Beat the Press

Open Borders Versus Die at the Border: Can't Experts See the Difference?

I just heard economics commentator Chris Farrell on Marketplace talking about the United States open border immigration policy, under which ambitious hardworking immigrants can freely enter the country. Excuse me, but what planet is this guy on? Open borders mean that a Mexican doctor, an Indian lawyer, a Brazilian economics commentator can come across the border in any form of transportation they like, and work wherever they like, at whatever pay they are willing to accept. The United States does not have this policy or anything like it. It has a policy that sharply limits legal opportunities for working in the country. The policy is that if you are willing to risk death in a dangerous border crossing and risk facing deportation at any time, then you can work in some sectors of the economy illegally. Doctors, lawyers, and economic commentators in the developing world are not willing to take these risks. Furthermore, the businesses that hire such people are not willing to risk the...

Sweatshops in Jordan

Steven Greenhouse had an excellent piece in today's New York Times about sweatshops in Jordan that manufacture apparel for export to the United States. This industry has been developed largely as a result of a trade agreement that Jordan signed with the United States in the late nineties. The article describes slave-like conditions, as foreign workers routinely have their passports confiscated by factory owners so that they cannot freely leave. According to the article, workers can be forced to work up to 48 hours straight, are routinely ripped off for their pay, and are beaten if they complain. Two aspects of the article raise especially interesting questions. First, the article indicates that the apparel jobs have gone almost exclusively to foreign (largely Bangladeshi) workers. It is unlikely that the trade agreement was sold in Jordan based on the jobs that it would create for guest workers. The benefits to Jordan's economy from this trade would be very limited. Second, the Jordan...

Cash Out Refinancing and the Housing Crash

At the risk of damaging my standing as one of the leading proponents of the housing bubble argument, I would take issue with the assessment of a Washington Post article . The article reported that the percentage of people refinancing homes with mortgages that are larger than the original mortgage (in other words, pulling equity out of their home) hit a 16 year high in the first quarter. The article rightly notes that people cannot use their homes as banks indefinitely, and that this process depends on continually rising house prices. This is all fair enough, but there is a key issue that is missing in this analysis. The main reasons to refinance are to save money on interest by taking advantage of lower interest rates and to pull equity out of your home by taking out a larger mortgage. Well, mortgage interest rates are back up to levels not seen since 2002. This means that few homeowners can save money by refinancing at a lower interest rate. Those looking to do so almost certainly...

Stock Market Tips

I was struck by the reporting on the increases that the Commerce Department reported for March consumer spending and the personal consumption expenditure deflator (PCE). Both figures were presented as being higher than expected. It seems that the financial markets were surprised by the news, since the yield on 10-year treasury bills rose by 6 basis points. I am surprised by the surprise because the spending and price data released on Monday was not new information. It was actually imbedded in the first quarter GDP data that was released on Friday. The Commerce Department needed to include March data for both consumption and inflation in order to compile GDP data for first quarter data. This means that anyone who cared could have pulled out the previously released data for January and February (which is subject to revision) to calculate the numbers that would appear in the March release. I have occasionally done this myself when I had no better use of my time. Unless the first two...

Reporting on Social Security and Medicare: Better, but not Good

The reporting on the release of the annual Social Security and Medicare trustees reports was better this year than in the past, but still not very informative. Most reports did not include the context that would have made the information understandable to most readers/viewers. In the case of the Social Security report, there was less mention of the scary sounding multi-trillion dollar shortfall projections that are meaningless without being placed in any context. (The 75-year shortfall projected by the Congressional Budget Office [CBO] is equal to 0.4 percent of GDP over this period, approximately 40 percent of the size of the post September 11th boost to the defense budget.) Much of the reporting still portrayed the projected 2040 date of the trust fund's depletion (2052 according to CBO) as a looming crisis demanding prompt action, implying that Congress needs 34 year lead time to deal with a problem that was dealt with in 8 months back in 1983. Given the size and uncertainty...

What's the Problem With Less Crowding?

It would be reasonable to think that a densely populated island with exorbitant land and housing prices would be happy to alleviate its crowding problem. That's not the thinking at the Washington Post . The Post had an article this morning noting the surprising fact that the number of obstetricians in Japan is declining along with its dropping birth rate. The article notes that Japan's population is currently shrinking, and that if current trends continue, its population will fall from over 127 million to just 100 million by 2050. The Post then describes this drop in population as a "problem." Well, fewer people, rising capital labor to ratios (and therefore higher wages), less crowding, and less pollution is not a problem in any economics I know. Maybe the Post will explain its reasoning in some future article, but for now, this front page story simply doesn't make sense. --Dean Baker

NPR Misses the Story on Dividend Tax Cut

NPR had a report this morning on the debate over extending the lower tax rate on dividends. The report correctly pointed out that the vast majority of this tax cut will go to the richest 1 percent of the population. It also noted the ambiguity of the evidence showing any substantial link between lower dividend taxes and increased investment and growth. However, the report neglected to point out that the vast majority of stockholders do not benefit from the cut in the dividend tax rate. The reason is simple. Most stockholders hold most or all of their stock in retirement accounts. These accounts accumulate money tax free as long as the money is in the account. When a worker retires and pulls money out of the account, the money (all of the money) is taxed as ordinary income. This is regardless of whether the money in the account came from wages, dividends, interest or capital gains. (The tax is paid in advance with Roth IRAs, but holders of these accounts also get no benefits from the...

Money for Nothing

Eduardo Porter had a very good piece in the Times this morning on the huge run-up in the foreign exchange reserves of developing countries. The basic point is that these reserves are held in short-term deposits that typically pay little or no real return. In poor countries that have great need of capital, diverting money to foreign exchange reserves has a large opportunity cost. The fact, that developing countries feel that they need such large reserves is a testament to the failure of the international financial system. If the system were working well, they would have no more need of reserves at present (relative to their GDP) than they did twenty years ago. We did a short paper on this topic a few years back. It is good to see the issue finally drawing more attention. --Dean Baker

John Kenneth Galbraith, 1908-2006

The passing of John Kenneth Galbraith is a real loss. His works made major contributions to public debate over the entire post-World War II era, and continue to have an impact. The New York Times had a mostly fair commentary today on Galbraith's life and work. (Brad DeLong does a good job pointing out the ways in which it is not fair .) The Post apparently did not learn the news in time for the Sunday edition, or alternatively it had not prepared an obit in advance. Any assessment of Galbraith's life invariably includes the comment that his work had more influence outside of economics than within the profession. This is unfortunate for the economics profession. While we can benefit from mathematical modeling and new econometric techniques, I believe that Galbraithian insights will ultimately prove far more important in advancing our knowledge of the economy and society. --Dean Baker

New York Times Exposes CEO Pay Scam

Eric Dash at the New York Times had a very good piece this morning on a backdoor $500,000 bonus that Denny's gave to its CEO, Nelson Marchioli, by allowing him to buy stock at below the market price. Of course Denny's is free to pay Mr. Marchioli whatever it feels is appropriate, but by making the payment in the form of stock options priced at below market values, it was able to conceal this payment from all but the most vigilant analysts. As the article points out, Denny's is not the only company making such surreptitious payments to its top executives. There are two important points here. First, this sort of surreptitious pay deal demonstrates a continuing problem in corporate governance. Companies are not supposed to be run for the well-being of their CEOs. If the pay could not be disclosed openly, then it is not proper, end of story. It would be reasonable for the laws to mandate that all compensation packages for top executives have to be subject to shareholder approval at...

No Correction on Mexican Growth at the Washington Post

To those following the issue, the Washington P ost still has not corrected the error in its reporting on Mexico's post NAFTA growth rate (" Mexican Deportee's U.S. Sojourn Illuminates Roots of Current Crisis ," 4-17-06:A1). My April 18th post noted that the growth data reported in this article implied that Mexico had enjoyed an average GDP growth rate of 17.5 percent a year in the post-NAFTA era, which would be a world record. The IMF data show Mexico's growth rate at a weak 2.9 percent. While the Post has taken a strong pro-NAFTA position on its editorial page, I wrote and continue to believe that this error was an honest mistake. The failure to correct this error after it has been called to their attention is harder to explain. (I also noted a similar error on growth in the Post's Sunday Outlook section, but we can give opinion writers more leeway.) Since the Post will make an effort to correct misspelled names in wedding announcements, it is difficult to understand its refusal to...

Arctic Oil Nonsense

Proponents of drilling in the Arctic National Wildlife Refuge are happy to make whatever outlandish claims are convenient to advance their cause. A few years ago, they were pushing the line that drilling in the Refuge would generate 500,000-750,000 jobs, citing a study by WEFA, one of the country's leading economic forecasting firms. We did a short analysis showing the faults of this study. When WEFA refused to stand behind its study, this outlandish job claim quickly disappeared from the debate. But the nonsense continues. President Bush claimed today that the country would be producing another million barrels of oil a day if President Clinton had allowed drilling in the refuge. He presumably meant this claim to impress his audience, implying President Clinton's opposition to drilling in the refuge is a major factor behind today's high oil prices. A few simple facts indicate otherwise. First, there is a world market for oil. What matters in determining the price of oil is how much...

The Housing Bubble: Why Did the Media Miss It?

As the housing bubble starts to unwind people will be looking for villains in this economic disaster. There are many, with the list including Alan Greenspan, the bulk of the economics profession, and of course, the reporters covering the housing market. As was the case with the stock bubble, there was very little attention paid to the underlying fundamentals in the market. Anyone who bothered to look at the data could have quickly recognized that the run-up in home prices in the years after 1997 had no historical precedent . From the early 1950s until 1997 (the years for which we have good data), house prices largely followed the overall rate of inflation. In the years since 1997, house prices have increased by 50 percent after adjusting for inflation. If housing prices have tracked the overall price level for 50 years, and then suddenly take-off relative to other prices, this is a fundamental change in a key sector of the economy. Fundamental changes in the economy are not impossible...

More Fact Checking Problems at the Washington Post

Last Tuesday, I pointed out that a front page Washington Post article had overstated Mexico's growth in the post-NAFTA era by a factor of five ( Mexican Deportee's U.S. Sojourn Illuminates Roots of Current Crisis , 4-17-06:A1). It appears that the Post's problems with arithmetic are continuing. The front page of the Sunday Outlook section had an article that refers to the rise to power of Hugo Chavez in Venezuela and Evo Morales in Bolivia ( Old States, New Threats , 4-23-06;E1). The article comments that "social tensions have exploded as a result of the unleashing of market economies that create rapid but uneven growth." Growth in Venezuela and Bolivia may have been uneven, but it certainly was not rapid. According to data from the Penn World Tables and the World Bank, per capita GDP in Venezuela was more than 10 percent lower when Hugo Chavez took office in 1998 than it had been in 1980. In Bolivia, per capita GDP had fallen by almost 15 percent between 1980 and 2005 (see also "...

"Protectionist," a Four Letter Word?

In many economic policy debates, the worst possible adjective is "protectionist." All right thinking people know that protectionism is bad. According to the economic in-crowd, only ignorant and reactionary people support protectionism measures. (The Post gives a nice example of this thinking in a piece explaining how the IMF will act to prevent protectionism in an economic crisis: " IMF Calls for Cooperation Ahead of Imbalances Meeting .") The image of hoary protectionism lurking on the horizon can be very effective for powerful interests seeking to push their agendas, but it has nothing to do with real world economic policy. The United States has all sorts of protectionist barriers, the most important of which apply to professional services like physicians' services and lawyers' services. These barriers take the form of licensing requirements that are deliberately designed to make it more difficult for foreign professionals to practice in the United States. If the United States was...

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