Thomas Friedman Says That Our Economy Is Being Killed By Employers Who Can't Do Arithmetic

November 18, 2012

18 Noviembre 2012

The evidence presented in Thomas Friedman's column today would lead readers to believe that the economy's biggest problem is that companies are being run by executives who are so ignorant of economics that they don't know that the way to attract more workers is to raise wages. The column begins with the story of Traci Tapini, who with her sister is co-president of Wyoming Machine. For some reason Friedman assures us Tapini "is not your usual C.E.O." According to Friedman, back in 2009, when the economy was collapsing and unemployment was soaring Tapini had to struggle to find 10 welders that she needed to meet an order from the military. She could not find workers with the right skills, which now includes not only the ability to make a good weld, but also a knowledge of metallurgy. Eventually she found a welder who had passed the American Welding Society Certified Welding Inspector exam and was able to train the other welders. Friedman tells readers: "Welding 'is a $20-an-hour job with health care, paid vacations and full benefits,' said Tapani, but 'you have to have science and math. I can’t think of any job in my sheet metal fabrication company where math is not important. If you work in a manufacturing facility, you use math every day; you need to compute angles and understand what happens to a piece of metal when it’s bent to a certain angle.' Who knew? Welding is now a STEM job — that is, a job that requires knowledge of science, technology, engineering and math." The obvious problem in this story is that Tapini apparently doesn't understand that you have to pay more money to get highly skilled workers. If the minimum wage had risen in step with inflation and productivity since the late sixties, it would be almost $20 an hour today. Back in the late sixties, a typical minimum wage worker would have a high school degree or less. Now, according to Friedman, we have CEOs who think that they can get highly skilled workers at the some productivity adjusted wage as someone who would have had limited literacy and numeracy skills 45 years ago. If we applied the same standard to doctors, they would be averaging around $100,000 a year today (instead of around $250,000). If employers really do have such poor understanding of how markets work then it will certainly be a serious impediment to economic growth in the years ahead.

Washington Post Doesn't Try to Scare You

By Dean BakerDean Baker

November 17, 2012

17 Noviembre 2012

After warning readers of the dire consequences of waiting until after January 1 to reach a deal on taxes and spending, the Post told readers that the markets don’t seem to share its concerns. This was a good honest assessment of what to date seems to be largely a non-response to the dire warnings emanating from Washington policy circles about THE FISCAL CLIFF!!!!!!!!

The Washington Post Is Trying to Scare You, Again

By Dean BakerDean Baker

November 15, 2012

15 Noviembre 2012

I'm not kidding, that's the headline of a blog post: "this graph should scare you." The Post reports on a new study from the Congressional Budget Office (CBO) which shows that GDP growth in this recovery has been considerably weaker than the average of prior recoveries. It's not entirely clear why the graph from CBO is supposed to be scary. After all, don't most people already know the economy stinks? And the reason is pretty simple, we don't have any source of demand to replace the $1 trillion or so of annual construction and consumption demand that was generated by the housing bubble. So CBO's graph doesn't seem to be giving us any new information. Perhaps we are supposed to be scared by CBO's assessment that two-thirds of the reason for slower growth is slower potential GDP growth, with only one-third is due to slower demand growth. This could be seen as somewhat scar. After all, if the economy really has much less growth potential that would be bad news, but on closer inspection there is not much "there" there. Half of CBO's estimated slowing of potential GDP growth is due to slower labor force growth. This is the story of the retirement of the baby boom cohorts. As a baby boomer who one day expects to retire, this never struck me as especially scary and it certainly is not news. Everyone other than former Senator Alan Simpson (who seems to have first discovered the baby boom cohort when he sat on President Obama's deficit commission) knew that we would have a big wave of baby boomer retirements about 50 years ago. We have two stories here. One is slower population growth. This pays us all sorts of dividends in reduced crowding and less pollution which are mostly not picked up in GDP measures. While some folks around this town (Washington) go nuts over slower population growth or, even worse, declining populations, I consider this outcome as 100 percent positive. (It is not good if people who want children feel that they are unable to afford them.) The other story is a rising ratio of dependents (retired and young) to workers. This is somewhat of a drag on living standards, but hardly a disaster. The graph below shows the projected negative impact on after-tax wages of the increase in the ratio of retirees to workers compared with the positive impact of various rates of productivity growth. Source: Social Security Trustees Report and author's calculations. Are you scared yet?

It's So Cute When People Who Couldn't See an $8 Trillion Housing Bubble Tell Us How Markets Will React to the Ending of the Bush Tax Cuts

By Dean BakerDean Baker

November 14, 2012

14 Noviembre 2012

The Washington Post has been as aggressive as any Republican in Congress in hyping the dangers of letting the Bush tax cuts expire. It has run numerous front page pieces telling readers of the dire consequences of letting January 1 pass without a deal (e.g. here and here). Today Wonkblog warned of us the real bad news of going off the fiscal cliff!!!!!!! Just in case you didn't understand the Post's official line on this, the headline of the piece is "the economy (probably) can't survive a short dive into austerity crisis." It starts with some clearly mistaken economics. It calculates the hit to the economy of higher tax with-holdings for the month of January. "In a narrow sense, a short voyage off the cliff shouldn’t crush the economy too badly. The CBO estimates that the full brunt of the policies add up to about $56 billion a month, which is a lot of money — about 4 percent of GDP — but should, in theory at least, do only modest damage to the economy if it lasted only a few weeks. One month of austerity along those lines would subtract only about a third of a percentage point from growth for the full year, before accounting for multiplier effects. For comparison, the U.S. economy grew at a 1.8 percent rate over the last year; if a single month of fiscal cliff-style austerity had been in place, that number would have been more like 1.4 percent." The problem with this arithmetic is that consumption is unlikely to respond in any measurable way to a one-month tax hike. There is a big debate among economists as to how much consumption responds to temporary tax cuts, like the Make Work Pay tax cut that was part of the initial stimulus package. Many economists, especially those who seem to be most worried about the "fiscal cliff" right now, argue that consumption responds little or not at all to tax cuts that are scheduled to be in effect for a year or two. One doesn't have to agree with this strong position to accept the view that a one month increase in taxes will have a minimal impact on people's consumption patterns. This is especially likely if the tax increase is likely to be reversed the next month, which would almost certainly be the case, as the column acknowledges in the next sentence. So, this arithmetic exercise gets us essential zero hit from jumping over the fiscal cliff.

USA Today Runs Huge Front Page Story Pushing Republican Line on Fiscal Showdown

By Dean BakerDean Baker

November 14, 2012

14 Noviembre 2012

The paper has a huge front page story showing the hit to the economy from each of the components of the showdown (e.g. the specific tax cuts that are ending and the various spending cuts). The problem is that what the article shows as the hit to the economy is the hit if nothing is done all year, it has zero, nothing, nada, to do with the impact of letting the December 31st deadline pass, with the tax increases and spending cuts reversed early in 2013. It is unlikely that many USA Today readers will recognize this fact and therefore will be badly misled by this front page article. (Given this fact, it is difficult to see why USA Today would devote so much space to this graph.)

The Republicans are working hard to try to build up fears around this deadline because they know that President Obama will be in a much better negotiating position after the end of the year. The USA Today piece fits with this agenda.

The paper has a huge front page story showing the hit to the economy from each of the components of the showdown (e.g. the specific tax cuts that are ending and the various spending cuts). The problem is that what the article shows as the hit to the economy is the hit if nothing is done all year, it has zero, nothing, nada, to do with the impact of letting the December 31st deadline pass, with the tax increases and spending cuts reversed early in 2013. It is unlikely that many USA Today readers will recognize this fact and therefore will be badly misled by this front page article. (Given this fact, it is difficult to see why USA Today would devote so much space to this graph.)

The Republicans are working hard to try to build up fears around this deadline because they know that President Obama will be in a much better negotiating position after the end of the year. The USA Today piece fits with this agenda.

David Brooks Is Worried About Non-Existent Economic Crises

By Dean BakerDean Baker

November 13, 2012

13 Noviembre 2012

It's so cute to see all the serious people who are so worried about economic crises that do not exist. They are constantly telling us how the "job creators" (a.k.a. rich people) who run businesses are just so nervous and uncertain they don't know what to do. The current concern is that taxes could rise at the end of the year and government spending will fall. Of course this would be bad news, but would it be a crisis? As many people have pointed out, this is called "deficit reduction," which is exactly what most of the people now complaining about an imminent crisis have been advocating. The tax increases and spending cuts would weaken the economy and, if left in place over the course of the year, would sharply slow growth and likely push the economy into a recession. But none of this happens in January. In fact, almost nothing happens in January except the Bush tax cuts expire, substantially improving President Obama's bargaining position. This is bad news for Republicans, but so what? Hence we have David Brooks telling us this morning: "The first thing to say about this strategy [letting the tax cuts expire] is that it is irresponsible. The recovery is fragile. Europe may crater. China is ill. Business is pulling back at the mere anticipation of a fiscal cliff. It’s reckless to think you can manufacture an economic crisis for political leverage and then control the cascading results." Is there any evidence for this assertion whatsoever? "Europe may crater." What on earth does Brooks mean by this? People will not want to hold euros because the U.S. economy might be slowing slightly (we're talking January, not the whole year)?

Post in Hyper Drive on Effort to Cut Social Security and Medicare

By Dean BakerDean Baker

November 12, 2012

12 Noviembre 2012

The Washington Post is throwing all journalistic norms aside in its drive to cut Social Security and Medicare. It continues to hype the budget standoff as an ominous "fiscal cliff" and tells readers on the front page of its web site that it could provide a "magic moment" in which Social Security and Medicare can be cut. The piece begins by telling readers: "Two years ago this month, the leaders of a presidential commission rolled out a startling plan to dig the nation out of debt. After decades of stagnating incomes, they said, Washington must tell people to work longer, pay higher taxes and expect less in retirement." Okay I tricked you, this is the Washington Post which doesn't acknowledge economic realities like stagnating income. The piece actually began: "Two years ago this month, the leaders of a presidential commission rolled out a startling plan to dig the nation out of debt. After decades of profligacy, they said, Washington must tell people to work longer, pay higher taxes and expect less in retirement (emphasis added)." This departure from reality gives you the gist of the story. The piece continues: "Lawmakers recoiled from the blunt prescriptions of Democrat Erskine Bowles and Republican Alan K. Simpson. But their plan has since been heralded by both parties as a model of clear-eyed sacrifice, and policymakers say the moment has come to live up to its promise." Well, yes people have praised their plan. They have also ridiculed it. For example it proposes immediate cuts in Social Security benefits that would be a larger share of the income of the typical beneficiary than President Obama's proposed tax increases on the top 2 percent would be for most of the affected taxpayers. It also proposes increasing the age for Medicare eligibility, even though this would add tens of billions to the country's health care costs over the next decade. And, it proposed a minimum Social Security benefit for low wage earners that few low wage earners would actually qualify for due to the number of working years required to qualify. There were many other carefully detailed criticisms from people who did not find the plan "startling" nor saw the need to "dig the nation" out of a debt that was almost entirely due to the economic plunge caused by the collapse of the housing bubble. As all budget wonks know the deficits were just over 1.0 percent of GDP prior to the economic collapse and were projected to stay low for the near future, until the collapse of the housing bubble sank the economy. Source: Congressional Budget Office.

It's Monday and Robert Samuelson Doesn't Like Social Security and Medicare

By Dean BakerDean Baker

November 12, 2012

12 Noviembre 2012

In case any Washington Post readers were unsure, Robert Samuelson used his column today to tell readers that he doesn't like Social Security and Medicare. The piece begins by telling readers: "If you doubt there’s an American welfare state, you should read the new study by demographer Nicholas Eberstadt, whose blizzard of numbers demonstrates otherwise. A welfare state transfers income from some people to other people to improve the recipients’ well-being. In 1935, these transfers were less than 3 percent of the economy; now they’re almost 20 percent." Samuelson goes on to tell us how awful this is because these transfers: 1) take money from other government programs; 2) undermine work incentives and thereby reduce growth; and 3) encourage gaming. Let's take each of these one by one. If we start with the biggest government transfer program, Social Security, it would be interesting to know how it takes money from other programs. It is financed by a designated tax. Maybe he thinks that people would be just as happy to pay their Social Security taxes to support the Pentagon, but that is not what polls show. In the case of Social Security, and likely most of the other transfer programs despised by Samuelson, the tax revenue is there because the programs are there. Most taxpayers don't like the things that Samuelson apparently wants to spend money on as much as he does. Of course if it is possible to lie to people and use taxes designated for Social Security for other purposes, then there can be more money for Samuelson's agenda. But this is a discussion of how to deceive the public, not a debate over social programs. Samuelson also claims that there is a tendency for these programs to expand over time. In fact over the last three decade Social Security has gotten considerably less generous. The age for getting full benefits has already been raised from 65 to 66 and in another decade will be 67. Also, changes to the way the consumer price index is constructed have reduced the annual cost of living adjustment by approximately 0.5 percentage point. In the case of Medicare, benefits were extended to cover prescription drugs, but this only became an issue because government granted patent monopolies sent the price of drugs through the roof. Drugs were not included in the original program in 1966 because their cost was trivial, but patent monopolies for drug companies now allow them to sell drugs at prices that are close to $250 billion a year above the free market price. Serious people might worry more about all the waste associated with these patent monopolies than the fact that the government is helping seniors pick up the tab for their drugs. As far as the second point, anything that makes people wealthier reduces work incentives. The fact that so many people on Wall Street are able to play financial games and make fortunes in their 20s and 30s undermines their work incentive by allowing them to retire early. Why should we be concerned if people opt for a modest Social Security benefit rather than working? After all, they did pay for it.

Lying to Push Their Agenda on the Budget: There Was No Bowles-Simpson Commission Report

By Dean BakerDean Baker

November 11, 2012

11 Noviembre 2012

What is wrong with these people who keep talking about a Bowles-Simpson Commission report? This one is not a debatable point. There was no Bowles-Simpson Commission report. That’s a fact, just like the fact that Governor Romney lost the election.

Look it up. The by-laws of the commission say:

“The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission.”

There was no vote on anything by December 1, 2010 and there was no report that had the approval of 14 of the 18 members of the commission. Therefore there was no commission report. The correct way to refer to the document in question is the report of the co-chairs.

Today’s guilty parties are David Leonhardt at the NYT and Steve Pearlstein at the Post. Come on folks, a lot of Republicans really wanted Romney to get elected, but that doesn’t make him president. And, no matter how much you guys like the Bowles-Simpson report, there was no report from the commission. Let’s get back to reality.

What is wrong with these people who keep talking about a Bowles-Simpson Commission report? This one is not a debatable point. There was no Bowles-Simpson Commission report. That’s a fact, just like the fact that Governor Romney lost the election.

Look it up. The by-laws of the commission say:

“The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission.”

There was no vote on anything by December 1, 2010 and there was no report that had the approval of 14 of the 18 members of the commission. Therefore there was no commission report. The correct way to refer to the document in question is the report of the co-chairs.

Today’s guilty parties are David Leonhardt at the NYT and Steve Pearlstein at the Post. Come on folks, a lot of Republicans really wanted Romney to get elected, but that doesn’t make him president. And, no matter how much you guys like the Bowles-Simpson report, there was no report from the commission. Let’s get back to reality.