U.S. Budget and Economy

Tuesday, April 25, 2017

Will the Fed selling Treasuries affect interest rates?

On April 5, it was reported that the Federal Reserve wants to start unwinding the $4.5 trillion in bonds on its balance sheet this year. This revelation came from a summary of the Federal Open Market Committee meeting held in March. The composition of the Fed's balance sheet can be seen in the following chart:

Note: In the following charts, click on the chart to see its data and sources.

Federal Reserve balance sheet: 2003-2017

As can be seen from the purple area in the chart, about 2.5 of the 4.5 trillion in assets are Treasuries. Also visible is that these levels have remained stable since the end of 2014, when QE3 ended. In any event, there has been much discussion on what will happen when the Fed starts selling its Treasuries. More specifically, who will step in and buy the Treasuries that the Fed is selling plus any additional debt being created? To judge this, it helps to look at how the holders of Treasuries have changed over time. The following chart shows the holders of Treasury securities since 1970:

Major Holders of Treasury Securities: 1970-2016

As stated below the table on this page, this includes marketable and nonmarketable Treasury securities held by the public (net of premiums and discounts) and Treasury securities held by federal government employee retirement funds. Hence, it does not include the $2.8 trillion of special-issue treasuries held by the Social Security trust fund. In any event, it's worth noting how the total value of Treasuries has increased sharply since the financial crisis. Hence, there is likely to be a great deal of new Treasuries that need to be bought in addition to those being sold by the Fed.

The chart does show that the value of Treasuries held by individuals and mutual funds increased sharply after the 2008 financial crisis. It would seem likely that this was in response to the fact that Treasuries were one of the few asset classes that did not go down sharply during the crisis. The value of Treasuries held by banking institutions also increased somewhat, possibly due to the improvement in their balance sheets. Treasuries held by government (state and local) and insurance companies seemed to remain fairly stable. Pension funds (including government retirement funds) did increase somewhat but were already major holders of Treasuries. Of course, as shown in the first chart in this post, the value of Treasuries held by the Fed increased sharply starting in 2011.

The one other major holder of Treasuries were foreign holders and they likewise can be seen to have increased after the crisis. The composition of this group can be seen in the following chart:

Major Foreign Holders of Treasury Securities: 2000-2016

As can be seen, Japan and Mainland China are the two countries with the largest holdings of Treasuries at just over $1 trillion each. The chart shows that the holdings of both countries have decreased over the past three years. The next two largest holdings are in Ireland and the Cayman Islands. This may initially seem surprising but the reason is that both are regional financial centers. The holdings in both of those countries have increased sharply since the financial crisis. Finally, the olive-colored line shows that the holding of all other countries have remained about the same over the past two years. As a result, the blue line at the top shows that the holdings of all countries has decreased slightly over the past two years.

Judging from the above chart, it would not seem that foreign holders of Treasuries can be counted on to buy many of the new Treasuries being created or sold by the Fed. One exception would be if those Treasuries pay higher interest rates. Another exception might be if there is another global financial crisis and U.S. Treasuries are seen as a safe harbor. The same may be true for Treasuries bought by individuals and mutual funds. Higher interest rates and/or a major market correction could motivate more investors to buy Treasuries.

There is no agreement on the effect of all this on future interest rates. For example, one blog suggests that "[i]n addition to actual rate hikes, this would put further upward pressure on interest rates, and downward pressure on bond prices." However, another blog reminds readers that "[a]s the Fed ceased QE1 and all economists knew rates must rise...rates shocked 100% of economists and fell by a third." It concludes "I don't think the Federal Government nor the Federal Reserve are about to let a "so called free-market" determine the yields paid on America's debt." Of course, the Federal Government and Federal Reserve may not be able to do anything to avoid higher interest rates. However, it is true that higher interest rates will cause the interest payments to increase, putting additional pressure on the U.S. budget. This will certainly be a motivation to keep interest rates low if that is possible.

Friday, April 21, 2017

Why does President Trump like a low-interest rate policy?

In an interview with the Wall Street Journal published on Wednesday, April 12th, President Trump said "I do like a low-interest rate policy, I must be honest with you". This view has reportedly changed over time with Trump saying that "Janet Yellen should have raised the rates" on November 3, 2015. In any event, it seems worth looking into why Trump may be supportive of a low-interest rate policy now.

This blog post lists winners and losers from low interest rates in the United Kingdom. The third item listed under winners is government debt payments and the first chart shows that bond yields are declining but then states the following:

This fall in bond yields is occurring, despite a rise in government debt to GDP, and a persistent budget deficit. It is important for limiting the percentage of tax revenue spent on debt interest payments.

This same statement could be made about the United States. The following chart shows various treasury interest rates since the early 50s:

Note: In the following charts, click on the chart to see its data and sources.

Treasury Interest Rates: 1953-2017

As can be seen, they have been dropping since they reached highs in the early eighties. The following chart then shows the federal debt as a percentage of GDP:

Public and Gross Federal Debt: 1940-2021

The red line is the gross federal debt and includes the debt owed to Social Security and other government trust funds and the blue line is the federal debt owed to the public. The net interest that is paid on this debt to the public is the purple line in the following chart:

Top U.S. Federal Outlays: 1970-2012

As can be seen, the net interest has come down to historically low levels even as the federal debt has risen sharply. This is due to the historically low interest rates being paid on that debt. However, note that the net interest is projected to double from about 1.25 percent of GDP in 2015 to about 2.5 percent of GDP by 2021. This is chiefly because the interest rates being paid on that debt is projected to increase. The following table shows the projected rates that will be paid on 91-day Treasury bills and 10-year Treasury notes through 2026:

Table S–12. Economic Assumptions
(Calendar years)
                            Actual  Projections
                            ------  -----------------------------------------------------------
                              2014  2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026
Interest rates, percent:      ----  ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
  91-day Treasury bills  .....   *     *  0.7  1.8  2.6  3.1  3.3  3.4  3.4  3.3  3.3  3.2  3.2
  10-year Treasury notes ..... 2.5   2.1  2.9  3.5  3.9  4.1  4.2  4.2  4.2  4.2  4.2  4.2  4.2

* 0.05 percent or less.
Source: U.S. Budget, FY 2017, Summary Table S-12
The CBO (Congressional Budget Office) just put out The 2017 Long-Term Budget Outlook in March. On page 19, it states:

The government’s net interest costs are projected to nearly double as a share of the economy over the next decade—from 1.4 percent of GDP in 2017 to 2.7 percent by 2027—as currently low interest rates rise and as greater federal borrowing leads directly to greater debtservice costs. In the extended baseline, those costs reach 6.2 percent of GDP by 2047 (see Figure 5 on page 12).

It would seem very possible that President Trump has been made aware that lower interest rates would have a beneficial effect on the budget, making any planned tax cuts or infrastructure spending more affordable. That could have much to do with why he now likes a low-interest rate policy.

Sunday, February 16, 2014

Is Washington D.C. the Problem?

On December 17th, the Washington Business Journal posted an article titled "D.C. far outpaces nation in personal earnings". It began:

D.C. residents are enjoying a personal income boom.

The District’s total personal income in 2012 was $47.28 billion, or $74,733 for each of its 632,323 residents, according to the Office of the Chief Financial Officer’s Economic and Revenue Trends report for November.

The U.S. average per capita personal income was $43,725. The highest of the 50 states, Connecticut, fell 25 percent short of D.C.

The article concludes:

The numbers suggest D.C. residents are living the high life. Some are, but, of course, it’s not that simple. Poverty is entrenched in many D.C. neighborhoods, especially east of the Anacostia River, where earnings are virtually nonexistent and the need for social services is dire. But as long as the District is booming on a per capita basis, the money should be available to help.

As it turns out, the $74,733 and $43,725 figures are slightly in error. They come from page 1 of the article's source but on page 17 of that source and on the BEA web site, the numbers are given as $74,773 and $43,735. Still, googing the erroneous numbers turns up a number of articles whose titles suggest conclusions that are less subdued than those drawn by the Business Journal. Just the first page of the google results include Who's Really Making Out Like Bandits in Obama's Economy?, As Unemployed Lose Benefits DC Enjoys A Wonderful Year Of Patronage, Fat City, Living High on the Hog, and It’s a Very Merry Christmas for Washington’s Parasite Class. This last article is by Daniel J. Mitchell of the Cato Institute and is reposted here, here, and here and is referenced on numerous other pages. In it, Mitchell cites the prior figures and states the following:

Why is income so much higher? Well, the lobbyists, politicians, bureaucrats, interest groups, contractors, and other insiders who dominate DC get much higher wages than people elsewhere in the country.

He goes on the reference an article titled Lobbying: A Terrific Investment and, following a link to a Reason TV interview with Andrew Ferguson of the Weekly Standard, he concludes:

I particularly like his common sense explanation that Washington’s wealth comes at the expense of everyone else. The politicians seize our money at the point of a gun (or simply print more of it) to finance an opulent imperial city.

So if you’re having a hard time making ends meet, remember that you should blame the parasite class in Washington.

Is Washington D.C. an "opulent imperial city" that is to blame for some of us "having a hard time making ends meet"? To answer that, it would seem that we need to do more than just compare the per capita personal income of D.C. against that of the entire United States. After all, D.C. is a single city and the U.S. is an entire country. At the very least, it would help to look at other cities. It might also be good to look at entire metropolitan areas so as to capture more of the people who are working in the city or as lobbyists and contractors to the government.

The following graph shows the 10 metropolitan areas which had the highest per capita personal income in 2012.

Per Capita Personal Income, Top 10 Metropolitan Areas in 2012

The numbers and sources for this and the following graph can be found at this link. Surprisingly, the metropolitan with the highest personal income is Midland, Texas. A recent article titled "Oil-rich Midland, TX is nation’s fastest growing metro area, with highest per-capita income in the country at $83,000" states:

For the third year in a row, Midland was the nation’s fastest growing MSA, with growth in personal income in 2012 of 12.1%. Midland also led the country as the MSA with the highest per capita personal income in 2012 at $83,049, followed by Bridgeport-Stamford-Norwalk, CT ($81,068), San Francisco ($66,591), the Silicon Valley MSA of San Jose-Santa Clara-Sunnvale ($65,679) and Washington, DC ($61,743).

The article goes on the explain that "America’s Shale Revolution is creating shale-based wealth, income, jobs and prosperity, especially in the states of Texas and North Dakota". This also likely has much to do with the recent rise of Casper, Wyoming to number 10 on the list.

A Bloomberg article from two years ago titled Rich Man, Poor Man: Connecticut Tops U.S. Wealth Gap says the following about the Bridgeport-Stamford-Norwalk metropolitan area:

In the Bridgeport-Stamford-Norwalk metro area, 53,076 households took home at least $200,000 -- and 16,505 earned less than $10,000.

“This region is a microcosm of the U.S.,” Pearson said.

Exacerbating the gap are the ranks of wealthy residents who have grown richer as the region became a hub for investment firms and hedge funds, she said. Median household income hovers 60 percent above the national figure at about $80,000.

Hence, this article suggests that the high income has some relation to the area becoming a hub for investment firms and hedge funds. In any case, the Washington D.C. metropolitan area does not stand as an "opulent imperial city" in terms of per capita personal income. How about in terms of the total personal income? The following graph shows the 10 metropolitan areas which had the highest total personal income in 2012.

Total Personal Income, Top 10 Metropolitan Areas in 2012

The graph shows each metropolitan area's total personal income as a percent of the total personal income of all metropolitan areas in the U.S. This was about $12.095 trillion in 2012. It should be noted that this was actually 88.1 percent of the total personal income in all of the U.S. in 2012 of about $13.729 trillion. The difference is that the latter figure includes the rural (non-metropolitan) areas.

The above graph is a little more as expected with the New York City area having by far the highest total personal income, followed by the Los Angeles area and then the Chicago area. As can be seen, the Washington D.C. area is fourth with just about 3 percent of the total personal income of all metropolitan areas. Hence, it's difficult to see how those who are having a hard time making ends meet should lay all blame on the "parasite class in Washington", as Mitchell describes them.

There does seem to be some agreement among many members of both parties that there is a problem with lobbyists, interest groups, and other insiders in Washington. However, there seems to be much disagreement about what to do about it. Some groups promote reforms of our campaign financing and other laws to better regulate these groups. In contrast, Mitchell ends his article with the following line:

P.P.P.S. Making government smaller is the only way to reduce the Washington problem of corrupt fat cats.

In any event, the above discussion shows the importance of looking at as much and as varied a selection of data as possible when studying economic issues. Even the above two graphs have their limitations. They say nothing about the distribution of income within those metropolitan areas and give no information as to what is going on immediately outside those areas. However, they give much, much more information than the simplistic comparison of one measure of a single city against an entire country.

Sunday, February 2, 2014

Ben Bernanke and the Federal Reserve Balance Sheet

January 31st marked the end of Ben Bernanke's 8-year tenure as Federal Reserve Chairman. An article titled "Bernanke Leaves Fed with Record Balance Sheet of $4,102,138,000,000" gives a short history of the actions of the Fed and growth in the Fed Balance Sheet during that time. Following is a short summary of the actions taken from there and Wikipedia:

Program   Start      End     Securities purchased
-------  --------  --------  --------------------
QE1      Dec 2008  Mar 2010  agency mortgage-backed securities (MBS) and agency debt, up to $600 billion total
         Mar 2009  Mar 2010  expanded to $1.25 trillion in MBS, $175 billion in agency debt, and $300 billion in treasuries
QE2      Nov 2010  Jun 2011  longer dated treasuries, at a rate of $75 billion per month for a total of $600 billion
Twixt    Sep 2011  Dec 2012  longer dated treasuries with funds from selling shorter dated treasuries, total of $400 billion
QE3      Sep 2012  Present   agency mortgage-backed securities (MBS) at a rate of $40 billion per month
         Dec 2012            added longer dated treasuries, at a rate of $45 billion per month (same rate as Twixt)
         Jan 2014            cut back to $35 billion MBS and $40 billion in treasuries per month
         Feb 2014            cut back to $30 billion MBS and $35 billion in treasuries per month
         Mar 2014            cut back to $25 billion MBS and $30 billion in treasuries per month
         Apr 2014            cut back to $20 billion MBS and $25 billion in treasuries per month
The effect of these programs on the federal reserve balance sheet can be seen in the following graph:

federal reserve balance sheet

As can be seen, federal reserve assets jumped sharply toward the end of 2008 in response to a number of Fed programs. These programs are shown in more detail in graphs and tables at this link. Then, mortgage-backed securities (MBS) are seen to grow sharply from early 2009 to early 2010 in response to Quantitative Easing 1 (QE1). Then, treasuries are seen to grow sharply from then end of 2010 to mid-2011 in response to Quantitative Easing 2 (QE2). Operation Twixt, which went from late 2011 to the end of 2013 is not visible because the changes occurred entirely within the purple area of "Other U.S. Treasuries" where longer dated treasuries were bought with the funds from selling shorter dated treasuries. However, both mortgage-backed securities (MBS) and treasuries are seen to grow sharply from the end of 2012 to the present in response to Quantitative Easing 3 (QE3).

The Federal Reserve website has an excellent program for downloading and graphing this data at this link. The data for the above graph is posted at this link and was downloaded via this program. This program was also used to generate the following graph:

federal reserve balance sheet from site

This graph looks very similar to the first graph but differs in that it is not a "stacked-area" graph. As a result, mortgage-backed securities (the red line) are shown separately from the U.S. Treasury securities (the green line). As can be seen, the Federal Reserve assets consisted chiefly of U.S. Treasuries before the financial crisis but its holdings of mortgage-backed securities briefly surpassed its treasury holdings in 2010 in response to QE1. However, the Fed's treasury holdings came back to surpass its MBS holdings with QE2 and that has continued as both have grown with QE3.

There is some disagreement as to the effects of these programs. On January 31st, the PBS Newshour had a segment titled "How economists grade Ben Bernanke’s Federal Reserve tenure". The following excerpt from the transcript shows a apparent disagreement between the conservative economist Charles Calomiris and Alan Blinder, a past vice chairman of the Fed, apparently over the wisdom of QE3:

CHARLES CALOMIRIS: The Fed under Bernanke in the last two years has created inflationary risk that could be hard for his successors to manage. What he created was a risk of inflation over the next five years, in exchange for getting very small potatoes in terms of improvement in the economy over the past two years.

PAUL SOLMAN: That risk is why Calomiris gives Bernanke a post-crash grade of incomplete.

But Alan Blinder calls inflation fears baseless.

ALAN BLINDER: For years, there was going to be inflation next year, inflation next year. Wrong, wrong, wrong, wrong. We haven’t had any inflation. Lately, since there’s no inflation, often, it’s the same people have started this, it’s causing speculative bubbles.

So let’s see, where? House prices? I don’t think so. They have recovered about one-third of what they lost, and it looks like they’re kind of leveling off. Can’t tell. Stock prices? Well, maybe, but, you know, we have extraordinarily high profits. We have extraordinarily low interest rates. On basic fundamentals, stock prices should be high. I don’t stay awake worrying about bubbles now.

On the other hand, Richard Fisher, President of the Federal Reserve Bank of Dallas, discussed what he believed to be the costs and benefits of the programs on a recent episode of EconTalk. In the following excerpt from the transcript, he discusses the costs:

And I'm worried about the long-term consequences of having all that money sitting out on the sidelines. These are in depository institutions as well as significant amounts of money sitting in private equity firms and sitting in hedge funds, etc., outside our purview. That's a lot of tender. If velocity were to pick up, how do we tamp it down so that it doesn't lead to inflationary impulses? Right now inflation is not an issue. But our charge, given to us by the Congress, says long run, long run, long run. And that's what I'm worried about. Those are the costs that I'm worried about.

He then goes on the discuss the benefits:

And the benefits? Well, I'll be blunt about this. Mr. Druckenmiller said this on television the other day: this is great for rich people; it's great for Warren Buffett. Bless his heart, he's a good investor. Good for Mr. Druckenmiller and others, they get money for free. It hasn't done what we wanted it to do, which is lead to greater job creation for the two middle income quartiles.

My impression is that there is general agreement that Bernanke handled the immediate aftermath of the financial crisis well. In the Newshour interview, both Blinder and Calomiris gave Bernanke an A for that period. However, there seems to be much less agreement on the Fed's recent policies. Much will likely depend on how things play out and whether the Federal Reserve is able to unwind its balance sheet without any major problems. As Paul Solman said at the end of the Newshour segment:

And so, as Ben Bernanke leaves office after what everyone agrees is an unforgettable eight years on the job, his final grade probably won’t come for years, during the tenure of successor Janet Yellen, or maybe even later than that.

Tuesday, January 28, 2014

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 4)

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 4)

At the end of my last post, I said that it would be interesting to see if the Wall Street Journal finally corrects the online version of Brett Stephens's column, "Obama's Envy Problem". As it happens, they have finally done so. I first noticed it when I rechecked the site after my last post late on January 20th. According to a blog post by Paul Krugman titled "Department of Corrections, and Not", the column was still uncorrected when he checked it a few minutes before his posting at 1:40 PM on January 20th. Hence, the Journal may have corrected it shortly after that. I may have initially missed it because they posted the correction at the end of the column. The correction reads as follows:

Corrections & Amplifications

Inflation-adjusted income data from the U.S. Census Bureau show that incomes declined by 2.6% for the bottom quintile between 1979 and 2012, increased by 5.7% for the middle class (third quintile), and by 42% for the top quintile. This column used non-inflation adjusted income figures.

An interesting blog post titled "Bret Stephens and Paul Krugman: What Should a Correction Look Like in the Digital Era?" discusses what an online correction should look like. The Journal did in fact follow the advice not to do a "silent edit" after a column's errors become the basis for other people’s posts. However, there may have been additional reasons that the Journal did not do a silent edit. Once the nominal figures are corrected for inflation, the entire argument put forth by the column pretty much falls apart. For this reason, it might be better if the Journal puts the correction before the column rather than after it. That will save future readers the time and effort of reading it. Coming at the end, the correction should likely begin with the words "Never mind!". Still, it is good to see that the Journal did correct the online column. Hopefully, this might help lead to a policy of doing this on all corrected articles posted by the Journal and other publications. However, that does leave open the question in the title of this post. To what degree do publications have the responsibility to screen their columns and catch these obvious errors to begin with?

Monday, January 20, 2014

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 3)

In my last post, I pointed out that the Wall Street Journal website is still displaying the same editorial with the same non-inflation-corrected numbers for which they had posted a correction. I concluded that it will now be interesting to see if the Wall Street Journal corrects it.

As of this posting, the Wall Street Journal has still not corrected it and I was therefore happy to see Paul Krugman also take up this issue. On January 19th, a Krugman column titled "The Undeserving Rich" was posted on the New York Times website. In it, he stated:

For an example of de facto falsification, one need look no further than a recent column by Bret Stephens of The Wall Street Journal, which first accused President Obama (wrongly) of making a factual error, then proceeded to assert that rising inequality was no big deal, because everyone has been making big gains. Why, incomes for the bottom fifth of the U.S. population have risen 186 percent since 1979!

If this sounds wrong to you, it should: that’s a nominal number, not corrected for inflation. You can find the inflation-corrected number in the same Census Bureau table; it shows incomes for the bottom fifth actually falling. Oh, and for the record, at the time of writing this elementary error had not been corrected on The Journal’s website.

On his blog, Krugman added a post titled "Department of Corrections, and Not" which recounts that Bret Stephens has contacted the Times to protest his contention that Stephens' error in using nominal incomes has not been corrected on the WSJ’s website. Krugman goes on to explain that Stephens is apparently referring to this correction but that that is not what he calls a "correction". He continues:

What, after all, is the purpose of a correction? If you’ve misinformed your readers, the first order of business is to stop misinforming them; the second, so far as possible, to let those who already got the misinformation know that they were misinformed. So you fix the error in the online version of the article, including an acknowledgement of the error; and you put another acknowledgement of the error in a prominent place, so that those who read it the first time are alerted. In the case of Times columnists, this means an embarrassing but necessary statement at the end of your next column.

Nothing like that happened in Stephens’s case. Someone reading his original column on line will see exactly the same piece that was originally published, bogus statistics and all, with no hint of a problem and no link to his mea culpa.(Or at least that was true a few minutes ago — maybe they’ll scramble to fix it now.) Maybe one in a hundred will hear somewhere that there was a problem — but for everyone else the misinformation is continuing to spread.

Krugman need not have worried as there appears to be nobody at the Journal scrambling to fix the original editorial. As of this moment, it has still has not been corrected. By the way, if you attempt to view the original column directly, you will likely just see the first few lines with a prompt to subscribe. However, there is an alternative method that usually seems to view the entire article. Go to google.com, search for "Obama's Envy Problem", and then click on the first item which should be titled "Bret Stephens: Obama's Envy Problem - WSJ.com". This should bring you to the same URL but show the entire article. It may be best to use Internet Explorer for this as Chrome does not always seem to show the whole article. As can be seen, the increase of 186% for the bottom 20%, based on nominal numbers, is still there.

Rather than fix the original editorial the Journal has posted a response by Stephens titled "Stephens: Krugman and the Ayatollahs". In it, Stephens states that "a formal correction was posted on Jan. 5 and I addressed the subject at length on Jan. 3". Can't anyone at the Journal read? Do they truly not understand that Krugman is talking about correcting the original editorial still posted online? Why hasn't the Journal corrected it? A cynical person might suggest the following:

The initial editorial was read by tens or hundreds of thousands of readers and the use of nominal numbers helped to make the case that Stephens and the Journal editorial staff supported. But, as Krugman suggested, the corrections might be seen by one in a hundred of the original readers. I don't subscribe to the Journal so I don't know where those corrections were printed in the paper. But Krugman seems to indicate that a correction was not included at the end of Stephens's next column, a place where his regular readers, at least, would be likely to see it. And by leaving the original editorial uncorrected, the same editorial will be read of additional readers, likely via search engines like Google, and the same flawed numbers will continue to help make the case which Stephens and the Journal support.

Stephens also took his arguments to Twitter, tweeting the following:

Paul Krugman nastily accuses me of "crude obfuscation," in the course of which me makes a dumb factual mistake. See if you can spot it.

As someone tweets back, I think that Stephens meant "he" instead of "me". In any event, following are the final three responding tweets (at this time):

PK with an excellent point. Any "correction" should be done as an addendum to the original article.

Man up, make a legit correction, and get over it.

Why not link to your original column and Krugman's in your acknowledgement of the error? Why not note error in original column?

It will be interesting to see if Stephens responds. What will be more interesting will be if the Journal will finally correct the original editorial or include a correction at the beginning and/or end of it. If they do not, I hope that people with large readerships like Krugman continue to hold them to account. Of course, Stephens and the Journal are free to hold Krugman to account for any uncorrected columns that the Times continues to post online. However, they have not yet shown that they recognize the principle, much less are prepared to follow it.

Wednesday, January 8, 2014

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 2)

At the end of my last post, I wrote:

It will be interesting to see if Stephens or the Wall Street Journal publish a correction to this egregious mistake. That might give some indication as to whether they are concerned about their reputations or are simply pushing a point of view by whatever means possible.

As it happens, a correction written by Stephens titled "About Those Income Inequality Statistics" was posted on January 3rd. In it, he admits his error in using data that had not been corrected for inflation, stating:

In my Dec. 31 column on income inequality, I used a data set from the U.S. Census Bureau to make the case that incomes in the U.S. have been growing across the board, even if the incomes of the wealthy have grown faster than those of others further down the income scale. But I wrote those lines looking at a set of numbers that had not been adjusted for inflation.

Professor Krugman, in a post on his New York Times blog, takes me to task for this. Had I done so looking at the inflation-adjusted table, it would have shown the incomes of the bottom 20% essentially stagnating since 1979 (and long before then, too), though it also would have shown incomes for the top 20% rising far less dramatically.

He goes on to mention that Krugman accuses him, not of making an honest mistake, but of "pulling a fast one". He then continues:

My mistake is all the more unfortunate because the basic point I was making is right: Americans are getting richer across the entire income spectrum, even if they are getting richer at very different rates. That much is confirmed by data from the Congressional Budget Office. The CBO finds that between 1979 and 2007 income for poor households grew by 18%, for the middle classes by nearly 40%, and for the top 81-99% by 65%. It's the top 1% who have made out very handsomely, with a jump of 275% over nearly three decades.

Hence, Stephens feels that his basic point is still right despite the fact that he was forced to switch from using Census data to CBO data to maintain it. He feels this despite the fact that he goes on to admit that the differences between Census and CBO data is complicated and ultimately subjective. In any event, the CBO numbers calculate that the income of the bottom 20 percent of households increased by 18% over the 28 years from 1979 to 2007. That works out to about 0.6 percent per year compounded.

The idea that this shows that "Americans are getting richer across the entire income spectrum" is highly debatable. As mentioned, Stephens had to go with CBO data instead of Census data. In addition, he is basing this statement on a mere four categories. The CBO data gives no indication as to the variation of income increases in the bottom 20 percent. This is especially the case when you consider the variation in inflation. Those who have been hit by high inflation in health care and higher education likely do not feel "richer". In addition, you would expect incomes to rise faster than inflation due to productivity and the real growth in the GDP. The following graph shows the growth in output and wages since 1950:

Wages versus Productivity (Wage gap): 1947-2012

As can be seen, wages generally kept up with productivity gains until the 70s but have generally lagged since. The following graph shows wages and corporate profits as a percent of GDP since 1950:

Wages and Corporate Profits: 1947-2012

As can be seen, wages as a percent of GDP stayed fairly level to the mid-70s but have generally declined since. Meanwhile, corporate profits as a percent of GDP have risen sharply since about 2001. The actual data and sources for both of these graphs can be found at this link.

In addition to Stephen's correction, the Wall Street Journal has posted a correction that reads as follows:

Inflation-adjusted income data from the U.S. Census Bureau show that incomes declined by 2.6% for the bottom quintile between 1979 and 2012, increased by 5.7% for the middle class (third quintile), and by 42% for the top quintile. Bret Stephens's column of Dec. 31 (Global View, "Obama's Envy Problem") used non-inflation adjusted income figures.

However, there is one major problem remaining. If you look at the original editorial, you'll see that nothing appears to have changed! The Wall Street Journal website is still displaying the same editorial with the same non-inflation-corrected numbers that they have posted a correction for! What is the point of the correction if you're not going to correct the original posting?

It was a positive step for Stephens and the Wall Street Journal to post corrections to this story. However, it will now be interesting to see if the Wall Street Journal corrects their original editorial. That might give some indication as to whether they are truly concerned with correcting their mistakes and limiting their effects or are simply going through the motions.

Do Publications Have Any Responsibility to Screen Their Editorials? (Part 3)

About Me

I became interested in U.S. budget and economic matters back in 1992, the first time that I remember the debt becoming a major issue in a presidential election. Along with this blog, I have a website on the subject at http://www.econdataus.com/budget.html. I have blogged further about my motivations for creating this blog and website at this link. Recently, I've been working on replicating studies such as the analysis at this link.

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