Most coverage of the April jobs report celebrated the 165,000 new jobs reported for the month which was somewhat better than consensus predictions. Almost no one noticed the decline in the length of the average workweek. As a result of the fall in average hours, the April reduction in the index for total hours worked tied for the largest drop in the recovery.

Catherine Rampell does pick up on this point in a NYT Economix blog post today. Noting the decline, she raises the possibility that it is related to the Affordable Care Act, which requires firms that employ more than 50 full-time workers to either provide health insurance or to pay a penalty. Since the cutoff for a full-time worker in this provision is 30 hours per week, there would be an incentive to keep hours under this cutoff.

While Rampell expresses skepticism of this explanation, it probably deserves even less credence than she gives it. It is important to remember that this issue would only be relevant for firms that employ more than 50 workers and don't currently provide health insurance for their workers. The overwhelming majority of firms that employ more than 50 workers already provide health insurance. Furthermore, most workers are employed at firms that employ fewer than 50 workers and are not close to this cutoff.

The share of the workforce that could plausibly be affected by this cutoff would almost certainly be well under 10 percent. This means that we would have to see very large movements in hours for this group of workers in order to move the overall average. Also, this issue just became relevant in 2013 which will provide the basis for the firms' obligations when this provision of the ACA comes into effect next year. If the ACA is a big factor in the general trend in hours then we should be seeing a very different pattern in 2013 than we did in 2012. We don't.

Dean Baker
Truthout, May 7, 2013

Dean Baker
The Huffington Post, May 6, 2013

Dean Baker
The Guardian Unlimited, May 7, 2013

Larry Summers weighed in on the famous Reinhart-Rogoff Excel spreadsheet error in a Washington Post column this morning. His first big lesson from the debate is:

"Anyone close to the process of economic research will recognize that data errors like the ones they made are distressingly common."

Summers immediately demonstrates the truth of this assertion as he tries to make a second point about inferring the future based on statistical regularities from the past.

"Trillions of dollars have been lost and millions of people have become unemployed because the lesson learned from 60 years of experience between 1945 and 2005 was that 'American house prices in aggregate always go up.' This was no data problem or misanalysis. It was a data regularity until it wasn’t. The extrapolation from past experience to future outlook is always deeply problematic and needs to be done with great care."

The problem with Summers story is that American house prices in aggregate did not always go up. In fact, for the century from 1896 to 1996 they just kept pace with the overall rate of inflation. Here's the story using government data from 1953. (Robert Shiller constructed a series going back to 1896 from a variety of data sources.)

Source: Bureau of Labor Statistics, Federal Housing Finance Authority, and Author's calculations.

The problem with economics is not that it's too complicated; the problem is that it's too damn simple. This problem is amply demonstrated by all the heroic efforts made by economists to explain the weakness of the current recovery.

We've had economists tell us that the problem is that we are now a service sector economy rather than a manufacturing economy. The story is that inventory fluctuations explain much of the cycle. Since we don't inventory services, we will have a slower bounceback in terms of production and employment. (There is a simple problem, since we don't inventory services, the downturn should also be less severe in a service dominated economy. How does this story fit with the worst downturn since the Great Depression?)

We've also been told that the problem is underwater homeowners who can't spend like the good old days because they are underwater in their mortgages. The problem with this one is that we only have around 10 million underwater homeowners, the vast majority of whom have relatively modest incomes. The emphasis is on "only" because, while 10 million is a lot of people to be underwater, it is not a lot of people to move the economy.

The median income for homeowners is $70,000. (Median is probably appropriate here rather than average, since it is unlikely that many wealthy people are underwater.) Suppose that being above water would increase consumption by each of these homeowners by $5,000 a year. This is a huge jump in consumption for people with income of $70k. (Do we think these homeowners are saving an average of $5,000 a year now?) This would lead to an increase in annual consumption of $50 billion a year or less than 0.3 percent of GDP. This would be a nice boost to output, but it would not qualitatively change the nature of the recovery.

Showing the sort of creativity that we have come to expect from economists, Tyler Cowen used his NYT column today to call for giving more money to the pharmaceutical industry as a way to deal with the risks of pandemics. Cowen moves from the true statement that research and development into prescription drugs and public health more generally has a substantial public good character, to the idea that we need to give pharmaceutical companies more money in order to get them to do the research.

In discussing the issue of protecting the public against pandemics Cowen tells readers:

"If anything, the American government — or, better yet, a consortium of governments — should pay more for pandemic remedies than what market-based auctions [of patent rights] would yield. That’s because, if a major pandemic does arise, other countries may not respect intellectual property rights as they scramble to copy a drug or vaccine for domestic distribution. To encourage innovations, policy makers need to bolster the expectation of rewards."

For reasons that Cowen never bothers to mention, he excludes the possibility that patents may not be the best way to finance research. The patent system does provide an incentive to innovate but it also provides an enormous incentive to misrepresent research results and deceive the public and regulators about the quality and safety of drugs. We see this happening all the time, exactly as economic theory predicts. (Think of Vioxx.) The result is considerable damage to public health and an enormous economic waste as money is paid to pharmaceutical industry for drugs that are ineffective or possibly even harmful.

Patents also give an incentive for duplicative research. If a company has a major breakthrough drug that produces high profits then its competitors have a substantial incentive to try to duplicate this drug in a way that circumvents the patent. In a regime where patents provide a monopoly, the availability of potential substitutes will have the benefit of bringing the price down, however if the drug were already selling at its free market price, without a patent monopoly, no one would look to waste resources developing a second drug that essentially does the same thing as the first drug.

Patent financed research also slows progress by encouraging secrecy. Science advances best when results are shared as widely as possible. Companies that are relying on patent financing will only make the bare minimum of their research available to the larger scientific community, providing the information needed to secure patents. They have enormous incentive to withhold any additional information that could provide benefits to competitors.

Patent financing also distorts research toward finding patentable treatments for diseases. If a disease can be best controlled through diet, exercise, or controlling pollutants, patents will provide zero incentive to carry out research in the proper direction. Instead resources will be wasted on trying to develop a patentable drug.

The April Jobs report was better than most economists (including me) had expected. Better news is always better than worse news, but it was one report amidst a lot of other less than stellar news. Furthermore, it just was not that good.

Nonetheless the front page Post story hyped the good news in the report and told readers [in print edition only]:

"The jobs report could also have significant implications for the Federal Reserve's $85-billion-a-month stimulus program. .. The program is tied to the outlook for the labor market, and some officials have begun suggesting that job growth could accelerate enough for the Fed to begin winding down the purchases this year."

The Post, like most major media outlets have been shooting from excessive optimism to excessive pessimism about the economy consistently failing to keep their eyes on an underlying trend
of weak growth. (Neil Irwin's blogpost yesterday gets the story almost exactly right.) Just last fall the Post and other news outlets were filled with pieces about how uncertainty over the "fiscal cliff" was already slowing growth and deterring investment. Somehow the people doing the investment did not get the message, as investment rose at a 13.2 percent annual rate in the quarter.

In terms of current data, the Fed probably noticed that new orders for non-defense capital goods (excluding aircraft) were still almost 4.0 percent below their January level in March, even after a 0.9 percent increase from their February level. The March number is less than 0.2 percent above the year ago level. The Fed probably also noticed the construction data released by the Commerce Department last week which showed that total construction spending fell 1.7 percent in March driven by a 4.1 percent falloff in spending by the public sector.

On March 19, 2013 Guatemala became the first nation to try a former head of state, Efraín Ríos Montt, for genocide and crimes against humanity in its own courts, an extraordinary achievement that led award-winning investigative journalist Allan Nairn to state that, “Guatemala has reached a higher level of civilization than the United States,” where such a trial would be unthinkable.   Ríos Montt’s took power in a March 1982 coup and his brutal military campaign that human rights defenders have characterized as genocidal received support from President Ronald Regan, though his administration denied it at the time.

Nairn had flown to Guatemala City as a proposed witness but once in Guatemala, he was asked not to testify after another witness, a former soldier, unexpectedly named current President Otto Pérez Molina as responsible for crimes against humanity.  In September 1982, Nairn had interviewed then Major Pérez Molina, a commander in the area where the crimes Ríos Montt is being tried for had occurred.  It appears that his testimony would have implicated the current president in crimes, and the victims’ lawyers were afraid that pushing the political establishment any further would endanger the case.

On April 18, the case was unexpectedly annulled by a judge not overseeing the trial, pre-trial judge Carol Patricia Flores.  She made the illegal ruling two days after former Guatemalan Vice President Eduardo Stein signed a communique published in Guatemalan newspapers, along with 11 other former members of the administration of Álvaro Arzú, calling the charges of genocide against Ríos Montt a “threat to the nation” and suggesting that if a sentence for genocide were handed down it could mean a return to political violence.

In a post for the Roosevelt Institute's Econobytes, Dean Baker, co-director of the Center for Economic and Policy Research, on the state of public pensions:

Last month, Moody’s, one of the big three bond-rating agencies announced that it was changing the way that it will treat public pension liabilities. While there are several notable features to announced changes, two are especially important.

• First, instead of accepting projections of pension fund returns based on the assets they hold, Moody’s will evaluate their liabilities using a risk-free discount rate.
• The second major change is that it will evaluate pension assets at their current market value rather than using a formula to smooth volatile asset prices over a period of 3-5 years as is the current practice.
• Together Moody’s changes in accounting will have the effect of making pension funds seem in considerably worse financial condition.
• They could also lead pension fund managers to follow investment strategies that will provide far lower rates of return on assets. This would mean higher costs for taxpayers with little obvious benefit in reduced risk. 

 The practice of using a risk-free discount rate to assess liabilities is a departure from the current practice of effectively discounting liabilities using projected rates of returns on assets.

• Most pension funds project rates of return on assets of between 7.0-8.0 percent. By contrast, the rate that Moody’s would apply at present would be around 4.5 percent.
• This makes a huge difference in assessing liabilities. If a pension fund was obligated to make $1 billion in payments each year for the next thirty years its liabilities would be calculated at $16.5 billion using a 4.5 percent discount rate.
• By comparison, they would be just $11.9 billion using a 7.5 percent discount rate. This is a difference of almost 40 percent.
• Put another way, a pension that is fully funded using the 7.5 percent return assumption would be almost 30 percent underfunded using Moody’s new approach.

While the implication for an assessment of funding levels is clear, there are grounds for debating which method is appropriate.

• Supporters of the Moody’s approach argue that it is appropriate to discount for the risk associated with pension returns, and especially stock returns.
• However this argument is problematic since it is not clear that there is much risk for pension funds on projected returns when they are properly calculated.
• The reason is that a pension fund, unlike individuals, does not need to be concerned about the stock market’s short-term fluctuations.
• State and local governments do not have retirement dates where they have to start drawing on stock holdings. They need only concern themselves with long period averages, without worrying about short-term fluctuations.

May 3, 2013