A New York Times article today commented on the extraordinary jump in wages over the last two quarters. Before anyone breaks out the champagne, take a look at the statistical discrepancy in the GDP accounts.

This might be is a bit nerdy, but there is an important story here. In principle, it is possible to add up GDP on either the income side (e.g. wages, interest, profits) or the output side (e.g. consumption, investment, government) and get the same number. Of course, they never end up exactly the same – you don’t get perfect accounting in a $13 trillion economy.

Typically, the output side comes up slightly higher than the income side. (The conventional wisdom is that people might hide income in order to avoid taxes.) This gap between output side GDP and income side GDP is the statistical discrepancy.

The big story on the statistical discrepancy is that it fell by $150.8 billion over the last two quarters. The most obvious explanation is that the income side of GDP is currently overstated. My favorite explanation for overstated income is that capital gains income (e.g. exercises of stock options) is showing up as labor compensation.

Suppose this is right. The $150.8 billion shift in the statistical discrepancy accounts for more than half of the nominal wage growth over the last two quarters. If this change in the statistical discrepancy is subtracted from wage growth, then the extraordinary 7 percent annual rate of real wage growth over the last two quarters falls to a modest 1 percent. Of course, it is unlikely that the full shift in the statistical discrepancy is the result of misattributed labor income, but such an error can explain much of this gain.

Lest anyone think this is a backdoor effort to deny the Bush administration credit for some good economic news, let me point out that the magic of shifting statistical discrepancies worked the other way earlier in his administration. Between 2000 and 2003, the statistical discrepancy increased by $176 billion (almost 3 percent of labor compensation). This increase implies a potential accounting loss of labor income of this magnitude, which did not correspond to an actual decline in labor income.

The moral of this story is that labor compensation is poorly measured in the national income accounts. While the accounts give us a general picture of movements in wages and profits, the data must be assessed with caution. When the data in the national accounts diverge sharply from other data on compensation (e.g. the average hourly wage series and the employment cost index), it is best to look at it more carefully for errors before assuming that we are getting new information on the economy.

--Dean Baker

Like the exclusive WASP-only country club that opens the door to blacks and Jews after it can no longer raise the money to fix the roof, the I.M.F. is inviting China to play a larger role. The problem is that it is far too late to invite China to be a junior partner in this U.S. dominated institution, a fact that would be more apparent if reporters recognized the true size of China’s economy.

The I.M.F. has been used by the United States to enforce a creditors’ cartel against countries that did not follow an economic path that fit the interests of major U.S. corporations. The basic story is that the I.M.F. would lay out an economic program and if countries didn’t follow it, they would be denied credit by not only the I.M.F., but also the much larger World Bank, as well as other international development agencies. In general the private sector would follow suit. The power of the I.M.F. was best illustrated in the East Asian financial crisis, when it imposed harsh conditions, requiring governments in the region to assume responsibility for the debt of private companies to major western banks.

The world has changed since the mid-nineties, as is best illustrated by the case of Argentina. After Argentina defaulted on its debt in 2001, the I.M.F. tried to impose its usual harsh “rescue” package, but the country balked. Instead it managed to circumvent the creditors’ cartel, and has now experienced four years of exceptionally strong growth.

Argentina’s success was a huge blow to the I.M.F.’s credibility. Furthermore, with China sitting on $1 trillion in liquid reserves, and feeling no compunction to adhere to the I.M.F’s assessment of sound economic policy in its lending practices, the I.M.F. faces a rapid slide into irrelevancy.

This is the context in which China is being invited into the club. But, there seems little reason that a country with a GDP that is approaching $10 trillion, and whose economy will surpass the size of the U.S. economy in less than a decade, should be anxious to accept the role of junior partner in a dying institution.

--Dean Baker

Virtually all economists missed the 2001 recession, in most cases not even predicting it until it was almost over. The main reason was that the recession did not follow the usual pattern. It was the result of the stock market crash decimating tech investment. All prior post-war recessions had been brought on by higher interest rates leading to a falloff in housing construction and new car buying.

There is a similar situation today. If the economy slides into a recession (my bet), it is because of a crash of the housing bubble. This is one that will also not follow the usual pattern. For this reason, standard forecasting methods are likely to provide bad predictions. Fortunately, we have not had many instances of national housing crashes, so we don't have much experience on which to predict the course of a recession based on one. (Yes, housing markets are local, but we will have the simulataneous collapse of enough local markets to have a national impact, just as the rise in housing values had a national impact.)

The one thing we can say is that the recovery from a housing crash induced recession will not be as easy as a normal recovery. Youl can't just lower interest rates and expect a boom in home construction and car buying. As I've note before, the Fed used the housing bubble to boost the economy out of the recession that resulted from the collapse of stock bubble. It's not clear that it has another potential bubble out there.

--Dean Baker

The NYT applies a large does of whitewash in its discussion of President Clinton’s current efforts to promote the treatment of AIDS in developing country. While the article notes in passing that Clinton “conceded that his administration fought too long to protect the patent rights of pharmaceutical companies against countries trying to make or import cheaper AIDS medicines,” this lone sentence hardly does justice to Clinton’s work on behalf of the pharmaceutical industry during his tenure in the White House.

Clinton was the person who allowed the pharmaceutical industry to use the power of the U.S. trade office to get the TRIPS provisions into the 1995 Uruguay Round agreement of the W.T.O. These provisions will limit the access to generic drugs for billions of people in the developing world, in some cases raising the price of AIDS drugs by several thousand percent.

Even in his last years in office, Clinton harassed the South African government over its efforts to issue compulsory licenses for drugs used to treat AIDS victims. He didn’t back down until protestors associated with ACT-UP began trailing Al Gore at his campaign events.

It’s good to see President Clinton now working to help AIDS sufferers in the developing world, but it is unlikely that he will be able to undo the harm caused by the policies put in place during his presidency.

--Dean Baker

Okay folks, get your checkbooks out. The people who pledged a CEPR contribution for every Post article/column whining about entitlements owe us money. This one is from Bob Kerrey and Warren Rudman, the co-chairs of the Concord Coalition.

In addition to conflating Social Security and Medicare as “entitlements” that will pose problems, the column also has a few other standard scare tactics. For example, it projects a rise in spending from approximately 20 percent of GDP at present to 40 percent in 30 years. The biggest part of this rise is due to a rising interest burden. See, if we run larger deficits, and Congress never responds by either raising taxes and/or cutting spending, then we get a rising interest burden. Silly trick, but this is the Post.

And of course, the article never discusses health care reform as something that should be on the national agenda. Do the authors not know that the U.S. spends more than twice as much per person on health care as the average among other wealthy countries? Do these great publicly minded authorities not realize that we are the only country that has such a problem with exploding health care costs?

The fact that the Post prints this stuff would not be so bad if they would occasionally allow an opposing view. They don’t. The Taliban Times will run a picture of the prophet Muhammad in a compromising position before the Post ever runs a column explaining that there is no “entitlement crisis,” just a broken U.S. health care system.

The NYT had a good story on the falling wage share of output and the growing concentration of wage income among high wage earners (e.g. doctors, lawyers, CEOs). While the basic story is accurate, there are a couple of points that should be treated with more care.

The article notes that the sharp drop in the wage share of GDP over the last three decades, from 53.6 percent in the first quarter of 1970 to 45 percent in the first quarter of 2006. While most of this drop is attributable to an increase in profits at the expense of wages, part of it is attributable to an increase in depreciation (the share of GDP that goes to replace warn out equipment and obsolete capital goods). The share of GDP going to depreciation has increased by almost 3 full percentage points over this period. This would imply a fall in the wage share of GDP, even if there was no redistribution to profits. The moral is just use national income or net national product (NNP) as the denominator.

The point about depreciation matters little to this story, but the growing share of depreciation does inflate standard growth comparisons between the post-1980 period (when depreciation shares first started rising) and the pre-1980 period. It also complicates international comparisons since other countries measure capital goods and depreciation somewhat differently.

The other point concerns the comparison between real wage and productivity growth over the period from 2000 to 2005. While real wages have tracked productivity reasonably well in the pre-1980 period, it is no longer reasonable to expect an exact tracking, both because of the rising depreciation share in GDP and the different price deflators used in the two measures.

Productivity is measured against the GDP deflator, while real wages are measured against the consumer price index. The GDP deflator has risen by an average of 2.0 percent over these five years, while the CPI has increased by an average of 2.5 percent. This means that even if there had no redistribution from wages to profits (or an increase in the depreciation share of output), real wage growth would be 0.5 percentage points slower than productivity growth.

--Dean Baker

There has been a raging blog debate, following in the wake of some recent Paul Krugman columns, as to whether the rise in income inequality is due to policy or the natural workings of the economy. While Krugman indicated that he believed the policy view (promising details later), many of the economists weighing in have said that they don’t see any policy mechanism(s) that could explain the rise in inequality.

Perhaps I have different eyes (or maybe I don’t have sufficient training in economics), but I see the mechanisms almost everywhere. There is a nice example in the news today. A judge ruled that Northwest’s flight attendants can’t go on strike to oppose the wage cuts that the airline is unilaterally imposing, following in the wake of its bankruptcy.

In other words, a U.S. judge is telling workers that they will go to jail if they refuse to work for the wages that Northwest wants to pay them. (I know, I’m skipping some steps here.) Judges don’t have to threaten workers with jail for refusing to agree to employers’ demands. This is a policy decision.

For those who find the labor-management framework difficult to understand, imagine that Northwest purchased flight attendant services from the Flight Attendant Services Corporation (FASC), which is a corporation wholly owned by the workers it employs. Suppose that FASC tells Northwest that it will not provide services for the lower fee it is now offering. Would any judge threaten FASC with jail if it didn’t agree to offer its services on Northwest’s terms?

There are many other examples of rulings that have gone against labor in the last quarter century. For practical purposes, it is now legal to fire workers for organizing a union (the penalties are a joke). This is not the whole policy story; I have much more in my book, The Conservative Nanny State. It’s short and free (and the summary is even shorter), so you have no excuse not to read it, unless you want to remain as ignorant as an NPR reporter your whole life.

--Dean Baker

The New York Times had an excellent piece this morning on the fact that sellers are increasingly offering substantial non-price concessions in order to move their homes. As the article notes (and has been mentioned repeatedly on BTP) these concessions are not recorded in the sale prices that enter the standard house price indexes. Therefore these indexes are missing some of the price decline in recent months.

I promised a BTP goat prize to articles commenting on housing prices that did not note this seller side concession issue. In the future, such articles will get a BTP-NYT goat prize.

One should never make too much of a single month's data, but yesterday's report of a sharp falloff in existing home sales, price declines throughout most of the country, and record inventories of unsold homes, might be seen as supporting the view that a bubble is bursting, but not in the NYT.

The Times article on the report included no comments from people expecting a serious downturn in the market. It also included this choice quote from Joshua Shapiro, chief United States economist with MFR [sorry, I don't know what it is]: "the trend here is one of stabilizing prices after the sharp gains seen for many years... While certainly a change in trend, so far the official data are not corroborating some of the more alarmist stories being bandied about recently.”

The Times article also earns another BTP goat prize. Apparently no one noticed the concesions being offered by sellers (some in full-page ads). These non-price concessions (e.g. help on buyer-side closing costs, subsidized mortgages, buyer-side realtor bonuses) do not appear in the contracted sales price. This means that contracted sals prices are higher than the true sales prices, so that house price indices will be missing some of the real price decline.

--Dean Baker

I wrote a short note a couple of days ago about an article in the Washington Post on the immigration bill passed by the Senate. I wrote that the article used an estimate from CBO that was based on an error in the bill's wording that would almost surely be corrected before the final passage.

After someone sent me a note, I reread the CBO report and I realized that the article had correctly reported the spending in the bill, as projected by CBO. However, it had neglected to mention the increase in tax revenue that CBO projected based on the corrected wording.

The headline and the article itself referred to $126 billion in spending over 10 years (0.4 percent of projected spending). This figure is correct. However, the net cost of the bill, after taking into account the projected increase in tax revenue, is $83 billion over ten years, or 0.2 percent of projected spending.

The article should have focused on the net cost, but I should have gotten my numbers right.

--Dean Baker

House prices have stayed even with the overall inflation rate from 1950-1995. Since 1995 they have risen by more than 50 percent in real terms. There has been no remotely comparable increase in rents. As a result, home building has been hugely outpacing the rate of household formation and vacancy rates are at record levels. Given this information, economists should see a bubble in the housing market and expect prices to plummet. Instead, when they see bad news on sales, they are surprised.

The news should be, "why are economists surprised by the collapse of a housing bubble?" Of course, the news five years ago should have been "why are economists surprised by the collapse of a stock bubble?" Unfortunately, the media never wrote that story five years ago, and they seem determined not to write the story about surprised economists this time either.

--Dean Baker

Good to see that reporters and my fellow economists are now discovering some of the downsides of the housing bubble. The WSJ now recognizes the problem in part, although we're still only talking about something "harder than a soft landing but softer than a hard landing." But, that's progress.

The article earns a BTP goat prize for failing to note that current house price indices are failing to pick up the full decline in prices because they miss the various concessions (seller paid closing costs, buyer-side realtor bonuses, and seller subsidized mortgages) that sellers often use to move their houses.

The WSJ also notes that the housing affordability index hit a record low. How could that have happened, seems it was at record highs just a few years ago. Excuse me while I go tear my hair out.

--Dean Baker

NPR ran a piece this morning on “counterfeiting” in China. (Anyone who heard the story knows that NPR disapproves of the practice being discussed, but the term that neutral reporters use is “unauthorized copying.”)

The segment included no economic analysis of the practice, which would point out many of the benefits of unauthorized copies. The segment included no discussion of the relative quality of the authorized copies. Nor did the segment even clarify the extent to which the unauthorized copies are genuinely counterfeit products. (The goods are only genuine counterfeits if the consumers believe that they are buying the brand whose products are being copies.)

A serious report on unauthorized copying would discuss such issues, pointing out that unauthorized copying can provide enormous economic gains. If the brand product sells at 5 or 10 times the price of the copy, then the economic harm of eliminating the unauthorized copies is the same as imposing tariffs of 500 or 1000 percent, and the good free-traders at NPR know how harmful tariffs can be.

--Dean Baker

As I have noted before (see “Missing Fact on British Health Care,” May 7, 2006), the New York Times feels the need to periodically run articles on the health care crises in countries with universal health care systems. These articles never make comparisons to the health care situation in the United States, which might help readers put the articles in some context.

An article in today’s Times fits the bill perfectly, reporting the surprising news that many Canadian doctors are hoping to make more money outside of the country’s public health care system. (Actually, the article never mentions the possibility that doctors want to leave the public system to make more money. The article implies that the doctors are just very publicly minded individuals who only think of the public good, not about money.)

Anyhow, the article includes the obligatory assertions about long waiting lines in the Canadian system from a right-wing think tank. The article does not include any comments from supporters of the public health care system.

It also tells us that the cost of the Canadian system is “skyrocketing.” This is a striking description. The New York Times has never used such a term to describe the considerably more rapid growth of health care costs in the United States.

--Dean Baker

The Post had an article on the Congressional Budget Office’s (CBO) estimate of the cost of the recently passed Senate immigration bill that was sure to mislead anyone who reads it. The article’s headline warns that CBO estimated the 10-year cost at $126 billion.

This headline not only commits the common sin of scaring readers with a big number outside of any context (the spending is less than 0.4 percent of projected federal spending), it also fundamentally misrepresents the CBO report. The report is very clear that there was a mistake in the wording of the bill. The $126 billion is an estimate based on the mistaken wording.

CBO did a separate estimate that is based on the intention of the sponsors of the bill, as conveyed to them from conversations with the key sponsors of the bill and their staff. The net cost of the bill under this estimate is less than $35 billion over the next decade, or less than 0.1 percent of projected spending.

Members of Congress may not be the brightest lights in the world, but it is reasonable to assume that they would have fixed the bill before its final approval. The $35 billion figure (0.1 percent of projected spending) should have been the headline for this article.

--Dean Baker

The absurdities associated with copyright enforcement in the 21st century seem to be endless. The NYT had an article on another one this morning. Apparently publishers of sheet music are up in arms over guitar tablature sites. These are sites where guitarists pass along tips to each other on how to play particular songs. (I know nothing about guitar playing, so I welcome clarification.) The sheet music publishers argue that these sites, which are accessible at no charge, are a violation of their copyright for the sheet music and should be shut down.

This is the best copyright enforcement story I’ve heard since the publishers of the Harry Potter series went after sites in which people exchanged their own Harry Potter stories – a great use of the state’s police power. (Anyone know how this one was resolved in the courts?)

What's missing in the NYT coverage of these stories is any input from economists. These problems arise because the state is granting a monopoly with copyrights, which sharply restricts the distribution of the product and its derivatives. Economists expect that when the state imposes such an artificial barrier, that people will seek to find ways around it. Excluding any economic analysis of the problems associated with copyrights is comparable to reporting on sugar quotas or textile tariffs without any mention of the cost.

Copyrights may have been an efficient mechanism to support creative and artistic work in the middle ages, but they don’t work very well in the Internet Age. There should be a policy debate on alternatives (here’s mine), as we push the entertainment and publishing industries into the 21st century.

Mortgage applications in 2006 are running at a pace that is about one-third lower than the year-round average for 2003. One-third fewer mortgages should mean that revenue is roughly one-third lower. This would presumably translate into a substantial drop in employment in the industry, but not according to the Washington Post.

Relying on industry sources, the article explains that mortgage bankers are cutting staff through attrition or simply allowing commision based pay to fall with the number of mortgage applicants. This could be the case for the moment, but it's hard to believe that employment will not adjust at least partly to the drop of revenue. Industries never like to tell reporters that business is bad and layoffs are soaring. It would have been a good idea to talk to an analyst not connected to the industry.

The NYT had a good piece this morning about plans by the I.R.S. to turn over 12,500 tax deliquency cases to private collection agencies. There are two interesting features to this story. First, the I.R.S. believes that it will get less money by turning these cases over to private collection agencies than if it pursued the cases itself. (Well, someone has to help out the collection agencies -- life's tough out there.)

The other interesting part of the story is that the I.R.S. is only turning over cases where the back taxes owed are less than $25,000. While this still amounts to a nice hunk of cheating (about 5 times the average cash TANF grant for a year), the industrial strength tax cheats will still not have to worry about annoying calls from bill collectors.

--Dean Baker

A couple of days ago I commented in passing about the Bureau of Labor Statistics plans to change the way it reports its inflation numbers. I realize that I did not fully understand the issue until a couple of posts clarified the problem.

Currently, BLS reports index numbers and changes only to the first decimal. Remarkably, it computes the monthly change based on index numbers rounded to the first decimal, even though it obviously has the data calculated to many decimals. This can lead to the monthly inflation figure being understated or overstated, depending on the rounding.

For example, suppose the June index number is 202.050 (rounded to 202.1) and the July number is 202.249 (rounded to 202.2). The inflation rate calculated based on the three decimal index numbers is 0.0985 percent, which would be rounded to 0.1 percent in the monthly CPI report. The inflation based on the one decimal index numbers is 0.0495 percent, which is rounded to 0.0 percent in the monthly CPI report. In this case, the rounding goes the wrong way.

Beginning in January, BLS will calculate the changes based on indexes calculated to three digits. This is a simple and desirable move. It should have been done long ago.

Of course, monthly inflation data are always highly erratic (hence my preference for three month averages), so it is silly to ever make too much out of a single month's data. But, there is no reason to ever give out inaccurate data when it is so easy to give out more accurate data.

--Dean Baker

It is common for people to complain that politicians are using the Social Security surplus to hide the true size of the federal budget deficit. In fact, this is not possible. The media decide which budget numbers the public hears on the news and reads in the newspapers. If they believe that the appropriate deficit numbers include the money borrowed from Social Security, then it is a very simple matter to report this number, regardless of which deficit numbers politicians happen to use. Reporters don’t even have to do the simple arithmetic of adding two numbers together. Every official budget document shows the deficit including the money borrowed from Social Security (the “on-budget” deficit) right alongside the more commonly reported unified budget deficit.

All the news reports on the new deficit projections from the Congressional Budget Office that I saw avoided any mention of the money borrowed from Social Security. For example, the deficit now projected for 2006 was reported as $260 billion. The projected on-budget deficit, which is right there for anyone to see, is $437 billion. If you don’t think that we should be using the Social Security surplus to hide the true size of the deficit, then this is the number that you care about.

The other major defect in budget reporting is reporting the number in billions. This is incredibly irresponsible. Apart from a small number of budget wonks, no one has a good sense of how much money $260 billion or $437 billion is. It would make just as much sense to write “really big number” everywhere that “$260 billion” appeared.

The simple way to make a deficit number meaningful is express it relative to the size of the economy. This is what matters. A $50 billion deficit is trivial for the United States – it is less than 0.4 percent of GDP. It would be a very big deal for Argentina (more than 20 percent of GDP).

Every economist would agree the absolute size of the deficit is a meaningless number, it only matters how large it is relative to GDP. So, why do reporters insist on reporting a number that is meaningless to the vast majority of people who hear it or read it?

For the record, the $260 billion unified budget deficit is equal to 2.0 percent of GDP. The $437 billion on-budget deficit is equal to 3.1 percent of GDP. This is larger than can be sustained indefinitely, but hardly off the charts by historical standards. It is about half the size of the current account deficit.

Economists believe that people respond to incentives. Unfortunately, they pay much too little thought to the incentives that the U.S. health care system gives to providers. The NYT has two very good pieces showing the practical effect of the current incentive structure in today's paper.

The first reports on the frequency of angioplasties in Elyria, Ohio. Doctors in Elyria use the procedure among Medicare beneficiaries at more than three times the average rate across the country. Why the high rate of angioplasties? They have a number of cardiologists that specialize in the procedure. This means that they are more likely to opt for angioplasties rather than trying drugs or open heart surgery, because they get paid to do angioplasties.

The second article reports on a secret deal between Bristol-Meyers Squibb and a generic drug manufacturer to keep a generic version of Plavix (an anticlotting drug) off the market until 2011. This sort of bargain is exactly the sort of corruption that economists should expect from patents. Bristol-Meyers Squibb gets to earn monopoly profits as long as it can keep generic competitors out of the market. Generic companies that enter the market stand to earn a normal rate of profit, the same rate of profit that firms earns from selling paper or pens. This means that both companies can benefit if Bristol-Meyers Squibb kicks back some of its monopoly profits to keep a generic competitor out of the market. And, that is what we see, again and again.

USA Today had a great story about President Bush’s visit to a Harley-Davidson factor in York, Pennsylvania to tout the merits of “free-trade.” The reason why the story was so great is that the plant is in fact a testament to the effective use of protectionist policies to sustain a favored industry.

Don’t take my word for it, here’s the beginning of a 1983 article in the New York Times describing President Reagan’s decision to impose tariffs on imported motorcycles:

“In an unusually strong protectionist action, President Reagan today ordered a tenfold increase in tariffs for imported heavyweight motorcycles.

The impact of Mr. Reagan's action, which followed the unanimous recommendation of his trade advisers, is effectively limited to Japanese manufacturers, which dominate every sector of the American motorcycle market.
The action was exceptional for protecting a single American company, the Harley-Davidson Motor Company of Milwaukee, the sole surviving American maker of motorcycles ("U.S. Raises Tariff for Motorcylces," 4-2-83:A1).”

So now this successful protectionist measure is touted as a testament to the merits of “free-trade.” Anyone got any Iraqi WMDs?

Thanks to Peter Hart from Fairness and Accuracy in Reporting (FAIR) for the tip.

--Dean Baker

The press treated it as big news that inflation in the core CPI came in at 0.2 percent in July after being 0.3 percent in each of the prior 4 months. The celebration may be premature. While there is some evidence of easing price pressure in the data (lower medical care inflation stands out in this regard), most of the story in July's lower inflation was a 1.2 percent drop in apparel prices. Apparel prices are always erratic, and it is very unlikely that a drop of this size will be repeated. If we construct a non-apparel core CPI, here is what it would have shown since February:

Feb -- 0.209
Mar -- 0.310
April -- 0.278
May -- 0.279
June -- 0.307
July -- 0.268

So, inflation is down by 0.04 pp from June but just 0.01 pp from April and May. Not much of a story here. Of course, those who really want to know about inflation read the CEPR price byte.

BLS is going to start publishing the inflation numbers to 3 decimals beginning in January. This is a good move.

-- Dean Baker

Newspapers should try to report economic data in ways that are clear to their readers. That should not be a debatable point.

The NYT badly failed in this task in an article on European economic growth. The headline told readers that "Economy Grows Nearly 1% in Europe." Before anyone bemoans poor European growth, it is important to realize that the 1.0 percent is a quarterly growth rate. In other words, Europe's economy grew by close to 1.0 percent in the second quarter of the year. This translates into close to a 4.0 percent annual rate.

In the United States, growth is always reported as an annual rate. There is absolutely no excuse for a reporter (or an editor) not taking the 2 seconds needed to convert a quarterly rate into an annual rate. This is about as simple as it gets; the Times should not be reporting economic data in ways that might unnecessarily mislead readers.

--Dean Baker

The Wall Street Journal has an interesting piece today on how France Telecom is trying to set up its workers in their own business as a way of getting around restrictions on layoffs. The story itself is interesting -- it’s an innovative initiative that would seem to produce win/win outcomes. But the discussion also raises another serious question about excess labor in France and other countries with restrictive laws on layoffs.

The article implies that much of France Telecom’s 120,000 workforce has been made unnecessary due to the rapid changes in technology over the last 15 years. In the United States, the old-line telephone companies have all had massive layoffs. In France, and most other European countries, employment protection laws prevent such large-scale dismissals so companies must retain workers even if they don’t need their labor.

This could be one of the factors explaining the difference between European and U.S. productivity growth over the last decade. (Prior to 1996, European productivity growth had been faster.) However, if there are many companies like France Telecom, who are forced to keep excess workers on their payrolls, then this implies a hidden productivity dividend that will be experienced when these workers retire. Since companies have many workers who contribute almost nothing to output, when these workers retiree, output will stay constant even as labor hours fall – implying an increase in productivity.

If the situation described at France Telecom characterizes the situation at many large firms, then France and other European countries will be seeing a productivity boom in the near future. This boom will make their national retirement systems more financially sound (higher productivity growth will translate into higher wage growth, which in turns translates into more tax revenue) and should help to reduce concerns about looming labor shortages.

--Dean Baker

The biggest sin that the Greenspan sainthood proponents must sweep under the rug is his failure to do anything about the stock market bubble. There are 3 questions here that the critics and worshippers must address:

1) Could it have been recognized?
2) Did it actually do the economy serious harm?
3) What could have been done?

These questions are loosely touched on by a worshipper’s ((Daniel Drezner) review of a critic’s (Peter Hartcher) book in the Post book review section. The worshipper comes up seriously short in his assessment.

First, there is little ambiguity on question 1. Greenspan recognized the bubble at the time, as he has acknowledged in the post-crash years. He said that it was his view that it was better to deal with the fallout from the crash rather than addressing the bubble head-on.

It took nothing more than third grade arithmetic to recognize the bubble. Once price to earnings ratios got way out of line with historic averages, it was necessary to believe either that profits would grow far more rapidly than everyone said they believed that they would grow, or to believe that investors were willing to accept much lower returns on stocks than they had in the past.

The second proposition is close to ridiculous. I did not know a single person in 1998-2000 who was putting money in the stock market believing that it would get roughly the same return as government bonds. Surveys provided zero evidence to support the view that expected returns on stocks had fallen, if anything, they had risen based on the experience of the recent past. In short, it was very simple to recognize the bubble and anyone who did not – well you had some serious bad judgment.

On the second question, Drezner seeks to promote the view that there was no harm He quotes a section of the book that reportedly claims that following the crash “a market upswing recovered ‘nine dollars out of every ten lost.’” This one ranks high in the “huh?” department.

The S&P 500 index peaked at more than 1500 in March of 2000. Six and a half years later it sits at 1266. This means that, adjusting for inflation, the market is more than 30 percent lower today than it was at its peak six and a half years ago. (Ah, if only Post writers had to know third grade arithmetic.)

As to the harm, how about the 2001 recession? I would add that the economy is not out of the woods from the stock crash yet, because Greenspan seized on the housing bubble as the only available tool to rescue the economy from the wreckage from the bursting of the stock bubble. Normal fiscal and monetary policy tools were proving ineffective in boosting the economy out of the slump. The recession that will result from the crash of the housing market is one of the dividends of Greenspan’s stock bubble.

The other big response to the “no harm” argument is the pension crisis. The country’s DB plans are in crisis today largely because they made no contributions to their funds throughout the bubble years. Rising stock values were sufficient to keep them fully funded. Arguably, this was a failure of regulation – competent regulators should have recognized the bubble and insisted that expected returns be adjusted down accordingly. But, our central banker presumably noted the mismanagement of trillions of dollars of pension assets and looked the other way.

I have written elsewhere on question 3. I am big fan of talk – Greenspan should have used his Congressional testimonies and other public forums to carefully explain how people can know that the stock market was in a bubble. Note, I don’t mean whispered comments about the market possibly being over-valued. I mean very clear charts that explain where stock returns come from (dividends and capital gains) and that at PEs that eventually exceeded 30, it was necessary to believe either that PEs will continue rising forever to absolutely crazy levels or that stockholders would be content with 3 percent real returns, or that the market was in a huge bubble.

I know that economists like to ridicule the idea that talk could make a difference (although they somehow respect Robert Rubin and his cautions about loose talk, because it can “move markets”), but I think there is a very strong case here. If the Fed chair makes a clear and solid case, every money manager in the country would have to address it. If they ignored it, and their portfolio plummeted, they would inevitably be asked, “what was your response to Greenspan’s assessment?”

Any portfolio manager who said that they did not pay attention to Greenspan would be fired, and possibly sued for negligence. Of course portfolio managers that did listen to Greenspan would have no response, because none existed.

The other tool Greenspan had to tackle the bubble was raising interest rates. I am not a fan of this, because it would slow the economy and throw people out of work, but it would have been better than letting the bubble grow unchecked. (This is my view today on the housing bubble.)

But, I would argue strongly for trying talk first. Maybe it would not have been sufficient, but as we know, talk is cheap.

--Dean Baker