The NYT told readers:
“The Federal Reserve has said that it expects to raise interest rates sometime soon, given evidence over the last year that economic growth is picking up.”
This undoubtedly had people wondering what the paper could have in mind. GDP growth has averaged less than 1.7 percent over the last three quarters. While employment growth has remained strong, the pace has slowed in recent months. Wages are barely keeping pace with inflation, with no sign of acceleration. Housing starts have picked up, but non-residential investment has been virtually flat.
In short, we are not looking at a story of the Fed raising rates in an economy that is picking up steam, rather the Fed seems to have lowered its expectations so that it is now prepared to raise rates and slow growth in an economy that is operating well below almost everyone’s estimates of potential GDP. What has changed is the Fed’s perceptions of an acceptable level of GDP and employment, not the economy.
The NYT told readers:
“The Federal Reserve has said that it expects to raise interest rates sometime soon, given evidence over the last year that economic growth is picking up.”
This undoubtedly had people wondering what the paper could have in mind. GDP growth has averaged less than 1.7 percent over the last three quarters. While employment growth has remained strong, the pace has slowed in recent months. Wages are barely keeping pace with inflation, with no sign of acceleration. Housing starts have picked up, but non-residential investment has been virtually flat.
In short, we are not looking at a story of the Fed raising rates in an economy that is picking up steam, rather the Fed seems to have lowered its expectations so that it is now prepared to raise rates and slow growth in an economy that is operating well below almost everyone’s estimates of potential GDP. What has changed is the Fed’s perceptions of an acceptable level of GDP and employment, not the economy.
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Andrew Ross Sorkin seems prepared to pronounce Ken Rogoff to be prescient once again with his prediction that China would run into a debt crisis. Rogoff’s past claims to prescience might be viewed as somewhat questionable. He, along with co-author Carmen Reinhardt, famously argued that countries face a severe slowdown in growth when their debt to GDP ratios exceed 90 percent. It turned out that this claim was driven by an error in an Excel spreadsheet, nonetheless it was used to justify austerity in the euro zone, the United States and elsewhere. This austerity did help to worsen the downturns caused by the collapse of asset bubbles, in effect contributing to the crisis that Sorkin credits Rogoff with predicting.
Anyhow, the jury is still out as to whether China will face a serious slump due to its market downturn, as Rogoff himself is quoted as saying in Sorkin’s piece. The prediction on which Rogoff and just about everyone else in the world has been proven correct is that China’s stock market bubble would burst. (It had risen by 150 percent between June of 2014 and June of 2015.) Rogoff does not seem prepared to say even now that this will lead to a more general collapse of China’s economy.
Andrew Ross Sorkin seems prepared to pronounce Ken Rogoff to be prescient once again with his prediction that China would run into a debt crisis. Rogoff’s past claims to prescience might be viewed as somewhat questionable. He, along with co-author Carmen Reinhardt, famously argued that countries face a severe slowdown in growth when their debt to GDP ratios exceed 90 percent. It turned out that this claim was driven by an error in an Excel spreadsheet, nonetheless it was used to justify austerity in the euro zone, the United States and elsewhere. This austerity did help to worsen the downturns caused by the collapse of asset bubbles, in effect contributing to the crisis that Sorkin credits Rogoff with predicting.
Anyhow, the jury is still out as to whether China will face a serious slump due to its market downturn, as Rogoff himself is quoted as saying in Sorkin’s piece. The prediction on which Rogoff and just about everyone else in the world has been proven correct is that China’s stock market bubble would burst. (It had risen by 150 percent between June of 2014 and June of 2015.) Rogoff does not seem prepared to say even now that this will lead to a more general collapse of China’s economy.
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If folks can take a break from worrying about how robots are going to take all the jobs, they may want to look at a NYT piece on Japan’s excess supply of housing. The basic story is that because of Japan’s declining population there are now hundreds of thousands of homes across the country that are sitting empty because no one wants them.
While this is an interesting and important story, the piece also includes the standard nonsense about the demographics of an aging population devastating Japan’s economy. It tells readers:
“The demographic pressure has weighed on the Japanese economy, as a smaller work force struggles to support a growing proportion of the old.”
Let’s see, if the smaller workforce is struggling to support a growing population of elderly they must be working weekends and overtime to make up for the shortage of workers. It seems the OECD hasn’t gotten word of these struggles. According to its data, the average work year has fallen from 2,121 hours in 1980 to 1,734 hours in 2013. If Japanese workers put in as many hours today as their counterparts did three decades ago, it would give them the equivalent of 22.3 percent more workers. It’s hard to see the evidence of the struggle in these numbers.
The piece also comments that Japan is:
“still building more than 800,000 new homes and condominiums a year, despite the glut of vacancies.”
Maybe if the country is having such a hard time meeting the needs of its retirees, it should spent fewer resources building homes that may not be needed.
Seriously, the effects of productivity growth swamp the demographic changes that the elites keep yapping about. If Japan could lift its rate of annual productivity growth by 0.5 percentage points over the next thirty years, it would swamp the impact of its aging population. If we believe anything remotely like the robot taking our jobs story, then aging is nothing to worry about. In fact, it is a good thing since it means there are fewer people for whom we have to find work.
If folks can take a break from worrying about how robots are going to take all the jobs, they may want to look at a NYT piece on Japan’s excess supply of housing. The basic story is that because of Japan’s declining population there are now hundreds of thousands of homes across the country that are sitting empty because no one wants them.
While this is an interesting and important story, the piece also includes the standard nonsense about the demographics of an aging population devastating Japan’s economy. It tells readers:
“The demographic pressure has weighed on the Japanese economy, as a smaller work force struggles to support a growing proportion of the old.”
Let’s see, if the smaller workforce is struggling to support a growing population of elderly they must be working weekends and overtime to make up for the shortage of workers. It seems the OECD hasn’t gotten word of these struggles. According to its data, the average work year has fallen from 2,121 hours in 1980 to 1,734 hours in 2013. If Japanese workers put in as many hours today as their counterparts did three decades ago, it would give them the equivalent of 22.3 percent more workers. It’s hard to see the evidence of the struggle in these numbers.
The piece also comments that Japan is:
“still building more than 800,000 new homes and condominiums a year, despite the glut of vacancies.”
Maybe if the country is having such a hard time meeting the needs of its retirees, it should spent fewer resources building homes that may not be needed.
Seriously, the effects of productivity growth swamp the demographic changes that the elites keep yapping about. If Japan could lift its rate of annual productivity growth by 0.5 percentage points over the next thirty years, it would swamp the impact of its aging population. If we believe anything remotely like the robot taking our jobs story, then aging is nothing to worry about. In fact, it is a good thing since it means there are fewer people for whom we have to find work.
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In his two months as a candidate for the Republican presidential nomination, Donald Trump has said many things that are racist, sexist, or otherwise offensive, but that doesn’t mean that everything he says is off the mark. The Wall Street Journal took Trump to task yesterday for dismissing the relatively low official unemployment rate and instead focusing on the large number of people who are not working.
While the WSJ is right that the vast majority of people who are not working are people who chose not to work. These are older people who are retired, young people who are still in school, or people who are taking time out of the labor force to care for children or other family members.
Nonetheless, even if we control for changes in demographics there has been a sharp decline in the employment rate of prime-age workers (ages 25-54) from the pre-recession level. The employment rate of prime age workers is still down by almost three percentage points from its pre-recession level and almost four percentage points from its peak in 2000.
While many analysts try to explain this falloff with vigorous hand waving, it is almost certainly due primarily to the weakness of the labor market. It is implausible that millions of prime-age workers suddenly decided that they don’t feel like working. Trump is right to call attention to the drop off in employment, even if he is wrong to be worried that our grandparents or teenage children aren’t working.
In his two months as a candidate for the Republican presidential nomination, Donald Trump has said many things that are racist, sexist, or otherwise offensive, but that doesn’t mean that everything he says is off the mark. The Wall Street Journal took Trump to task yesterday for dismissing the relatively low official unemployment rate and instead focusing on the large number of people who are not working.
While the WSJ is right that the vast majority of people who are not working are people who chose not to work. These are older people who are retired, young people who are still in school, or people who are taking time out of the labor force to care for children or other family members.
Nonetheless, even if we control for changes in demographics there has been a sharp decline in the employment rate of prime-age workers (ages 25-54) from the pre-recession level. The employment rate of prime age workers is still down by almost three percentage points from its pre-recession level and almost four percentage points from its peak in 2000.
While many analysts try to explain this falloff with vigorous hand waving, it is almost certainly due primarily to the weakness of the labor market. It is implausible that millions of prime-age workers suddenly decided that they don’t feel like working. Trump is right to call attention to the drop off in employment, even if he is wrong to be worried that our grandparents or teenage children aren’t working.
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Joe Nocera rightly takes Jeff Bezos to task for making Amazon an undesirable place to work. (Sorry, I have more sympathy for the warehouse staff in overheated warehouses than the overachievers who are treated poorly at headquarters.) However he gets one part of the story wrong.
He tells readers:
“Practically from the moment Amazon went public in 1997, Wall Street has pleaded with Bezos to generate more profits. He has ignored those pleas, and has plowed potential profits back into the company. Bezos believes that if Amazon puts the needs of its customers first — and no company is more maniacally focused on customers — the stock will take care of itself. That’s exactly what has happened. That is the good side of Bezos’s indifference to the opinion of others.”
While it is clear that the stock market has rewarded Amazon, just as it rewarded AOL.com in the 1990s bubble, it is not clear that Amazon had “potential profits” to plow back. Profits are independent of investment decisions, at least if a company is not engaged in accounting fraud. Amazon may have kept prices low to expand market share, thereby depriving itself of profits, but then it doesn’t have money to plow back either. It is very hard to make sense of the assertion that Amazon somehow doesn’t have profits because it is re-investing, although if it gets not very bright market actors to believe it, Amazon’s share price can continue to rise.
It is also important to note the big handout that Amazon has relied upon from taxpayers. Amazon has not had to collect sales tax in most states for most of its existence, giving the company an enormous subsidy in its competition with brick and mortar competitors. The cumulative size of this subsidy almost certainly exceeds its cumulative profits in the years that it has been in existence. Any discussion of Bezos success should mention this huge subsidy from the government.
Joe Nocera rightly takes Jeff Bezos to task for making Amazon an undesirable place to work. (Sorry, I have more sympathy for the warehouse staff in overheated warehouses than the overachievers who are treated poorly at headquarters.) However he gets one part of the story wrong.
He tells readers:
“Practically from the moment Amazon went public in 1997, Wall Street has pleaded with Bezos to generate more profits. He has ignored those pleas, and has plowed potential profits back into the company. Bezos believes that if Amazon puts the needs of its customers first — and no company is more maniacally focused on customers — the stock will take care of itself. That’s exactly what has happened. That is the good side of Bezos’s indifference to the opinion of others.”
While it is clear that the stock market has rewarded Amazon, just as it rewarded AOL.com in the 1990s bubble, it is not clear that Amazon had “potential profits” to plow back. Profits are independent of investment decisions, at least if a company is not engaged in accounting fraud. Amazon may have kept prices low to expand market share, thereby depriving itself of profits, but then it doesn’t have money to plow back either. It is very hard to make sense of the assertion that Amazon somehow doesn’t have profits because it is re-investing, although if it gets not very bright market actors to believe it, Amazon’s share price can continue to rise.
It is also important to note the big handout that Amazon has relied upon from taxpayers. Amazon has not had to collect sales tax in most states for most of its existence, giving the company an enormous subsidy in its competition with brick and mortar competitors. The cumulative size of this subsidy almost certainly exceeds its cumulative profits in the years that it has been in existence. Any discussion of Bezos success should mention this huge subsidy from the government.
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Mitch Daniels did a big pitch for making student loans more complex and more profitable for the financial industry in a Washington Post column today. The basic story is that he is pushing “income-share agreements” where students contract with lenders to pay them a fixed share of their income for a number of years after they graduate college in exchange for a student loan.
My bet is that good students will be able to figure out ways to get much of their income after the end date on the ISAs, but that is the lender’s problem. The more obvious problem is that Daniels is making a pitch for special government assistance for his friends in the ISA business.
He wants Congress to pass a law that will make the ISA loans exempt from bankruptcy. This means that if a student has a serious illness that makes him or her unable to work or falls on really bad economic times, he can be harassed for the full term of his contract by ISA lenders. This can be 25 or 30 years after graduation (or possibly not graduating).
That may not sound like such a great way to help our young people deal with college costs, especially since there are much simpler alternatives, like the income-based loan repayment plans initiated by the Obama administration or other proposals to reduce the cost of college. Daniels rejects such plans by telling readers:
“It is fallacious to term such an approach “debt-free”; borrowed by an already bankrupt federal government, the money will be all debt, merely shifted to taxpayers, including these very same students as they enter their working years. Already facing $57,000 per person in federal debt, incurred not for their future but almost entirely for the current consumption of their elders, the last thing today’s young people need is another massive federal entitlement program.”
Sorry folks, but anyone who thinks the federal government is “bankrupt” should be treated like a ranting nut, because this is utter nonsense. If Daniels had access to the business pages, he could see that the United States government can now borrow long-term for an interest rate of less than 2.1 percent. Private sector lenders do not lend money to “bankrupt” borrowers at less than 2.1 percent interest.
If Daniels could take off his tin hat, he might notice that the $57,000 in debt per person corresponds to hundreds of thousands of dollars in assets in the form on infrastructure, technology, natural resources, and the education of its population. In Daniel’s calculation, our children would be better off if we stopped paying for their education altogether to get down the $57,000 debt that he thinks is burdening them.
If anyone wants a serious assessment of the debt burden on the federal government, at present interest payments, net of refunds from the Federal Reserve Board, are less than 0.7 percent of GDP. By contrast they were over 3.0 percent of GDP in the early 1990s.
Mitch Daniels did a big pitch for making student loans more complex and more profitable for the financial industry in a Washington Post column today. The basic story is that he is pushing “income-share agreements” where students contract with lenders to pay them a fixed share of their income for a number of years after they graduate college in exchange for a student loan.
My bet is that good students will be able to figure out ways to get much of their income after the end date on the ISAs, but that is the lender’s problem. The more obvious problem is that Daniels is making a pitch for special government assistance for his friends in the ISA business.
He wants Congress to pass a law that will make the ISA loans exempt from bankruptcy. This means that if a student has a serious illness that makes him or her unable to work or falls on really bad economic times, he can be harassed for the full term of his contract by ISA lenders. This can be 25 or 30 years after graduation (or possibly not graduating).
That may not sound like such a great way to help our young people deal with college costs, especially since there are much simpler alternatives, like the income-based loan repayment plans initiated by the Obama administration or other proposals to reduce the cost of college. Daniels rejects such plans by telling readers:
“It is fallacious to term such an approach “debt-free”; borrowed by an already bankrupt federal government, the money will be all debt, merely shifted to taxpayers, including these very same students as they enter their working years. Already facing $57,000 per person in federal debt, incurred not for their future but almost entirely for the current consumption of their elders, the last thing today’s young people need is another massive federal entitlement program.”
Sorry folks, but anyone who thinks the federal government is “bankrupt” should be treated like a ranting nut, because this is utter nonsense. If Daniels had access to the business pages, he could see that the United States government can now borrow long-term for an interest rate of less than 2.1 percent. Private sector lenders do not lend money to “bankrupt” borrowers at less than 2.1 percent interest.
If Daniels could take off his tin hat, he might notice that the $57,000 in debt per person corresponds to hundreds of thousands of dollars in assets in the form on infrastructure, technology, natural resources, and the education of its population. In Daniel’s calculation, our children would be better off if we stopped paying for their education altogether to get down the $57,000 debt that he thinks is burdening them.
If anyone wants a serious assessment of the debt burden on the federal government, at present interest payments, net of refunds from the Federal Reserve Board, are less than 0.7 percent of GDP. By contrast they were over 3.0 percent of GDP in the early 1990s.
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In a blogpost Paul Krugman picked up on a discussion by Rex Nutting of the Carter presidency. Nutting points to many of the positive accomplishments of the Carter years, including the fact that, by many measures, the economy actually performed quite well.
Krugman picks up on this theme and uses a chart of median family income to show that the typical family was actually better off in 1981 when Carter left the White House than they had been in 1977 when he took office. Krugman argues that the problem for Carter’s re-election prospects was that income was declining in the last years of his presidency, which is what people had in their minds when they went to vote.
While this point is undoubtedly accurate, there is another complication when we try to get a sense of people’s perceptions when they went to vote in November of 1980. The measure of inflation that is used to derive real median income in Krugman’s chart is the CPI-U-RS. This applies the methodology that we use today to construct what the CPI should have been in prior years. This gives a very different and much lower measure of inflation than the CPI that the Bureau of Labor Statistics was using at the time.
Here is how the two compare for 1978-1981.
CPI CPI-U-RS
1978 9.0% 7.8%
1979 13.3% 10.7%
1980 12.5% 10.7%
The cumulative difference for these three years is 5.6 percentage points. (Yes, this is just adding and I should be compounding, but let’s keep this simple.) This means that folks going to vote in 1980 would have been seeing in the data a 5.6 percent greater drop in real income by 1980 than what Krugman has in his chart. The question is whether this error in the data would have affected people’s perceptions of their well-being or whether we should only care about what we might think of now as the “true” rate of inflation.
I would argue for the importance of the errors in the data. First, none of us really have a clear idea of the true rate of inflation. It’s based on a basket of goods and services that none of us literally buy. There is a big weight for large purchases, like cars, that we may buy at five year intervals, or even longer. Also, the prices are quality adjusted. Is the typical person’s assessment of the rate of the quality improvement in a cell phone or computer the same as the BLS’s assessment? It’s very likely that if she pays more for a car or computer than for her last purchase, she sees that as a price increase, even if BLS has determined that the quality adjusted price has fallen.
On the other side, back in the late 1970s many contracts were legally tied to the CPI. This meant that workers had reason to know the inflation rate shown by the CPI since it would determine their pay increase that year. This was often true of rents as well. As a result, if the BLS said the rate of inflation was 13.3 percent in 1979, it is likely that many people thought the inflation rate was 13.3 percent, even though our methodology now tells us that the rate of inflation was actually just 10.7 percent.
There is more to this story of mis-perceived inflation—could mis-measured inflation lead to actual inflation? I’d argue yes, but we’ll leave that one for another day. For today, I’ll just say that it was not only Paul Volcker’s Fed that doomed Jimmy Carter’s re-election prospects, but also the mistakes made by the folks at BLS.
In a blogpost Paul Krugman picked up on a discussion by Rex Nutting of the Carter presidency. Nutting points to many of the positive accomplishments of the Carter years, including the fact that, by many measures, the economy actually performed quite well.
Krugman picks up on this theme and uses a chart of median family income to show that the typical family was actually better off in 1981 when Carter left the White House than they had been in 1977 when he took office. Krugman argues that the problem for Carter’s re-election prospects was that income was declining in the last years of his presidency, which is what people had in their minds when they went to vote.
While this point is undoubtedly accurate, there is another complication when we try to get a sense of people’s perceptions when they went to vote in November of 1980. The measure of inflation that is used to derive real median income in Krugman’s chart is the CPI-U-RS. This applies the methodology that we use today to construct what the CPI should have been in prior years. This gives a very different and much lower measure of inflation than the CPI that the Bureau of Labor Statistics was using at the time.
Here is how the two compare for 1978-1981.
CPI CPI-U-RS
1978 9.0% 7.8%
1979 13.3% 10.7%
1980 12.5% 10.7%
The cumulative difference for these three years is 5.6 percentage points. (Yes, this is just adding and I should be compounding, but let’s keep this simple.) This means that folks going to vote in 1980 would have been seeing in the data a 5.6 percent greater drop in real income by 1980 than what Krugman has in his chart. The question is whether this error in the data would have affected people’s perceptions of their well-being or whether we should only care about what we might think of now as the “true” rate of inflation.
I would argue for the importance of the errors in the data. First, none of us really have a clear idea of the true rate of inflation. It’s based on a basket of goods and services that none of us literally buy. There is a big weight for large purchases, like cars, that we may buy at five year intervals, or even longer. Also, the prices are quality adjusted. Is the typical person’s assessment of the rate of the quality improvement in a cell phone or computer the same as the BLS’s assessment? It’s very likely that if she pays more for a car or computer than for her last purchase, she sees that as a price increase, even if BLS has determined that the quality adjusted price has fallen.
On the other side, back in the late 1970s many contracts were legally tied to the CPI. This meant that workers had reason to know the inflation rate shown by the CPI since it would determine their pay increase that year. This was often true of rents as well. As a result, if the BLS said the rate of inflation was 13.3 percent in 1979, it is likely that many people thought the inflation rate was 13.3 percent, even though our methodology now tells us that the rate of inflation was actually just 10.7 percent.
There is more to this story of mis-perceived inflation—could mis-measured inflation lead to actual inflation? I’d argue yes, but we’ll leave that one for another day. For today, I’ll just say that it was not only Paul Volcker’s Fed that doomed Jimmy Carter’s re-election prospects, but also the mistakes made by the folks at BLS.
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That’s what millions of people are asking after reading a NYT article contrasting the “bombastic” Donald Trump to Jeb Bush who is described as “the wonky son of a president.” Bush has repeatedly said that he can generate 4.0 percent GDP growth during a Bush presidency.
The baseline projection for the years 2017 though 2025 from the Congressional Budget Office is 2.1 percent. Raising this to 3.0 percent would be a remarkable accomplishment. There is no remotely plausible story that would raise growth to 4.0 percent. It would be sort of like predicting a baseball team going undefeated through 162 game season. It would be difficult to take seriously a team manager who confidently made such predictions. The same should apply to a presidential candidate boasting of 4.0 percent GDP growth.
That’s what millions of people are asking after reading a NYT article contrasting the “bombastic” Donald Trump to Jeb Bush who is described as “the wonky son of a president.” Bush has repeatedly said that he can generate 4.0 percent GDP growth during a Bush presidency.
The baseline projection for the years 2017 though 2025 from the Congressional Budget Office is 2.1 percent. Raising this to 3.0 percent would be a remarkable accomplishment. There is no remotely plausible story that would raise growth to 4.0 percent. It would be sort of like predicting a baseball team going undefeated through 162 game season. It would be difficult to take seriously a team manager who confidently made such predictions. The same should apply to a presidential candidate boasting of 4.0 percent GDP growth.
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It might have been worth a few sentences calling attention to the seeming irony in the industry’s objections to proposed regulations that would limit emissions of methane gas. The NYT article noted that a large share of greenhouse gas comes from such methane emissions. At the same time, the industry has promoted fracking as a way of developing a bridge fuel, that emits less greenhouse gas than the coal it replaces, until renewable energy becomes cheaper.
If the net effect of fracking is to reduce emissions, then regulations that ensure this outcome should not pose a problem for the industry. The regulations should only be a major issue for the industry if it turns out that methane gas emissions largely or completely offset any reductions in carbon dioxide emissions.
It might have been worth a few sentences calling attention to the seeming irony in the industry’s objections to proposed regulations that would limit emissions of methane gas. The NYT article noted that a large share of greenhouse gas comes from such methane emissions. At the same time, the industry has promoted fracking as a way of developing a bridge fuel, that emits less greenhouse gas than the coal it replaces, until renewable energy becomes cheaper.
If the net effect of fracking is to reduce emissions, then regulations that ensure this outcome should not pose a problem for the industry. The regulations should only be a major issue for the industry if it turns out that methane gas emissions largely or completely offset any reductions in carbon dioxide emissions.
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