Beat the Press

People Do Have Ideas on Reducing Inequality of Income/Education, They Just Don't Get Mentioned in the New York Times

Fri, 10 Feb 2012 10:48:06 GMT

The NYT had an interesting article reporting on new research showing a sharply growing gap in educational outcomes based on the income of children's parents. While the racial gap has fallen sharply, this income gap has exploded.

The discussion of this research was quite valuable, however the second part of the article was devoted to telling readers that nothing can be done. For example, article concluded by presenting the views of Douglas Besharov, a fellow at the Atlantic Council who was formerly at the American Enterprise Institute:

"The problem is a puzzle, he said. 'No one has the slightest idea what will work. The cupboard is bare.'"

Of course there are all sorts of ideas on measures that would reduce income inequality, which would presumably also reduce the large gap in educational outcomes. For example, if doctors and lawyers were not largely protected from international competition they would no longer have the sort of incomes that would allow them to hire tutors and give other advantages to their children compared with the children of ordinary workers.

The Housing Market is Recovering from a Bubble, It Is Not In a Slump

Fri, 10 Feb 2012 10:30:46 GMT

The Washington Post still seems to not have seen the housing bubble. A front page article refers to a housing "slump" and discusses the possibility that the states' settlement on foreclosure practices will heal the housing market.

These sorts of comments imply that it is plausible that the housing market will somehow bounce back to its bubble levels of prices and construction. It isn't.

The bubble led to house prices in many parts of the country that were completely out of line with the fundamentals of the housing market, just as was the case with stock prices at the peak of the stock bubble in 2000. It also led to enormous overbuilding of housing.

There is no reason to expect house prices to bounce back at all, as house prices nationwide are just now returning to trend levels. Housing construction will pick up gradually as the oversupply from the bubble era is gradually reduced through population growth, but there is no plausible story where we will see some sort of boom in housing construction at a time when vacancy rates remain near record highs.

Confidence Lags the Economy, It Doesn't Predict It

Fri, 10 Feb 2012 03:50:33 GMT

A NYT Economix blognote told readers that confidence about the economy is up and that this should be reinforcing leading to a stronger economy, as firms invest more and consumers spend more. The chart accompanying the note shows the opposite.

The recent levels of the Gallup Economic Confidence Index are getting back or slightly exceeding the peaks hit at the end of 2010, just before the economy nearly ground to a halt, growing just 0.3 percent in the first quarter of 2011. After 6 months of very slow growth, the confidence measure cratered. It has been rising again following the stronger growth of the last two quarters.

In short, this confidence measure looks like a very good lagging indicator, one that tells us where the economy was.

A Competent Federal Reserve Board Would Help the White Working Class

Thu, 09 Feb 2012 10:35:30 GMT

So would trade policy that was not designed to lower their living standards. Nicholas Kristof devoted his column to the worsening plight of white workers without college degrees over the last three decades. He notes that the share of prime age workers with only a high school degree who have dropped out of the labor force has quadruped since 1968.

This can be explained in part by the Federal Reserve Board to pursue polices that promoted full employment. When the economy did achieve low rates of unemployment, as was the case in the late 90s, workers at all education levels were being pulled into the labor force. There were strong wage gains at all points along the income distribution. If the Fed was actually doings its job and promoting full employment, instead of ignoring asset bubbles, like the stock and housing bubbles, the late 90s would be the norm rather than the exception.

Trade policy has also worked to weaken the economic situation of these workers since it has been designed to put them in direct competition with low-paid workers in Mexico, China and other developing countries. By contrast, the protectionist barriers that make it difficult for lawyers, doctors and other highly educated professionals from these countries from competing with our professionals have generally been left in place. The theoretical and actual result of such policies is a redistribution from less educated workers to more educated workers.

Does the NYT Really Not Know the Difference Between Nominal and Real GDP?

Thu, 09 Feb 2012 10:28:13 GMT

It seems not, since a graph accompanying an article on Greece's debt negotiations still shows countries like Spain, Greece and Italy with modest growth since the downturn began in 2007. In fact, all three economies have shrunk in when growth is adjusted for inflation. It will be interesting to see how long it takes the NYT to correct this one.

Germany Cannot Prosper in the Long-Run by Lending Money to Countries That Can't Repay Their Debt

Thu, 09 Feb 2012 10:14:03 GMT

A column by Norbert Walter in the NYT defended Germany against complaints over its trade surplus by pointing out that its export industry acts as an engine for Europe's economy. He accurately points that Germany's export industry boosts demand for supplier industries in Netherlands and France. He then inaccurately asserts that:

"unemployed workers in Madrid or Athens can easily move to Munich or Cologne for work."

We know that unemployed workers in Madrid and Athens cannot easily move to Munich or Cologne because in general they don't. Prior generations of workers from Spain and Greece did often move to Germany and other northern European countries in search of work, but this practice has become much rarer in the last two decades.

Walter's argument that Germany, with an aging population, should have a trade surplus is reasonable, except the surplus should not be with other countries with similar demographics. In standard economic theory we would expect to see Germany have large trade surpluses with rapidly growing developing countries like China and India that would be easily able to repay the debt incurred.

Slow growing countries like Greece and Italy will not. Germanys cannot both want a large trade surplus with these countries and then complain about their debts. When it makes such complaints, Germany is complaining about its own behavior as much as that of Greece and Italy, since there are no borrowers where there are no lenders.

The Comment Gremlin

Thu, 09 Feb 2012 03:07:04 GMT

The evil doers put CEPR's website out of commission this morning. We managed to get it back up and restore the posts on BTP this afternoon. Unfortunately, it seems that comments on several recent posts were lost in cyberspace. Sorry to lose these words of wisdom. Don't take it personally.

The Recording Industry Complains About Free Speech (Seriously)

Wed, 08 Feb 2012 20:49:06 GMT

Cary Sherman, the chief executive of the Recording Industry Association of America (RIAA), had a column in the NYT complaining about “how the democratic process functions in the digital age.” The gist of the complaint seems to be that the Internet allows for the widespread dispersion of views contrary to the interests of the RIAA through outlets that they cannot dominate. This apparently contrasts with traditional media outlets like the NYT which seems to have an open door for the industry to say almost anything it wants regardless of whether it is true.

For example the column absurdly claims that Congress had an obligation to pass legislation like SOPA because it has a “constitutional (and economic) imperative to protect American property from theft, to shield consumers from counterfeit products and fraud, and to combat foreign criminals who exploit technology to steal American ingenuity and jobs.”

Of course this it is absurd to argue that Congress is obligated to take steps to enforce every property claim to the extent that its owners would like. For example, it is standard practice for people to tear down political posters expressing views that they don’t like. Congress has never felt the need to pass special legislation that would prevent such destruction of property. According to Mr. Sherman’s logic, Congress has a constitutional obligation to pass stronger bills to ensure that such destruction of property does not take place.

Furthermore, to be analogous to SOPA, Congress would require third parties to take steps to ensure that destruction of political signs does not occur. This would mean that it could fine car companies for selling cars to people who use them to tear down political signs.

The jobs part of Mr. Sherman’s argument is even more ridiculous. The money that people save by not paying his clients doesn’t go under a mattress; it is spent on other products. This is the exact same argument as the gains from trade liberalization except instead of eliminating a tariff that might raise the price of a product by 10-20 percent, the availability of unauthorized copies can reduce the price of a product by 100 percent. This leaves consumers with more money to spend on cars, health care and a wide variety of other goods and services.

The real issue here is that copyright is an archaic property form that it is no longer practical to enforce in the Internet Age. Serious policy people should be looking to develop alternative mechanisms for financing creative and artistic work. Unfortunately, the organizations that ostensibly represent creative workers are not very creative.

It is impressive that the NYT allows a piece from the industry to appear with apparently no fact checking. Two days earlier it had a similar column complaining about the failure of SOPA. Given its dominance of the NYT’s opinion pages, it is understandable that the RIAA would be upset about the growth of independent voices on the Internet.

Asset Bubbles and the Gold Standard

Wed, 08 Feb 2012 01:29:08 GMT

There are plenty of books on economics that are written by people who are very confused on the topic. When a news outlet like NPR chooses to devote a major segment to one such book, it should at least make sure that the person interviewing the author has some understanding of economics. That does not seem to have been the case in its treatment of Philip Coggan, who just wrote the book, Paper Promises: Debt, Money and the New World Order.

According to the segment, Coggan's thesis is that when the United States went off the gold standard in 1973, it opened to door to the creation of asset bubbles. There are two obvious problems with this story.

First, we had plenty of asset bubbles when the economy was on the gold standard. A knowledgeable reporter might have asked Coggan why the gold standard did not prevent the stock bubble of the 1920s or the land bubbles of that decade in many parts of the country. Other countries on the gold standard also had asset bubbles.

The other major problem with Coggan's thesis is that the United States was not really on the gold standard after 1933. Usually the gold standard is taken to mean that the currency can be redeemed for gold at a fixed rate. This was not true for individuals and businesses after 1933. In fact, they were prohibited from owning gold. Only foreign central banks could redeem dollars for gold and this practice was strongly discouraged as a matter of policy.

Other parts of his story also don't correspond well to reality. The United States went completely off the gold standard in 1973. The first notable bubble did not arise until the mid-90s, more than 20 years later. That seems a pretty weak link.

The piece then quotes Coggan:

"'The result of all that [central banks supporting the economy after bubbles burst] was that it was kind of a one-way bet for speculators: Keep borrowing money to keep buying assets; central banks will always bail you out,' Coggan says. 'And that's why we ended up in this mess that we are in ... with lots of debts and central banks creating money to try and prop the whole system up.'"

Coggan may have missed it, but the Fed did not prop up the stock market when the bubble burst in the years 2000-2002. The Nasdaq fell from a peak of more than 5000 to a low of less than 1200 in the summer of 2002. It never came close to recovering even half of these losses. If the issue is supposed to be that the Fed prevented investors from losing money, this is clearly not true. Plenty of people lost lots of money in the collapse of the stock bubble, why would they think the Fed would bail them out if the housing market collapsed.

In short, nothing presented in this segment makes any sense. If the segment accurately represents the main points of this book then it is one that richly deserves to be ignored.

NYT Gets Real and Nominal GDP Mixed Up

Tue, 07 Feb 2012 21:34:17 GMT

A chart that accompanied an article about negotiations on Greece's debt showed that GDP had risen since 2007 in all the crisis countries except Ireland. This is not true. GDP is down in all of the crisis countries,

Source: IMF.

It appears that the chart in the NYT is showing nominal GDP. This has risen since 2007 but only as a result of higher prices. Real GDP has fallen in all five crisis countries. (Sorry, I left off Portugal.)

Lessons on Economics and Politics for the Post: Democracies Have Unions

Tue, 07 Feb 2012 12:28:08 GMT

Washington Post columnist Charles Lane has decided that public sector unions are undemocratic. This will be a surprise to every democracy in the world, since all of them have public sector unions.

The basic argument seems to be that since unions prevent elected officials from paying as little as they miight want to their workers, they interfere with democracy. This is a bit hard to follow. If a pension fund manager refuses to manage the state's pension fund for a $100 an hour wage, or a doctor refuses to work for $50 an hour for Medicaid, are these people interfering with democracy because they are not accepting the pay offered by an elected official?

Lane then complains that public sector unions make campaign contributions to the state officials with whom they negotiate. This is a reasonable complaint for someone who knows nothing about U.S. politics. It is standard for all sorts of people who do business with the government (e.g. defense contractors, construction companies, pension fund managers) to make campaign contributions to the people with whom they negotiate. It might not be pretty, but this is a problem that goes well beyond unions.

Lane then complains about the "rubber rooms" demanded by NYC in its negotiations with the teacher unions. The city required that teachers awaiting hearings on discipline charges come to school and sit for 8 hours a day. This may be stupid, as Lane suggests, but his complaint is with the city, not the union.

If Lane thinks that unions are an obstacle to good education then he needs to do more homework. Nordic countries like Finland, that rank at the top in most education measures, have much higher unionization rates among their teachers than the U.S. This suggests that the problem is more likely to lie with the Lane's friends on the other side of the negotiating table.

Lane is also confused about basic economics. He complains that the clout of public sector unions allow their members:

"to enjoy retirement and health-care benefits that are often better than those available to the middle-class citizens whose tax dollars support them" adding "even after Walker’s bill, Wisconsin public employees pay just 5.8 percent of their salary toward their pensions and a modest 12.6 percent of their health-care premiums."

In economics, we look at a workers' total compensation packages. It is understood that benefits that are ostensibly paid by employers are a trade-off for higher wages. When the total compensation packages of public sector workers are compared to those with comparable education and experience in the private sector, they actually get somewhat lower pay.

The Post Is Confused About Unemployment

Tue, 07 Feb 2012 11:26:20 GMT

In a front page piece, the Post asked why, given the economy's recovery, so many less-educated workers don't have jobs? There is a very simple answer that could have saved the lives of many trees. The economy has not recovered much. While the unemployment rate has fallen by almost two percentage points from its peak in late 2009, the employment rate (EPOP), the percentage of people with jobs has risen by just 0.6 percentage points. (This adjusts for a change in population controls that reduced the EPOP by 0.3 percentage points from December to January.)

This means that almost two-thirds of the drop in the unemployment rate has been due to people dropping out of the workforce (and therefore not being counted as unemployed), not people getting jobs. Measured in terms of employment, the economy has improved very little from its trough, therefore it is not surprising that less-educated workers, like more educated workers, are still having difficulty finding jobs.

The unemployment rate for the 30 percent of the workforce with college degrees is still more than twice its pre-recession level. If the Post had done its homework it would know that the problem is not the skill levels of unemployed workers, the problem is the skill level of people who make economic policy.

Employment to Population Ratio

Source: Bureau of Labor Statistics.

David Brooks Is Confused Again

Tue, 07 Feb 2012 10:22:00 GMT

David Brooks devoted today's column to a plea to use a broad range of approaches to combating poverty in the hope that some will work. For this reason his focus on President Obama's decision to end a school voucher program in the District of Columbia is misplaced.

President Obama is not ending school voucher programs, in fact he is protecting the idea of local control that could lead to exactly the sort of diversity of approaches that Brooks is touting. The issue is that Congress has sought to deny local control to the District of Columbia, which has opted not to use school vouchers. Obama's action simply gives the same authority to the people of the District of Columbia to run their schools as people in other cities in other cities enjoy.

The Debt Splits the Left, Because the Media Do Such a Horrible Job of Reporting on Economic Issues

Mon, 06 Feb 2012 12:20:56 GMT

This column reports on the fact that people on the center and left of the political spectrum have a range of views in the debt/deficit, which the right seems fairly united in arguing for less government spending. It is worth noting that one reason why there may be divisions and confusions on this issue is that the media routinely allow politicians to say complete nonsense on this topic without correcting it.

For example, the piece tells readers:

"Mitt Romney takes up the same theme, with more subtlety, warning that Obama and the Democratic party are fostering a European-style welfare state with a growing 'contingent of long-term jobless, dependent on government benefits for survival.'"

In fact, the generous European welfare states of northern Europe do not have a growing "contingent of long-term jobless, dependent on government benefits for survival." Germany, the Netherlands, Sweden, Denmark, Austria and Norway, the countries with the most generous welfare states, all have lower unemployment rates than the United States both short-term and long-term.

Competent reporters would ridicule Mr. Romney for making such an obviously false assertion, which suggests that either he has no idea of what he is talking about, or is deliberately misrepresenting reality to deceive voters. However, since this assertion generally goes unchallenged, Romney will continually repeat it, leading many in the public to believe that it is true.

Explaining the Housing Bubble to Robert Samuelson

Mon, 06 Feb 2012 11:19:55 GMT

Almost no one who wrote about the economy for a major news outlet was able to recognize the $8 trillion housing bubble that was driving the economy before it burst. Because people who write about the economy are not held responsible for the quality of their work, none of the people who missed this huge bubble were held accountable for this failure. Remarkably, many of them even now do not understand the bubble.

Robert Samuelson, the economic columnist for the Washington Post, is among this group. Today he writes that:

“some economists argue that China’s trade surpluses — converted into dollars and invested in U.S. bonds — fueled America’s financial crisis by driving down interest rates. Low rates then encouraged riskier mortgage loans.”

Actually, the problem was not low interest rates. Low interest rates are generally good for growth. The problem was that China’s trade surplus with the United States, along with the surplus of other countries, created a large gap in domestic demand. This gap in demand could only be filled by either government budget deficits or negative savings in the private sector. (This is a logical necessity – a trade deficit means negative national saving, there is no way around this story.)

Since folks who write for or get cited in the Washington Post were all yelling about budget deficits, there was no alternative to the housing bubble-type situation where ephemeral bubble wealth led to a consumption boom, while inflated house prices caused construction to surge.

Samuelson also concludes with a dire warning of a dollar crisis in which the value of the dollar plunges against other currencies. It is difficult to envision what this would look like. Right now, other countries are deliberately propping up the value of the dollar in order to preserve their export markets in the United States.

In order for this sort of crisis to come about, they would have to be prepared to give up not only their export markets but to also allow U.S. goods to become hyper-competitive in their home market. If the dollar were to fall to say, 3 yuan to a dollar (from close to 6 yuan to a dollar now) or 3 dollars to a euro, then U.S. exports would hugely undercut many domestically produced items in Europe, China and elsewhere. It is difficult to believe that these countries would allow this sort of disruption to their economies.

Bill Keller Does not Understand Free Speech, Copyright, and the Constitution

Mon, 06 Feb 2012 10:18:59 GMT

Bill Keller tells readers that Congress should pass laws that require intermediaries like Google and Wikipedia to take responsibility for helping to enforce copyrights. It is interesting to see how he thinks the wording of the Article 1, Section 8:

“To promote the progress of science and useful arts, by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries”

which gives Congress the power to grant copyright and patent monopolies, also authorizes Congress to require that individuals and companies assist others in enforcement of their copyrights. Can Congress require that people help me make a profit on my hotdog stand?

If the development of technology makes copyright and inefficient way to “promote the progress of science and useful arts,” then the constitutional route for dealing with the situation would be to find more efficient mechanisms to serve this purpose.

This might be difficult in the United States. There have been numerous news stories and columns decrying the shortage of workers with the necessary skills. In this case, the skill in short supply is the ability to think creatively about an effective response to developments in technology.

Anyhow, it is perverse response to the development of technology to grant the government ever greater powers of repression in order to ensure that an archaic social institution can still be used to generate profits for a small group of powerful corporations and individuals.

It Is Brazil's Bloated Financial Sector, not Its Growth, that Attracts Immigrants

Sun, 05 Feb 2012 11:17:42 GMT

The Post ran a piece on the growing number of foreigners who are going to work in Brazil, especially in its financial sector. It attributed this in part to Brazil's rapid growth, which it reports as averaging 4.5 percent since 2004.

According to the IMF, Brazil's growth has averaged 4.1 percent over this period. That is not especially fast for a developing country. Chile averaged an almost identical 4.0 percent over this period while Venezuela grew at a 4.5 percent rate and Argentina grew at a 7.3 percent rate.

If Brazil is attracting a large number of skilled workers from abroad it is primarily because of the lack of domestic supply, not rapid economic growth.

Post Column Defending Europe Gets the Story Wrong

Sun, 05 Feb 2012 10:00:00 GMT

An opinion column in the Post defending Europe against charges of being a continent of broken down socialist states, by Martin Klingst, the Washington bureau chief of the German newspaper Die Zeit, got the basic story of its economic crisis wrong. It told readers that Europe's fiscal calamities, "stem in part from the unaffordable benefits for its citizens," later adding, "it is also true that a number of E.U. countries have irresponsibly expanded their welfare systems and can no longer afford their bills."

In fact, the 5 crisis countries (Greece, Ireland, Italy, Portugal, and Spain) all rank near the bottom in terms of the generosity of their welfare states. The European countries with the most generous welfare states, Denmark, Norway, Sweden, the Netherlands, France and Germany, are mostly weathering the economic crisis relatively well.

The problems in the crisis countries stem in part from real estate bubbles that were allowed to grow unchecked by the European Central Bank (ECB), massive tax evasion (especially Greece and Italy), and the inflation fighting obsession of the ECB, coupled with its insistence that it would not act as a lender of last resort. The latter policy has caused the interest burden of these countries to soar. This has meant that a country like Spain faces a far higher interest rate than the U.K., which has a central bank that acts as a lender of last resort, even though the U.K. has a much higher debt burden.

Overstating the Decline in Wage Share

Fri, 03 Feb 2012 11:49:55 GMT

An NYT Economix blognote overstated the effective decline in the labor share of national income over the last three decades by using gross national income rather than net national income. The note shares the labor compensation share declining by 4-5 percentage points over this period.

However, the depreciation share of gross domestic product rose by roughly 2 percentage points over this period. If we assume that this increase came proportionately from the capital and labor share of income, then the rise in the depreciation share would lead to a 1.2 percentage point reduction in the labor compensation share of gross national income.

Much of the loss of income by ordinary workers has been due to increased pay of CEOs, doctors, and other highly paid workers. This is still included as part of labor income.

The Post Hopes for Job Loss in San Francisco, May be Disappointed

Fri, 03 Feb 2012 11:37:39 GMT

A Washington Post editorial on indexing the minimum wage told readers:

"at the margins, minimum-wage increases probably destroy jobs in small restaurants, landscaping and janitorial firms."

It then added:

"as the city of San Francisco, which has just imposed a highest-in-the-nation $10.24 minimum, may soon find out."

Whether or not the first claim is accurate, the warning to San Francisco clearly is not. San Francisco first put its city-wide minimum wage in place in 2004. Since that time, it has risen in step with inflation. If the minimum wage was going to cost jobs the city should have seen the job loss already. Research on this issue failed to find any evidence of job loss -- but the Post can still hope.