the only Latin American country for which the media have difficulty with official statistics. Apparently, the media have been anxious to tout high poverty numbers for Venezuela. The problem appears to be that they want to cite poverty data for 2004, which showed a large upturn in the poverty rate in the immediate wake of a strike in the oil sector.

The Venezuelan economy rebounded sharply, beginning in 2004, and the poverty rate predictably fell back below its previous levels. However, even though the 2005 data is now available, the media continues to use the much higher numbers from 2004. My colleagues at CEPR posted a short piece on Venezuelan poverty today.

Rising Wages for Nurses? Nanny State to the Rescue

2006-05-24T16:53:00.000-04:00

The New York Times had an article today that could have badly used a bit of economic analysis. The article reports on a provision in the Senate immigration bill that removes the cap on the number of nurses who can enter the country each year.

The problem, as described in the article, is that the country faces a large and growing shortage of nurses. The decision to turn to immigrants is striking, since this is not what Congress did to meet the large shortages of doctors, lawyers, accountants, economists, CEOs and other occupations that draw very high wages. In other words, the Senate is making a decision to consciously try to depress the wages of nurses, in a way that it has not done for other professions that command high wages.

It would have been reasonable to ask why nurses are being singled out in this way. There certainly is no economic argument for holding down the wages of nurses but not the wages of workers in more highly paid occupations.

Washington Post Still Believes in Mexico's Post-NAFTA Growth Miracle

2006-05-23T11:51:00.000-04:00

It is now 36 days since the Washington Post published an article that reported that Mexico’s economy has grown at a world record 17.5 percent annual rate since NAFTA was implemented in 1994. (According to IMF data, annual growth averaged 2.9 percent.) They have refused to print a correction despite repeated calls and e-mails from my colleagues at CEPR.

The Post has a very strong policy on correcting errors, which was printed in a recent column by the ombudsman (“Policy vs. Reality in Correcting Errors” 5-7-06; B 6):

“The Washington Post is committed to correcting all errors that appear in the newspaper, just as we are committed to the kind of careful journalism that will minimize the number of errors we print. Preventing and correcting mistakes are two sides of the coin of our realm: accuracy. Accuracy is our goal, and candor is our defense.”

-- The Post Stylebook

As I noted before, the Post had taken a strong editorial stand in support on NAFTA. I will allow them to explain this situation themselves.

What if Money Managers Had to Work for a Living?

2006-05-23T06:40:00.000-04:00

The Times had an article this morning about the effort by stock exchanges to merge across international borders. At one point, it comments about fears that this trend could make it easier for companies to shop among stock markets in order to list their shares in the country with the least restrictive accounting and reporting rules.

This is a reasonable concern. It is a safe bet that if companies can evade regulations that cost them money, they will.

But, there is a very important implicit assumption in this story which is worth noting – that investors don’t value the regulations that impose high standards for corporate accounting. This is probably an accurate assumption, but one that deserves to be examined more closely.

The Sarbanes-Oxley Act, and other examples of regulatory tightening, was prompted by massive fraud at companies like Enron, WorldCom, and Global Crossing. These companies were able to get away with their fraud because money managers that control billions of dollars of assets did not know anything about the companies in which they invested. No doubt these money managers received large bonuses when the soaring stock prices of these companies produced huge returns for their portfolios.

When it turned out that the stock price was driven more by fraud than profits, the money managers played the “who could have known game.” Maybe there was a money fund manager who lost their job for investing a large amount of money in one or more of the poster children for corporate fraud, but I certainly have not heard of such a person.

In short, investing in companies that play with their books does not seem to carry a cost for money fund managers. They get the benefit of the high returns for as long as the fraud can be perpetuated, but then suffer no consequences when the fraud is exposed and the stock loses most of its value.

In such a world, strong governmental regulation of accounting standards is especially important. But it is interesting to ask why highly paid money managers are not held accountable for their failings. This seems to be yet another example of an economy where those at the top enjoy employment security, even when their incompetence has huge costs. It is only factory workers and dishwashers who are responsible for the quality of their work.

The Times Versus Bush on the Deficit and the Dollar

2006-05-20T14:25:00.000-04:00

The lead editorial in Saturday’s New York Times noted the recent drop in the dollar. It then blamed President Bush’s deficits and warned of an impending recession unless the budget deficit is reduced. As best I can tell, the editorial was incoherent, like much of the discussion on the trade deficit and the budget deficit.

In the last quarter century, the conventional wisdom on the relationship between the dollar and the budget deficit has changed almost as frequently as the seasons. It may not be surprising that politicians would change their views on how the economy works whenever it is convenient. It is a bit more disappointing that the media would show similar flexibility.

In the old days, economists used to say that large budget deficits lead to higher interest rates in the United States. When interest rates in the United States rise, more people want to hold dollar denominated assets (e.g. government bonds or money market accounts in U.S. banks). This increases the demand for dollars, causing the dollar to rise. A higher dollar makes imports cheaper for people in the United States, leading us to buy more imports. It also makes U.S. exports more expensive for people living in other countries, thereby reducing demand for exports. With imports up and exports down, the trade deficit rises.

In this way, a budget deficit could be argued to cause a trade deficit. Note the importance of the dollar in this story -- the high dollar is the key mechanism. People shopping at Wal-Mart don’t buy the imported shirt rather than U.S. made shirt because the U.S. has a large budget deficit; they make the decision to buy the imported shirt because the high dollar has made the imported shirt cheaper.

This part of the story is important to emphasize, because in the Clinton-Rubin era the conventional wisdom was that a high dollar was somehow good, even though it led to an enormous trade deficit. Right thinking people everywhere (many of whom had decried the budget deficits of the Reagan-Bush 1 era in large part because of the trade deficits they caused) espoused the virtues of Robert Rubin’s high dollar policy. In other words, the demon of the over-valued dollar, and the resulting trade deficit, was somehow good when the over-valuation was driven by foreign investors who were anxious to lose their shirts in the U.S. stock bubble of the late nineties.

Now, the high dollar is again bad, although the current cause of the over-valuation is not quite clear in the conventional wisdom (at least as rendered on the Times editorial page). If we assume that the Times has returned to the world of standard economic theory, then the over-valuation of the dollar is attributable to the upward pressure on interest rates that is caused by budget deficits. In this world, a larger budget deficit leads to a higher dollar.

But wait, the Times seems to have a somewhat different story:

“The problem is this: unless a falling dollar is paired with reductions in the federal budget deficit, it could do more harm than good by driving up interest rates, perhaps sharply. That's because the foreign investors who finance the administration's "borrow as you go" budget are likely to demand higher returns to invest in a depreciating dollar.

But if budget deficits declined over the long run, the government's reduced need to borrow would help keep interest rates low as the dollar depreciated.”

Okay, foreign investors will demand higher returns to invest in a depreciating dollar (i.e. if the dollar is falling 5 percent a year against the euro, then investors want a return in dollars that is at least 5 percentage points higher than the return available in euros), that seems right. But, the dollar falls more in a world where the budget deficit is reduced than in a world where it stays high. (Remember – a higher budget deficit leads to a high dollar.)

This means that, at least through a period of transition to an era of a lower dollar, we might expect higher interest rates if the budget deficit were to be reduced rapidly and then the dollar fell enough to fill the gap in demand with more net exports.

I apologize if this discussion is unnecessarily complex, but tackling warped logic is not always easy. Putting a different twist on the basic issue could be helpful.

An over-valued dollar, regardless of the cause, creates imbalances (i.e. trade deficits) that inevitably imply a painful correction process. The current over-valuation was not caused by budget deficits (remember, we had a huge budget surplus in 2000, when the dollar was considerably higher than it is now). The correction from the over-valued dollar is going to hurt regardless of what we do with the budget deficit. The price of imports will rise between 10-20 percent, raising the rate of inflation and reducing living standards in the United States.

There are good arguments for reducing the budget deficit, but it’s just silly to pretend that the pain from a falling dollar is attributable to the budget deficit, or that a lower deficit will somehow prevent this pain.

The Fed and the Housing Bubble: Fool Me Once, …..

2006-05-20T05:56:00.000-04:00

The financial press eagerly reported Federal Reserve Board Chairman Benjamin Bernanke’s comments this week saying that he expected a gradual softening of the housing market, not a serious collapse. Mr. Bernanke’s comments may reflect his true view of the housing market. However, it is also possible that these statements were made simply to soothe the financial markets.

One of the most fascinating stories in the stock bubble was Alan Greenspan’s view of the Fed’s proper role in dealing with the bubble. Following the bubble’s collapse, Greenspan has publicly stated that he recognized the stock bubble, but thought it was inappropriate for the Fed to take any steps to reign in the bubble. This included saying anything publicly about the bubble. Greenspan’s comments about the stock market as it was soaring to unprecedented price to earnings ratios were carefully crafted comments of noncommittal nonsense. He never said that a 5000 NASDAQ could be justified by fundamentals, but he was also very careful never to say that it could not.

Given that Mr. Greenspan thought that the Fed should not comment on a stock bubble, is it reasonable to think that he would have the same attitude toward a housing bubble. In other words, if Mr. Greenspan believed there is a housing bubble, would he tell us?

I don’t have the answer to that one, but it does seem a reasonable question. It also seems to be an important piece of information that should be included in any news story that focuses on Greenspan or his successor’s assessment of the housing market. In other words, if Greenspan, and now Bernanke, think the same way about the housing market as Greenspan thought about the stock market, they would not say that there was a housing bubble, even if they believed that there actually was one.

The Power of the Press: Congress Takes Back Tax Breaks for Big Oil

2006-05-19T06:07:00.000-04:00

The New York Times had an article this morning about efforts in Congress to renegotiate federal oil and gas leases that gave the industry a windfall projected to be $20 billion over the next 25 years. The sums at stake are not huge for the country or the industry (the $800 million annual windfall is less than 1 percent of the industry’s current profits), but the story does show the impact that the media can have when they do their job.

The windfall was part of the energy bill approved by Congress last year. It included a provision that gave an incentive for the industry to drill in deep water off the U.S. coast, by not requiring royalty payments. The prior energy bill also included this incentive, except royalties would be required if the price of oil crossed $34 a barrel. The new energy bill dropped the $34 threshold provision, making all oil and gas from these wells royalty free.

Times reporter Ed Andrews wrote a series of pieces earlier this year exposing this little-known clause. The resulting outrage is forcing Congress to rewrite the legislation and require the government to renegotiate the leases. The press can do good.

Two small points:

1) To an outsider from another planet, this proposed renegotiation of offshore energy leases might look similar to the recent renegotiation of energy leases in Bolivia, Ecuador, and Venezuela that have prompted such outrage from the media.

2) The principle of having royalty payments kick in when oil prices cross a certain level works pretty much the same way as a properly designed windfall fall profit tax. The idea is that the industry will have incentives based on an expected future price of oil, but if the price soars, presumably due to events beyond the control of the industry, the government takes back part of this unearned and unexpected windfall.

Budget Reporting Without Context

2006-05-18T05:58:00.000-04:00

The Times ran a piece this morning on a budget resolution passed by the House last night. According to the article, the resolution provides for a substantial increase in defense spending (not counting war expenditures) and some degree of cuts for everything else. However, it is not clear where (if anywhere) adjustments have been made for inflation (now between 3.0-4.0 percent) so I doubt that many readers have any clear sense of what spending changes would be implied by this resolution for a $2.7 trillion budget ($2.8 trillion on NPR).

In fairness, this bill was passed at 1:00 A.M. and the Senate will almost certainly not approve it, but if it was worth writing about, it was worth writing about in a way that provided information to readers.

The Conservative Nanny State in html

2006-05-17T22:44:00.000-04:00

To increase sales, we now have my new book, The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer, available for free download in html format. It is still possible to get a free PDF download, or you can also order a paperback copy.

Also, for those interested in asking questions on the book, or just questioning my competence and integrity, I will be guest blogging at Maxspeak on Wednesday, May 24, from 1:00-2:30 (EDT).

European Union Enlargement and Mexico

2006-05-17T05:48:00.000-04:00

Both the Clinton and Bush administrations were eager proponents of European union expansion, calling on the EU to quickly admit the former Soviet bloc countries, as well as Turkey. The media have typically presented resistance to rapid expansion as reflecting perverse European fears of globalization. The Post had another piece in this vein this morning.

In assessing this resistance to expansion, it would be helpful to point out that the EU is more than just a NAFTA type trading bloc. It is a quasi-state, that in principle allows free movement of people and workers across borders and provides for substantial subsidy flows from richer regions to poorer ones.

In this context, the people who oppose rapid ascension of the considerably poorer countries of east Europe and Turkey are showing the same sort of perverse fears as those people who oppose free entry of Mexican workers into the United States and a committment to use federal tax revenue to quickly bring Mexico up to U.S. living standards.

Immigration ID Logic

2006-05-16T06:48:00.000-04:00

Perhaps I’m missing something, but it seems that there is an obvious flaw with President Bush’s proposal to have a tamper proof identification card for guest workers. As I understand it, under his program guest workers would be required to present this ID to employers when they get a job.

The flaw in the logic is that all workers are already required to present ID to employers showing that they are either a U.S. citizen or have legal authorization to work in the United States. The problem is that the necessary documents can be readily forged, which is why so many workers are employed illegally.

The question is, if the documents accepted for proof of U.S. citizenship can still be readily forged, what difference does it make that the ID for guest workers is relatively secure? If the flaw in the president’s plan has been reported, I have not seen it.

No Fun With Numbers: Another Cost of Intellectual Property

2006-05-15T23:15:00.000-04:00

The Times had a piece this morning about how Major League Baseball is suing to prevent fantasy baseball games from using players' statistics without paying a licensing fee.

The article tried to be fair in presenting the views of both parties as well as independent legal scholars. What is missing from the discussion is any independent economic analysis. The lack of economic analysis in articles on efforts to extend intellectual property has been an ongoing problem in the media (read the discussions of the legal battles over Napster and related services). This would be comparable to reporting on the debates over agricultural protections without ever referring to their economic costs.

The economics profession has not been very good in its treatment of intellectual property (IP) issues, but that should not give the media an excuse to ignore the often sizable economic impact of IP controversies.

Two Points on Health Care

2006-05-14T15:51:00.000-04:00

Since questions continually arise on my health care postings, I will make a couple of points here that do not directly relate to the news coverage.

First, health care costs have posed a problem everywhere, but nowhere do they pose as much of a problem as in the United States. If we look at the OECD data, in 2003 (the most recent year available) the United States spent 15.0 percent of its GDP on health care. The next three countries ranked by expenditure as a share of GDP are Switzerland, Germany, and Iceland at 11.5 percent, 11.1 percent and 10.5 percent, respectively. Canada clocks in at 9.9 percent of GDP, Sweden at 9.4 percent, and the United Kingdom at just 7.7 percent.

The comparison of GDP shares actually understates the gap in expenditures. Per capita GDP is more than 20 percent higher in the United States than in Europe, primarily because we work more hours.

The difference in current expenditure levels is attributable to much more rapidly growing costs in the U.S. than elsewhere. In 1970, the United States was tied with Sweden and the Netherlands for 3rd place in the rankings, behind Canada and Denmark. The story in other countries is that health care costs have somewhat outpaced the growth in per capita GDP (this is partially due to aging – most of these countries have a considerably older population than the U.S.), it is only the U.S. where health care spending is exploding relative to GDP.

The other point is that the projected cost explosion for our public sector health care programs (primarily Medicare and Medicaid) over the next two decades is grounded in projections of exploding private sector costs. I don’t make these projections – they come from the Centers for Medicare and Medicaid Services (CMS). The projections may well turn out to be too pessimistic (we should all hope that they are), but it is ludicrous to make plans to only deal with the public side of the problem and not address the problem of health care costs in the private sector.

The CMS projections imply that the average cost of health care for a person between the ages of 55 and 65 in the year 2025 will be almost $18,000 (in 2005 dollars). These are the 10 years before people reach the age of Medicare eligibility. How do we think that these people are going to pay for their health care in 2025? Anyone who is serious about tackling the projected explosion in Medicare and Medicaid costs better have a plan to deal with the explosion of private sector costs, otherwise, they are not being serious.

The Medicare and Social Security Hoax

2006-05-12T06:13:00.000-04:00

Medicare and Social Security costs are projected to soar over the next decade as the baby boomers retire. Medicare and road maintenance costs are projected to soar over the next decade as the baby boomers retire.

Health care costs in the United States are out of control, with per capita health care costs rising at rate that is more than 2 percentage points more rapid than the rate of growth of per capita income. If this pattern continues, health care costs will have a devastating effect on the private economy and also on the federal budget because of government health care programs like Medicare and Medicaid. The obvious policy response to the projections of exploding health care costs would be to find some way to fix the U.S. health care system (no other country has a problem of the same magnitude). It is dishonest to portray the issue as a problem of aging – we can afford the costs associated with aging – the problem is our health care system.

When the media reports, as the Post did this morning, that the problem is not with discretionary spending, “but with entitlement programs such as Medicare and Social Security, which will grow by 23 percent through 2010,” they badly mislead readers. The cost of Social Security is rising only slightly faster than GDP. Over the next decade, Social Security spending is projected to increase by just 0.2 percentage points as a share of GDP. By contrast, spending on Medicare and Medicaid is projected to increase by a total of 1.5 percentage points of GDP.

Furthermore, Social Security is financed by a designated tax that is projected to keep the program fully solvent through the 2052 by the non-partisan Congressional Budget Office. This means that any cuts to Social Security should in principle be matched by cuts in the tax, unless the intention is to mislead people about the purpose of this tax.

There is a large and powerful lobby that would badly like to cut and/or privatize Social Security, and they have no qualms about playing with the truth to advance their agenda. The media should not help them.

Copyrights and Consumers: Not at the Times

2006-05-12T05:47:00.000-04:00

The New York Times had an article this morning about a new digital copyright law in France. The main features (according to the article) appear to be a requirement that music downloading services be usable on multiple devices (as opposed to Apple’s Ipod monopoly) and a relatively small penalty for unauthorized downloading of copyrighted material.

For comments on the law, the Times turned to a representative of Apple, a representative of the recorded music industry, a representative of the software industry, and a business consultant. This would be like writing an article on steel tariffs and only getting comments from the steel companies and their workers. Wouldn’t it be appropriate to get some comments from consumer groups or at least economists who could discuss the potential benefits to consumers and the economy from lower prices?

The Times Discovers Temps in Europe

2006-05-11T06:34:00.000-04:00

The New York Times had an interesting article about the growth of part-time and temporary employment in Europe. It notes that in several European countries, 20-30 percent of the workforce is employed either part-time, or on temporary employment contracts, or both.

It is good to see this piece, because part-time and temporary employment has been an important part of many European economies for close to two decades. As the article notes, these workers tend to enjoy far less employment protection than do full-time workers.

Of course, the article is somewhat misleading in implying that these workers enjoy no protection. The extent to which employment protection extends to part-time and temporary workers varies substantially across countries, but in most countries, part-time and temporary workers enjoy more legal protection than do full-time workers in the United States, who generally can be fired without cause at any time. Part-timers and temps in Europe also generally have health care coverage and other benefits like paid vacations that part-timers and temps in the United States rarely receive.

But the basic point is absolutely correct, part-timers and temps offer employers more flexibility than permanent full-time employees. Given the choice, employers will opt for more flexibility. The extent to which this increased flexibility has led to lower unemployment and more growth is questionable (the OECD research on this issue has not produced strong evidence), but it is an important feature of economic life in Europe, and it is good to see that the Times has discovered it.

The Conservative Nanny State is Here!

2006-05-10T12:08:00.000-04:00

The moment you have all been waiting for has finally arrived. You can download your copy of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer today. The book is available as a free e-book (read chapter 4 for the reasoning). You will soon be able to order paperback copies at Conservativenannystate.org.

The book takes issue with the prevailing political metaphor in U.S. politics: that liberals want the government to intervene to promote fairness and equity, while conservatives want to leave outcomes to the market. The book argues that conservatives (or at least those in power) support a wide range of government interventions that have the effect of distributing income upward. This list includes a trade and immigration policy that places less-skilled workers in direct competition with workers in developing countries, while protecting highly paid professionals from the same sort of competition. Another item on the list is Federal Reserve Board policies that deliberately weaken the bargaining power of less-skilled workers in order to keep inflation under control.

A third set of policies involves the use of patents and copyrights – government enforced monopolies – that lead to large economic distortions, and incidentally also allow some people to get very rich. Even corporations themselves owe their existence to the government – there are only individuals out there in strict free market land.

The book is intended to force a rethinking of the relationship between the government and the economy. The current framing -- that liberals like government and conservatives like the market -- works well for those who support the economic policies of the last quarter century. Those who think that we can do better need a new framework.

The New York Times Discovers Sweden

2006-05-10T06:02:00.000-04:00

The Times had an article this morning that reports on Sweden’s success in sustaining healthy rates of economic growth, while also ensuring a high degree of economic security for its workforce. The article is mostly fair, but is misleading on a few points.

For example, the article reports that Sweden overhauled its Social Security system in the mid-nineties and added private accounts. This is true, but it would have been helpful to add that the defined benefit portion of Sweden’s system is still approximately one-third larger (relative to wages) than the current U.S. system.

The article also reports a common complaint that the official unemployment rate of 4.8 percent substantially understates true unemployment because it excludes the people in government retraining programs. (The article reports that labor unions put the true rate at 8 percent. Labor unions rarely appear as a source for economic data in Times articles.) It is not clear why workers in government funded training programs should be counted among the unemployed. Would it be appropriate to count workers in companies receiving tax breaks as unemployed?

In its discussion of unemployment the article also adds that, “according to some estimates, Swedes take an average of 17 weeks a year off from work on sick, disability or parental leave, further twisting the statistics. Absenteeism is the highest in the developed world.” Presumably, these comments are intended to imply that the unemployment rate is actually worse than the official numbers indicate, but it is hard to follow the logic here. Other things equal, aren’t people better off if they get long vacations and can take sick days without worrying about losing their jobs. (I said “other things equal” – so we’re assuming this doesn’t affect productivity, economic growth, etc.)

It may have been appropriate to mention in this context that the employment rate (the share of the working age population that is employed) is approximately 2 percentage points higher in Sweden than in the United States.

The article concludes with the obligatory warning that Sweden and the other Nordic success stories are unique, “And in this debate, size, geography and history do matter. Sweden has been free of war for 200 years. Norway, with 4.6 million people, is rich in oil but fiscally cautious. The economy in Finland, with some 5.2 million people, revolves around the fortunes of the cellphone giant Nokia.

Also, the Nordic countries tend toward the individualism of seafaring lands whose past spanned trade and conquest. Only Finland, the lone republic among the Scandinavian monarchies, joined the euro common currency, and Norway has rejected membership in the European Union altogether.”

In other words, don’t try these policies at home.

Post Columnist Advocates Default on National Debt

2006-05-09T06:17:00.000-04:00

Washington Post columnist Allan Sloan called for defaulting on the U.S. national debt, or at least a portion of it, in his weekly column today. Mr. Sloan pointed out that the Social Security trustees project that the program will begin drawing on the government bonds in its trust fund in just over a decade. He said that repaying the bonds in the trust fund will be a burden to the government, and that his children, as future taxpayers, shouldn’t have to bear this burden.

Mr. Sloan probably would object to describing his column as a call for default on the national debt, but this in fact exactly what it is. In the column, he implicitly derides the legitimacy of the bonds held by Social Security by calling them IOUs. Of course all bonds are IOUs, but they are never described this way in normal discussions.

Under the law, the bonds held by the Social Security trust fund are legal obligations of the federal government. Social Security bought these bonds with the excess Social Security taxes paid by more than 150 million workers over the last two decades. (Taxes were deliberately raised to exceed benefits in order to build up the trust fund.) The trust fund current holds more than $1.9 trillion in bonds, approximately $12,000 for every active worker. Workers have every right to expect that the money they paid into the trust fund in Social Security taxes will be repaid in benefits that are financed out of general revenue. (This is not in one pocket out the other – general revenue comes primarily from the progressive individual and corporate income taxes, while Social Security taxes are highly regressive.)

Mr. Sloan’s kids may not want to pay their taxes (most people would prefer not to pay taxes, if they can avoid it), but as a moral matter, there is no greater justification for defaulting on the debt to Social Security than any other portion of the government debt. If a future Congress debates default on the bonds held by the Social Security trust fund then it would also be reasonable for it debate default on all other government bonds, including those held by banks, corporations, and wealthy individuals.

Realistically, if we fix our national health care system, then future budgets should not impose any extraordinary burdens on future generations of taxpayers. But, if default ever rises as an issue on the national agenda, then we should be talking about making all debt holders share the burden of the default, not just the debt holders that Mr. Sloan doesn’t like.

Dying Children and Numbers in Context

2006-05-09T05:31:00.000-04:00

A New York Times article this morning, reporting that up to 4 million infants die every year for the lack of very simple medical care items, provides a classic example of reporting numbers out of context. The article informs readers that the Bush administration proposes to spend $323 million in 2007 on aid for maternal and child health care in developing countries, down from $356 million in 2006.

Apart from the failure to adjust the spending figures for inflation, very few Times readers are probably aware of the fact that the 2007 appropriation comes to $1.08 per person in the United States, or 0.013 percent of federal spending. This program may or may not be a good use of public money, but it is a trivial item in the federal budget, and readers should be made aware of this fact.

Missing Fact on British Health Care

2006-05-07T09:09:00.000-04:00

The New York Times had an interesting piece on the poor state of the dental care provided by the British public health care system in its Sunday paper. The article reports that people face long waits for even emergency dental care, and that many now turn to private dentists or go to foreign countries for treatment.

Readers naturally feel sorry for the plight of Britons with bad teeth and are thankful that here in the United States we have an efficient private health care system. The key fact missing in the story is that Britain spends less than 40 percent as much person for its health care as the United States. Whatever the relative merits of the British mechanism for providing health care and the U.S. system, it would be truly astonishing if the British system could best the U.S. in every category, spending just 40 cents to our dollar. (Britain does much better on life expectancy for its 40 cents.)

This article is part of a long series of articles in the New York Times which could go under the title of “the problem of publicly financed health care systems.” Previous articles in this series have noted problems in French, British, and most often the Canadian health care systems. Articles in this series almost never mention the fact that the health care system in question costs far less than the U.S. system or that it produces longer life expectancies. My guess is that most of the highly educated readers of the New York Times are ignorant of these basic facts about health care, even though Paul Krugman has done a heroic job of trying to fill the information gap in his columns.

Are Wages Rising?

2006-05-05T09:29:00.000-04:00

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.