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Robert Samuelson’s Psychological Problems

6:50 am in Uncategorized by Dean Baker

The ScreamRobert Samuelson is convinced that the U.S. economy is suffering from psychological problems. In a piece titled, “Why Job Creation Is So Hard” he tells readers:

We have gone from being an expansive, risk-taking society to a skittish, risk-averse one.

Point number one is the rise in the saving rate:

In the boom years, the personal saving rate (savings as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5 percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent.

Is this really a matter of psychology? People have lost $8 trillion in housing wealth as a result of the collapse of the bubble. Homeless people generally don’t spend much money, is this due to psychological issues? As Samuelson noted, in the pre-bubble years the saving rate averaged more than 8 percent. If anything, we should be surprised by how much people are spending.

Next we have investment. Samuelson tells us:

Businesses have also retreated. They resist approving the next loan, job hire or investment. Since 1959, business investment in factories, offices and equipment has averaged 11 percent of the economy (gross domestic product) and peaked at nearly 13 percent. It’s now a shade over 10 percent, reports economist Nigel Gault of IHS Global Insight.

Okay, let’s look at this one more closely. If we check the data, the Commerce Department tells us that business investment averaged 10.9 percent from 1959 to 2012 (Table 1.1.5). In 2012 it was 10.3 percent. That’s a drop of 0.6 percentage points in an economy with huge amounts of excess capacity. Furthermore, if we break it down to the equipment and software component and the structure component, we see that all of the decline was in the latter. Equipment and software investment averaged 7.3 percent over the longer period compared to 7.4 percent in 2012. While the decline in structure investment may be due to psychology, it is possible that the large amount of vacant office and retail space is also an important factor.

Samuelson has even more bad news for us.

The market is simply regaining levels of late 2007. A report from Credit Suisse argues that returns to stocks will average about 3.5 percent annually (after inflation) in the next 20 years, down sharply from 6 percent since 1950.

As much as I would hate to argue with people that couldn’t see an $8 trillion housing bubble (or a $10 trillion stock bubble), it is difficult to understand how returns will only be 3.5 percent when the current ratio of after-tax profits to corporate equity is more than 7.5 percent. (The Fed reports the market value of the shares of U.S. corporations $19,698 billion at the end of the third quarter of 2012 [Table l.213, line 23]. The Commerce Department reports after tax profits for domestic corporations in the third quarter of 2012 were $1,515.2 billion [Table 1.12, Line 15].)

It’s hard to imagine what corporate America will do with the extra money if its earning 7.5 percent for each dollar of market capitalization but the return to shareholders is just 3.5 percent. It’s possible that Credit Suisse envisions a sharp plunge in profits from their current highs (it would have to be very sharp to get to 3.5 percent), but this would go in the opposite direction of the concern expressed in Samuelson’s next sentences:

To compensate for lower returns, companies would need to contribute more to pensions. Wages would suffer. Consumption spending would weaken.

Oh well.

There is one more point about the psychology and job creation story worth noting. If psychology, rather than lack of demand, explained slow job growth then we would be seeing firms filling the demand for labor through alternative mechanisms. Specifically we would see an increase in the length of the average workweek and increased hiring of temps. In fact, we see neither. The length of the average workweek is still slightly below its pre-recession level as is temp employment.

In short, the story of the downturn remains depressingly simple. We have nothing to replace the huge amount of construction and consumption demand created by the $8 trillion housing bubble. Perhaps if the problem were more complicated policy types would have an easier time seeing it.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.

Fun With Robert Samuelson: The Good News Is Bad News

4:50 am in Uncategorized by Dean Baker

NewsIt’s always entertaining to read Robert Samuelson’s columns on Monday mornings. They are so deliciously orthogonal to reality. Today’s column, asking whether America is in decline, is another gem.

He starts with a set of “good news” items from a paper issued by Goldman Sachs:

For starters, the U.S. economy is still the world’s largest by a long shot. Gross domestic product (GDP) is almost $16 trillion, ‘nearly double the second largest (China), 2.5 times the third largest (Japan).’ Per capita GDP is about $50,000; although 10 other countries have higher figures, most of the countries are small — say, Luxembourg.

That sounds good, except that having double the GDP of China depends on looking at exchange rate measures of GDP. This figure is inflated by the over-valued dollar and under-valued yuan. Using the purchasing power parity measure of GDP, the gap is much smaller, with the IMF projecting it will go the other way by 2017. According to some estimates China’s GDP is already larger than ours, so it’s probably best to keep this celebration short.

It is true that the U.S. has a higher per capita income than Germany, France, and most other wealthy countries. But by far the main reason for this gap is that we work about 25 percent more on average than workers in Western Europe who all get 4-6 weeks a year vacation, paid parental leave, and paid sick days. This is far more an issue of a different trade-off between work and leisure than a question of people in the United States being richer.

Next we get the good news about our massive energy resources:

In turn, the oil and gas boom bolsters employment. A study by IHS , a consulting firm, estimates that it has already created 1.7 million direct and indirect jobs. By 2020, there should be 1.3 million more, reckons IHS.

Ignoring the issue of pollution from drilling out this windfall, it is important to put these jobs numbers in perspective. These are gross jobs, not net jobs. In other words, the vast majority of the 3 million jobs that IHS is promising us in oil and gas by 2020 are not additional jobs to those that would otherwise exist in the absence of these resources. These are jobs that displace jobs in education, medical research, health care, and other sectors. Samuelson may be excited that more people will be employed digging gas wells in 2020 and fewer educating the young, but the economic and social benefits of this reallocation of workers are not obvious.

Then we have the fact that we will be younger than other countries:

American workers will remain younger and more energetic than their rapidly aging rivals. By 2050, workers’ median age in China and Japan will be about 50, a decade higher than in America.

Yeah, you probably jumped ahead on this one. A main reason that we will be younger is that we have shorter life expectancies. The good news just keeps coming.

Then we have the U.S. as the prime destination for highly educated emigrants:

Moreover, the United States attracts motivated immigrants, including ‘highly educated talent.’ A Gallup survey of 151 countries found the United States was the top choice for those wanting to move, at 23 percent. At 7 percent, the United Kingdom was second.

Let’s see, the U.S. population is roughly five times as large as the U.K.’s population. That means if the poll reflects actual immigration patterns, then the U.K. will draw 50 percent more highly educated workers relative to the size of its population as the United States.

If Samuelson’s good news is not quite as good as he would like us to believe, the bad news is also not as bad:

Read the rest of this entry →

When it Comes to the Fed and Jobs, Robert Samuelson Is Worried About Inflation and Martians

2:30 am in Uncategorized by Dean Baker

Last week the Fed announced that it would continue to maintain its zero interest rate policy until the unemployment rate fell below 6.5 percent. While the Fed has always targeted low unemployment in addition to low inflation as part of its legal mandate, this was the first time it had explicitly tied its monetary policy to an unemployment target instead of just an inflation target.

This decision has Robert Samuelson very worried. Samuelson warned that the last time the Fed tried to target both inflation and unemployment was in the 1970s and complains that this ended disastrously. Both parts of Samuelson’s claim are wrong.

In fact, in the decades since the 1970s the Fed has maintained a commitment to lowering unemployment in addition to inflation, even if its priority was always on the latter. It would be very difficult to explain the decision to lower interest rates in the 1995 and again in the recession in 2001 except by a concern over excessive unemployment. This concern is certainly reflected in the transcripts of the meetings from these years. The only difference between last week’s announcement and the Fed’s past actions was the decision to explicitly set an unemployment target for its monetary policy. In the past, analysts would have found it necessary to review the minutes and public statements by members of the Fed’s Open Market Committee to infer a target.

The notion that inflation just exploded out of the blue in the 1970s is also inaccurate, as an examination of price movements of that decade shows.


Source: Economic Report of the President (Table 63).

The chart shows the inflation rate over the last 40 years. The blue line shows the official CPI that is most widely used in public discussions and in most legal contracts. The red line shows the core CPI, which excludes energy and food prices. The green line shows an error adjusted core CPI. In the years prior to 1982, the official CPI used a homeownership component. This measure showed a much higher rate of inflation when mortgage interest rates spiked in the mid-70s and again in the late 70s. In 1982 the index was changed to include an owners’ equivalent rent component that imputes a rent for owner occupied homes. The green line applies this methodology to a core index going back to 1969, in effect showing what a core CPI using the current methodology would have looked like in that period.

As can be seen, there are two notable spikes in the 1970s. In the first, in 1975 the core error adjusted CPI hit 8.0 percent. In the second, the error adjusted core hit 10.0 percent in 1980. In both instances the run up in core prices was preceded by sharp jumps in food and energy prices. The major factor in both cases were big rises in oil prices, the first driven by an oil embargo led by Arab countries and the second by the cutoff of oil flows associated with the Iranian revolution. At the time the United States was far more dependent on oil than it is today, which means that a comparable spike in oil prices would have considerably less impact on prices than it would today.

The error in the CPI in the 1970s almost certainly contributed to the rise in the inflation rate during this period also. At the time, a large segment of the workforce had wage contracts that were explicitly tied to the official CPI. Many other contracts were also tied to the CPI. This means that if the CPI erroneously showed a higher rate of inflation, this error would be directly passed on in higher wages and prices, leading to higher actual inflation. (Alan Blinder and Janet Yellen made the same sort of argument about how much smaller changes in measurement had the effect of lowering actual inflation in the 1990s.) In short, there were two spikes in inflation in the 1970s, both around 4.0 percentage points using current methods, and both driven by extraordinary circumstances which are unlikely to be repeated.

However much Samuelson might be misguided in thinking that another spike in inflation might come up out of the blue, he is even more misguided in his assessment of the consequences. The bad story from the 1970s inflation was the recession of 1981-1982 that was used to bring down inflation. While it’s not clear that such a severe recession was necessary to bring inflation under control (inflation fell sharply everywhere in the world in these years, not just the United States), this recession was much less severe by most measures than the current downturn. While unemployment peaked at almost 11.0 percent in December of 1982, it was down to 8.3 percent by the end of the 1983 and 7.3 percent by the end of 1984. (This was in a context where full employment was thought to be over 6.0 percent unemployment.)

If we infer that in the unlikely event that we get another spurt of inflation that we will have to undergo a downturn similar to the 1981-82 recession to bring it under control, then we would still be in a better world than we are in today. In effect, Samuelson is telling a person suffering from an otherwise terminal case of cancer that the drug that would save him could lead to nausea. While Samuelson thinks this makes the choice of treatments a close call, most other people probably would not see it that way.

Dean Baker is co-director of the Center for Economy and Policy Research. He also writes a regular blog, Beat the Press, where this post originally appeared.