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Saturday, April 07, 2007

"ECONOMISTS WERE SURPRISED" (AND THE TIMES WAS PISSED)   Our monetary policy correspondent "Irrational Exuberance" points to a blog posting at criticizing the New York Times for having come up with a graphic that manages to make Friday's big upside surprise in payroll jobs creation into a negative.
The NYT has an interesting chart accompanying its payrolls story today. While the text is as upbeat as you'd expect given the excellent figures...someone on 43rd Street seems to have decided to run a graphic showing payrolls going down.

The chart violates a basic rule of charting, which is that a bar chart like this should be used to show how quantities change from month to month. Looking at the bar chart, you expect the March bar to refer to March figures, the February bar to refer to February figures, and so on. But in fact they refer to a year-on-year differential, which is better displayed with a line chart.

Still, that's a quibble: A line chart would still be going down, even as everybody is talking about the payroll numbers going up. What gives? To be honest, I'm not entirely sure. Year-on-year figures obviate the need for seasonal adjustment, so maybe the real trend is down but is being hidden by the seasonal adjustments. Alternatively maybe the enormous revisions that the BLS has been doing to the time series of late make the year-on-year figures less useful than they otherwise would be.

In any case, it's not immediately clear to me why year-on-year figures should be charted when all of Wall Street concentrates solely on the month-on-month number. If you're going to use these figures, you should at the very least somewhere explain why.

Reader Jerome Schmitt wonders why economists were so surprised by the surge in jobs:
Another media cliche -- "economists were surprised..." After 20 straight quarters of being “surprised” by strong economic growth and job growth, when are they no longer allowed to call themselve economists?

In my field of engineering, being consistently “surprised” about work topics quickly results in job loss.

Update... Economist John Seater writes,
Contrary to what FelixSimon says, the NYT graph does *not* show payroll employment going down. It shows them going up. The graph shows the one-year *change* in payroll employment. The change is positive, so employment went up. What went down was the rate of change.

As for "economists being surprised," please note that I am an economist and I was not surprised. So right away we have to modify the remark to "some economists were surprised." Indeed, there are thousands of economists in this country alone, the NYT article cites a grand total of two of them, one of whom explained why no one should have been surprised. In fact, the article never says anybody was surprised. It only says the reported increase was larger than the average forecast. What of it? Realized outcomes of random events virtually always differ from expected outcomes, sometimes by a lot. I would have thought that anyone at all familiar with random variables would have understood that.

Finally, note that the same NYT news report said that the Labor Department revised up its January and February job change figures. Such revisions happen all the time as the Labor Department analyzes the full set of data. Perhaps in the next month or two the Labor Department will revise down the current March figure, in which case those who were surprised by the initial figure may turn out to have been right after all. Everyone should be careful not to attribute more precision to these initial figures than they actually have.

John, I think the point was that the Times had massaged the numbers until they found something about the time series that was falling.

Update 2 [4/8/2007]... Reader Jerome Schmitt responds to Seater:

I didn’t say ALL economists were surprised – I said it was a cliche. Ever since President Bush’s tax-cuts, if I’ve hear the word “surprise” once connected with reports of good economic news, I’ve heard it a thousand times. In fact, I don’t read the NYT; my comment was a reaction to Friday’s NPR report. It’s the media who should fire their consistently “surprised” economists (Paul Krugman comes to mind of course) and hire ones who know what is happening. Economists should demand this as a matter of professonal pride – otherwise the public gets the wrong impression.

How would the public feel about engineers if they were prominently represented by a professor who designs bridges that always collapse?

Update 3... Reader Keith Morton wonders how much "surprise" is really involved:
The expected number of jobs created for March was 160,000. The actual was 180,000. The jobless rate was expected to go from 4.5% to 4.6%. It went to 4.4%, a five year low. Average wage climbed significantly. Wow, that's good news! So the Chicago Tribune headline was "Job growth fans fear of inflation". If the numbers had come in worse, would the Trib have said "Inflation fears calm.."? I doubt it. Then you would have annouced the negative numbers. This happens frequently. If news is bad the Trib portrays it as such. If news is good, the Trib finds something wrong with it. Do you have an agenda?
Update 4... Reader Dan Noble weighs in on the Times' graphic:
Maybe I am not getting this but it looks to me that the nonfarm payroll graphic is a rate of change in job creation. So non farm payrolls are still going up but not as fast as they were in the beginning of 2006 but faster than in 2004.

Ok, so sometimes things get better faster and sometimes they get better not as fast. Where is the story? Must things get better always at an absolutely constant rate?

How about comparing the rate of change of non farm payroll with the rate of change of newspaper circulation? Or network news Nielson ratings?

Posted by Donald L. Luskin at 12:17 PM | link  

LIMBAUGH REPLAY   Reader Jameson Campaigne was kind enough to come up with this link to a RealAudio file of my appearance on Rush Limbaugh Friday. I don't have the Real Player software installed, so I'm going on faith here...

Posted by Donald L. Luskin at 12:14 PM | link  

Friday, April 06, 2007

FREE TRADE?   Joseph Tutton heard me today on Rush Limbaugh, and emailed me with a couple famiiar questions about free trade:
I am not a "free trade denier". China uses slave labor. There will not be unions there, not because they are "barnacles" (which I agree they have become in the US), but because China is a Communist dictatorship that jails union organizers.

China does not follow ANY of the health and safety conventions that are taken for granted in the West.

Do you really believe that it is alright to have 6 year old children working in coal mines, like we did here until the union activities of the early 1900s?

The unions have come close to killing the golden goose, but that does not mean that everything use to be hunky-dory. As you noted on Rush's show, Toyota etc., set up shop in the South instead of Detroit to avoid the unions. But you did not note that they would not have started making cars here at all, if it had not been for threat of tariffs if they didn't.

Do you really believe that workers should be locked in sweat-shops, with no ventilation and no way of escape in case of emergency?

...It is only "free" trade if it is close to a level playing field. That does not mean union wages and benefits and work rules. But it does mean basic health and safety, and no forced labor camps. Surely, you would not say that Nazi work camps were OK? So, why are Communist Chinese camps?

...It is also important to remember that we have enemies. It is not wise to be dependent on any foreign nation for food or militarily sensitive industrial products. That is another reason that Japan was "encouraged" to build cars here. It doesn't matter, from a national security perspective, who owns a factory, but where it is located -- in times of emergency, factories can be nationalized. But if all of them are in the home of your enemy, you are screwed.

...I understand that you are an investments officer, and investments overseas are good for business. But there are considerations besides profit. National security is the largest of these other considerations. China views us as an enemy. It would be the honest thing to make your investors aware of this.

Here's my reply.
You are making two entirely separate arguments. One is an ethical argument about whether we ought to be doing business with countries that have poor labor conditions. I take the point; I suppose there would be some extreme, such as literal slavery, where I would draw the line. But in the case of China it is far from literal slavery. The people working in modern factories there are the lucky ones. They have come from farms where their lives were utterly hellish. At least now they have a chance for a reasonably healthy working environment, some wages (high by their standards), and the creation of skills that will serve them will in the future.

As to our “dependence” on foreign manufacturing, let me state again what I said on the air. This country is at peak manufacturing capacity right now. We are simply not dependent on anybody for anything, other than raw materials we can’t get here, but couldn’t have anyway.

But let’s take it to extremes. Let’s say we had the opportunity to shut down our entire steel-making capacity here and import it all from China. Should we do that? Let’s say the answer from a military preparedness standpoint were “yes.” In that case, should the Dept. of Defense take over the operation of steel mills? Should soldiers do the work? If there aren’t enough soldiers, should people be drafted to do it? Those are questions you’d have to ask, since the only reason for otherwise shutting down that capacity is that it is uneconomical on normal terms.

Update... Perry Eidelbus responds,
I thought you let him off pretty easy, especially on his strawman of child labor. He and other liberals like to believe there's an evil capitalist hiding in every shadow, forcing us into slavery-like conditions, but the fact remains that child labor stems from necessity, not industrialization's maliciousness. It's merely part of the nature of an impoverished existence. You and I, being smart capitalists who know how the world really works, understand that when a man and woman do not produce enough by themselves, their children have to help. Decades ago, American factories, coal mines, etc., needed all available workers, young and old, simply because of technology. Any individual worker produced just a fraction of what one today can, so like on a farm, a son would work with his father -- except industrial jobs guaranteed having enough to eat. Even the most idyllic agrarian life required the children to work (and hence give up schooling), and no matter how much everyone worked, there was a very real chance of not having enough to eat, if not starvation.

I make no value judgment either way, refraining from saying in an absolute sense that children should work or that the law should forbid them to work. But I will say that if it hadn't been for "child labor," my father may have well starved to death. He was 11 when the Great Depression officially began, and he sold fruit on the streetcorners of upstate New York. If he saw someone's walkway covered in snow, he offered to shovel it in the hope of earning a quarter. If he could have worked in a factory, he'd have jumped at the chance. When a bit older, he was a promising track star, but he had to work after school.

Once I read about Chinese urban laborers sharing beds in shifts. Three would take turns, because, of course, the conditions are so crowded. And you're right, they are the lucky ones. It's better than risking starvation in the rural provinces. In my mother's home country of the Philippines, children must often work because their parents cannot earn enough by themselves. The lucky ones, when they get older, get jobs at Manila call centers. American liberals consider that slave labor because it's below our minimum wage, but one of my online friends couldn't be happier.

Posted by Donald L. Luskin at 1:34 PM | link  

THERE'S NEVER A FINANCIAL MEDIA AROUND WHEN YOU NEED ONE   Holman Jenkins, the columnist for the Wall Street Journal, just published a fascinating explanation of the extraordinarily favorable terms of Sam Zell's proposed purchase of the Tribune Company. But he didn't publish it in the Journal, and indeed the Journal hasn't covered this at all. Jenkins published it in WSJ's email service "Opinion Journal Political Diary." Note the rebuke highlighted at the bottom -- nominally aimed at CNBC, but surely really aimed at the Journal.
Here's how it works. Trib employees buy 100% of the company's stock with borrowed money, then turn around and sell 40% (a stake worth $3.1 billion at today's share price) to Mr. Zell for $590 million (a figure that represents the $90 million he'll pay for the option and $500 million he'll pay to exercise the option).

How does anybody buy $3.1 billion with $590 million? Good question: The Trib sale was forced by a big shareholder, the Chandler Trusts. Current shareholders care only about the price they get for their stock from the ESOP (employee stock option plan). What the ESOP does next isn't their problem, and the ESOP was Mr. Zell's idea and he basically represented the ESOP and himself at the same time in negotiating the terms.

Mr. Zell's lucrative, hard-to-justify option undoubtedly explains why he'll get only a $25 million break-up fee if the Trib deal falls apart. We'd have to guess that's exactly what will happen -- because the Los Angeles billionaire crowd, all strong Democrats, will blow the deal sky-high by publicizing the terms. Sam Zell is an energetic and admirable entrepreneur in many ways, and might even be the tonic the Trib needs, but the terms of his investment are absurdly underpriced.

Given all the media firepower concentrated on the Trib deal the last three days, why are you reading about this here? Out of delicacy, let's just note that leadership in business news is changing and CNBC and its on-air analysts have not quite stepped up to their new roles as the ones who now define the important business story for the rest of the media. But don't worry. Somebody will see this post and call attention to Mr. Zell's sweet option as if they had figured it out themselves.

Posted by Donald L. Luskin at 1:28 PM | link  

KENNEDY THE SUPPLY-SIDER   No, not Teddy, of course. But Jack. Here's a YouTube video of a remarkable August 1962 speech in which he proposes a massive tax cut, "...a creative tax cut, creating more jobs and income, and eventually more revenue."

Here's the whole transcript. Thanks to Andy Roth at the Club for Growth for the pointer.

Posted by Donald L. Luskin at 8:44 AM | link  

Thursday, April 05, 2007

KAUS RESPONDS TO DELONG   Which saves me some bother. I just hope DeLong's readers follow all the embedded links in his attack on me and Mickey Kaus. I actually don't know why Jabba the Economist includes those links, since anyone who follows them will easily see how bogus and out-of-context his critiques are. I'll just confine my further response to two words: "Botswana" and "fake."

Posted by Donald L. Luskin at 10:52 AM | link  

THE MYSTERIOUS EAST   Who says the yuan is undervalued? No, in China it's fish that are overvalued.
A Chinese restaurant has paid $75,000 for a giant golden-colored tiger fish, a symbol of wealth and good fortune, state media said Tuesday...

The fish, named "golden cash tiger fish" in Chinese, would be sold to diners at about 2,000 yuan per kg, the China News Service said, without explaining the prospect of losing money on a dish that cost the restaurant 12,000 yuan per kg.

Posted by Donald L. Luskin at 1:25 AM | link  

Wednesday, April 04, 2007

BIGGS APPOINTED!   Great news. Today President Bush appointed Andrew Biggs to be deputy commissioner of the Social Security Administration, using the power of recess appointment. The recess appointment was necessary because Democrat Max Baucus, chair of the Senate Finance Committee, had said that he wouldn’t even give the Biggs appointment consideration. Baucus's only reason for refusing to act was Biggs' policy views. In February Baucus said, "Mr. Biggs has championed Social Security privatization in the past, and he continues to think it’s a good idea today. It’s a bad idea to give the number-two position at the Social Security Administration to someone who still supports that failed proposal..."

In other words, Baucus didn't like the idea that Biggs held policy views that agree with those of President Bush.

When Bill Clinton was president, however, policy wasn't a litmus test. Clinton’s SSA Commissioner Ken Apfel was not only not disqualified based on policy views held before assuming the SSA post -- but after assuming it, he was given a lead role in policy advocacy. He was easily confirmed by the full Senate on 9/19/97, and was widely regarded as a perfectly appropriate and capable SSA Commissioner.

Here are some soundbites of the Apfel. First, "...Apfel faces the daunting task of being the president's right-hand man on Social Security reform." Which, in fact, he was. He played a key role in the Clinton Administration’s 1998 year of discussion. Second,in Sept 2000, obviously a very politically sensitive time, he spoke out as to why then-candidate Bush’s personal accounts proposal was a bad idea:

The nation's top Social Security administrator has "serious reservations" about creating individual savings accounts using portions of payroll tax revenues, an idea favored by Republican presidential candidate George W. Bush. Social Security Commissioner Kenneth S. Apfel said "carving out" money from the 12.4 percent payroll tax and using it for savings accounts would make less money available to current recipients.
Third, here he is selling the Clinton plan:
Apfel's appearance was part of a nationwide educational campaign to drum up support for President Clinton's plan to use federal budget surpluses to pay down the national debt and devote the resulting interest savings to extending the trust fund's solvency until 2054.
And if Biggs is disqualified, then what about Peter Orszag, the liberal ideologue who has been installed by the Democrats at the helm of the Congressional Budget Office? CBO is as obligated to neutrality as SSA, strictly a scoring agency, and often involved in evaluating Social Security issues. Orzag is the proud author of a Social Security reform plan based almost entirely on tax increases. CBO itself did an evaluation of the Orszag proposal, and found that it would retard economic growth. Now Peter heads the agency that issued that analysis. Why isn't that a conflict of interest?

Posted by Donald L. Luskin at 4:06 PM | link  

HE'S RUNNING A BUSINESS, NOT A UNIVERSITY   Here's an element of the story about the new "countervaling duties" on imports of coated paper from China just imposed by the Bush administration. The US paper company that brought the complaint to the Commerce Department in the first place, NewPage, is owned by the private equity firm Cerberus, whose CEO is former Bush Treasury secretary John Snow. Pretty sad that Snow, who studied economics at the University of Virginia under James Buchanan, should betray the "settled science" of the virtues of free trade.

Posted by Donald L. Luskin at 8:36 AM | link  

Tuesday, April 03, 2007

KUDLOW REPLAY   Here's the YouTube version of yesterday's hit, in which I am forced to thump the Bible to fend of financial armageddon. Betcha didn't know that the Book Of Revelation was all about investing! In that case, let me do some highlighting for you. Here's 13:16 and 13:17:
And he causeth all, both small and great, rich and poor, free and bond, to receive a mark in their right hand, or in their foreheads; that no man might buy or sell, save he that had the mark, or the name of the beast, or the number of his name....
See? It's financial regulation! It's talking about marking your bond position! If you don't mark your bond position, you can't buy or sell!Now on to 13:18:
Here is wisdom. Let him that hath understanding count the number of the beast: for it is the number of a man; and his number is Six hundred threescore and six.
There's the famous 666 thing. As I told Larry, yesterday gold traded at $666 and oil traded at $66.6! And now, here's 3:18:
I counsel thee to buy of me gold...
Aha! See? Investment advice! And not bad, either... buy gold!

Posted by Donald L. Luskin at 12:09 AM | link  

Monday, April 02, 2007

"STUPID, EVEN FOR THE NEW YORK TIMES"   That's what reader John Tomasso says about an editorial in today's New York Times claiming that people who run so-called "private equity" funds ought to be taxed more.
The deeper question in all this is whether capital gains — which are currently taxed at less than half the top rate of ordinary income — should continue to be so lavishly advantaged. The answer there is no. Today’s preferential rate for capital gains is excessive, with no mechanism in the tax code to ensure that it is not overused. Excessively favoring one form of income over another encourages wasteful gamesmanship, creates inequity and crowds out other ways to foster risk-taking. Tackling the too-easy tax terms for private equity is a good way for Congress to begin addressing that bigger issue.
Reader Sam Steinman adds,
Follow their line of thought: favoring one form of income over another crowds out risk-taking, therefore we need to raise the tax on capital gains to eliminate the favoritism. So in order to foster risk-taking, we need to raise taxes on the byproduct of taking risk, i.e. capital gains. Brilliant!
Update [4/3/2007]... Reader Rich Sinda writes,
So, favoring one form of income over another affects risk taking, I wonder if other forms of favoritism in the tax code could cause problems in the economy. I wonder if welfare payments create a disincentive to work. It could be possible that the government sends out confusing economic messages all the time. We should look closer into these ideas and create a school of economic thought that revolves around them. Ohhh wait, thats what liberal (in the classical sense of the word) economics has been teaching for 200+ years.

Posted by Donald L. Luskin at 11:19 AM | link  


The New York Times Sunday Book Review ran a review yesterday of Radicals for Capitalism by Brian Doherty, a history of the libertarian movement. David Boaz at Cato has the story:

It might have made sense to get a libertarian, or someone familiar with the libertarian movement, or a political historian to write the review. Instead, the Times turned to someone [columnist David Leonhardt] who knows something about economics...

Leonhardt writes:

The story of the American libertarian movement, like the story of its most famous salon, has been a combination of small numbers and big influence. It has never really emerged from the fringe, for the simple reason that most Americans want their government to educate the young and care for the old...
Most movements are small, even those that have big effects. “Fringe” is a subjective issue; if a movement produces several Nobel laureates and a chairman of the Federal Reserve Board, and plays a role in such policy reforms as the end of the draft, deregulation, sharply reduced taxes, and freer trade, is it still on the fringe?

...Leonhardt then devotes a long paragraph to criticizing Doherty for not adequately grappling with the mistakes and failings of various libertarian characters. Doherty does mention them — that’s how Leonhardt knows about them — but it’s true he doesn’t make them the central theme of his book.

He relates that Rand “notoriously testified” before the big-brotherly House Un-American Activities Committee in October 1947, when the committee was investigating Hollywood, where Rand had worked as a screenwriter, but the episode receives only two paragraphs.
This is rich, coming in a review in a newspaper that still to this day proudly touts the Pulitzer Prize it received in 1932 for Walter Duranty’s dispatches from Russia, reports that are now widely acknowledged to have minimized or covered up the horrors of Stalin’s government-created famine in Ukraine. I’m not sure Rand should have agreed to testify for HUAC. But she told them about the ideas that Communist screenwriters were putting into Hollywood movies, and she strongly opposed any effort at government censorship. So it’s hardly a terrible blot on her character, much less on an entire movement.
He skates over other questionable matters, too: for instance, that Friedman advised the murderous Pinochet regime in Chile;
Brian Doherty addressed Friedman’s Chilean connection at length here. Friedman had one meeting, of less than an hour, with Pinochet. He and other Chicago-school economists recommended sound economic policies for Chile, many of which were implemented, and ever since then Chile has had the strongest economy in Latin America. Is that a bad thing? Should Friedman have refused to give sound economic advice to the government of a poor country? Leonhardt doesn’t mention that Friedman spent far more time advising the murderous Communist regime in China. Friedman has noted that “I gave exactly the same lectures in China that I gave in Chile,” but nobody ever demonstrated against him for that. In fact, Friedman made three trips to China and talked to government officials each time. And perhaps he could take some credit for the rapid economic growth there as well.
…that Merwin Hart “infected his free-market thought with anti-Semitism”;
Despite 30 years in the libertarian movement, and despite having read this book, I had never heard of Merwin Hart. But I found him in the index... Turns out he ran something called the National Economic Council in the 1950s. And why is he in this book? Because he’s a major libertarian figure? Because he’s a minor libertarian figure? No. He gets one line in this book because movement founding father Leonard Read told people to stay away from Hart because, yes, he “infected his free-market thought with anti-Semitism” — in other words, he wasn’t one of us.
…and that Rothbard supported Strom Thurmond’s segregationist campaign for president in 1948 (because, Doherty casually observes, “he admired Thurmond’s states’ rights position”).
Okay, that’s embarrassing. And all those whose friends and forebears did not support the pro-Soviet Henry Wallace that year are entitled to criticize. But look: Rothbard was 22 at the time, raised in a family of actual sho-nuff Communists (except for his father), and still searching for a political home...
The book fails to ask why people who claim to love freedom have so often had a soft spot for those who would deny it to others.
If that’s the sum total of embarrassing libertarian moments, it’s a pretty darn good record over 70 years or so. Modern liberals have to deal with the fact — not an embarrassing fact but a shameful one — that many of their forebears supported Stalin and the Communist party, or were at least fellow-travelers...
The libertarians at the Cato Institute, meanwhile, are struggling to persuade people that global warming — the archetypal free-market failure — is a hoax.
Nope. Climatologist Pat Michaels, a scholar at Cato and at the University of Virginia, says that the earth is warming, that human activity is partly responsible, but that the warming is almost certainly not going to be large or disastrous.

Posted by Donald L. Luskin at 9:04 AM | link  

THIS IS GETTING JUST PLAIN SILLY   Krugman this morning:
I have a theory about the Bush administration abuses of power that are now, finally, coming to light. Ultimately, I believe, they were driven by rising income inequality.
Ah, give us this day our daily Bush-bashing. The Bush administration is corrupt. Income inequality is rising. Must be these two Leftist cliches are connected somehow. Let's see if we can write a column about how one cause the other. Next week let's reverse the lines of causation. Russell Roberts at Cafe Hayek has a great counterblast.

Posted by Donald L. Luskin at 8:51 AM | link