Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).
The NYT had an article on the research lab that uncovered Volkswagen's cheating on its emissions. Apparently, the lab was run on a grant of $70,000. That would be less than 0.5 percent of your typical CEO's pay. In fact, it would be less than 10 percent of the pay of the top executives at major foundations that are supposed to care about doing good in the world.
The story is hardly a surprise to anyone who knows the world of research, but still striking.Add a comment
Samuelson told readers that we "can't borrow ourselves to prosperity." We can only assume that this is something that his parents told him because it surely has no basis in evidence. If the argument is that excessive borrowing has somehow caused us problems then Samuelson would have some serious work to make that case. The interest rate on 10-year Treasury bonds is 1.6 percent. The inflation rate remains well under the Fed's 2.0 percent target.
It's hard to imagine what on earth Samuelson can be thinking of, these are the pieces of evidence that economists would look to as harm from excessive borrowing. Of course, in the Washington Post they don't give a damn about evidence if the point of the argument is to keep ordinary workers from having jobs and keeping wages down. For this reason, Samuelson will probably be able to get a paycheck for as long as he likes for repeating things that his parents told him.
Samuelson also suffers from a serious lack of historical knowledge. He claims:
"Americans are now said to be “angry” and to demand “change.” This is misleading. In the past two decades, Americans have had more change than they’ve wanted. What they’d really like is to repeal the changes — the economic uncertainties, the physical threats, the geopolitical challenges — and revert to the romanticized world of the late 1990s, when the outlook seemed more tranquil."
Actually, what is more likely than romanticizing the 1990s is that people think that they should be able to share in the gains of productivity growth rather than living in an economy which is rigged to give all the money to Wall Street types, CEOs, and other elite characters. The normal state of affairs until this rigging was that wages rose roughly in step with productivity. However since 2000, real wages have barely risen for the vast majority of the population. A columnist with a bit more historical knowledge would know that it is highly unusual for wages to stagnate for long periods of time and all income gains to go to those at the top.Add a comment
Ross Douthat inadvertently told readers much about why large segments of the public in the U.S., U.K., and Western Europe are rejecting the policies pushed by elites. In his NYT column, he complained about Donald Trump's acceptance speech (which provided much ground for complaint):
"That message was a long attack, not on liberalism per se, but on the bipartisan post-Cold War elite consensus on foreign policy, mass immigration, free trade. It was an attack on George W. Bush’s Iraq war and Hillary Clinton’s Libya incursion both, on Nafta and every trade deal negotiated since, on the perpetual Beltway push for increased immigration, on the entire elite vision of an increasingly borderless globe."
Actually the United States does not push "free trade." A major thrust of all trade agreements of the last quarter century has been longer and stronger patent protections. These are "protections" as in not free trade. They raise the price of the affected goods by factors of ten or a hundred, making them equivalent to tariffs of several hundred or several thousand percent.
While the ostensible purpose of thesse protections is to promote innovation and creative work, there is little evidence that the additional incentive provided is justified by the additional cost. The one thing that we know for certain is that they redistribute income upward, forcing ordinary people to pay more for everything from prescription drugs to movies and computer software. The beneficiaries are the high end employees and shareholders of drug companies, software companies and the entertainment industry.
It is also not true that our elites have a vision of a "borderless globe." In the United States it is illegal to practice medicine unless you complete a residency program in the United States. This means that our elites will have foreign doctors arrested for doing their work. This protectionism raises the pay of U.S. doctors by more than $100,000 a year compared to their counterparts in other wealthy countries. It costs the country around $100 billion a year (@ $700 per family) in higher health care costs.
It is striking that Douthat apparently can not even see these and other protections that redistribute income upward. Perhaps this explains why many people don't like the elites.Add a comment
The NYT, like much of the rest of the media, feel the need to argue that our trade policies could not possibly be hurting manufacturing workers. Its latest effort in this direction was a piece arguing that China could not possibly be "stealing" U.S. jobs because it is losing jobs itself to other countries.
The basic story is that China has seen a sharp rise in its wages (29 percent over the last three years, according to the article) so it is no longer the low cost producer for many items. The article points out that wages are now far lower in countries like India, Vietnam, and Bangladesh, and that many firms now operating in China are moving production to these countries. Some companies are even looking to reshore operations to the United States.
While the NYT obviously does not like Donald Trump, this argument is just silly on its face. Suppose the United States had a 20 percent tariff on imported textiles that was angering our trading partners. The NYT would then go to factories in North Carolina and elsewhere that were laying off workers, and then ridicule people who said that the tariffs were reducing textile imports.
That would obviously be absurd, but that is the logic of the NYT piece. The issue at hand is whether China's policy of deliberately keeping down its currency against the dollar has increased its trade surplus with the United States and thereby cost the U.S. manufacturing jobs. The fact that China itself might now be losing jobs, does not in any way disprove the argument that its currency policy did and still does cost the U.S. jobs.
The NYT, like much of the rest of the media, pursues a policy of selective protectionism. It either ignores or supports protectionist measures that tend to benefit higher income people. For some reason, it never discusses the laws that require doctors to complete a residency program in the United States to practice in the United States, as though there were no other way for a person to be a competent doctor. Our protectionist measures for doctors costs the country roughly $100 billion a year in higher health care costs (@ $700 per year per household). There are comparable measures in place for other highly paid professions.
The U.S. also demand stronger and longer copyright patent protection as part of its trade agreements. Protectionism in prescription drugs alone costs the public more than $300 billion a year (@ $2,500 per family). For some reason the NYT doesn't take note of this protectionism either.
It is only measures that would benefit less-educated workers that earn the wrath of the NYT and the rest of the media. Ironically, pushing a policy that would prevent currency management of the type pursued by China is actually a free trade policy. But the NYT apparently cares much more about who benefits from a policy that the logic behind it.Add a comment
Catherine Rampell correctly points out that the Donald Trump Republicans want a nanny state, going through various ways in which they want government to intervene in people's lives and the economy to make life better for them. You can add some important items that Rampell left out, like stronger and longer copyright and patent monopolies, to redistribute money from people who work to people who own patents and copyrights. They also seem fine with the protectionist barriers that keep our doctors and other highly paid professionals from having to compete with their lower paid counterparts in the developing world or even Western Europe. But she does get one item badly wrong.
Rampell lists breaking up the big banks as an intervention. Actually the opposite is the case.
The reason to break up the big banks is that if their highly paid CEOs push them into bankruptcy through incompetence, the government will invariably bail out them out. The Treasury and/or Fed will give them money at below market interest rates to ensure they survive. Such bailouts will almost certainly always get political support because folks like Rampell's employers at the Washington Post will furiously denounce anyone who doesn't support saving the big banks. The opponents will be called all sorts of names and face bleak political prospects if they don't come through with the money for Wall Street.
Since market actors know that the big banks will be bailed out by the government if they get in trouble the banks can borrow at a lower cost than smaller competitors in the same financial situation. This amounts to a government subsidy to their top executives and shareholders. The I.M.F. and others have estimated the size of this subsidy as being between $25 billion and $50 billion a year. That is not a free market.Add a comment
There have been many pieces in the media noting that the Republican platform calls for restoring Glass-Steagall and arguing that this is stealing an item from Elizabeth Warren's agenda. While the Republican proposal would presumably restore the separation of investment banks from commercial banks that take government guaranteed deposits, the 21st Century Glass-Steagall Act being pushed by Senator Warren goes well beyond this.
Most importantly, the act would change the priority given to derivatives in bankruptcy. As current law is written, various derivative instruments have priority in bankruptcy proceedings over other liabilities. This allowed non-bank institutions like Lehman to continue to carry through normal business even as their financial situation was deteriorating due to bad mortgage debt. By taking away the priority for derivative contracts, market actors would have serious incentive to evaluate the financial situation of an institution like Lehman. This would likely prevent it from developing the same sort of massive uncovered liabilities that Lehman did in the housing bubble years.Add a comment
No, that is not some new concession that the Speaker made to appease Donald Trump, this is his budget wonkiness. According to the analysis of Ryan's budget by the Congressional Budget Office, he would reduce the non-Social Security, non-Medicare portion of the federal budget, shrinking it to 3.5 percent of GDP by 2050 (page 16).
This number is roughly equal to current spending on the military. Ryan has indicated that he does not want to see the military budget cut to any substantial degree. That leaves no money for the Food and Drug Administration, the National Institutes of Health, The Justice Department, infrastructure spending or anything else. Following Ryan's plan, in 35 years we would have nothing left over after paying for the military.
As I have pointed out here in the past, this was not some offhanded gaffe where Ryan might have misspoke. He supervised the CBO analysis. CBO doesn't write-down numbers in a dark corner and then throw them up on their website to embarrass powerful members of Congress. As the document makes clear, they consulted with Ryan in writing the analysis to make sure that they were accurately capturing his program.
For some reason, the media refuse to give Mr. Ryan credit for the position he has openly embraced. The NYT followed this pattern in its editorial implying that Mr. Ryan had compromised his respectable wonkiness in his endorsement of Donald Trump. Ryan has made his career by arguing an extreme position that is far to the right of even most of the Republican party. It is long past time that the media take seriously the position he is advocating.Add a comment
An NYT article on insurers' requests for higher premiums in the health care exchanges set up by the Affordable Care Act (ACA) might have misled readers about the reason that insurers face higher costs. The piece noted the request to the federal government for large increases in several states, ranging from 34 to 60 percent. It then quoted Gregory A. Thompson, a spokesman for Blue Cross and Blue Shield plans in five states.
"...the reason for the big rate requests was simple. 'It’s underlying medical costs,' he said. 'That’s what makes up the insurance premium.'"
Insofar as insurers are seeing sharp increases in costs it is not due to rising health care costs in general. These have been rising relatively slowly. The Commerce Department reports that spending on health care services in nominal terms rose just 5.0 percent over the last year, only slightly faster than the growth in nominal GDP. (Prescription drugs spending rose at a somewhat more rapid 7.0 percent rate in the last year.)
The only plausible explanation for faster cost growth in the exchanges is that the people signing up for the exchanges are less healthy than the population as a whole. This has always been a problem with health care insurance. If only less healthy people sign up, it makes the insurance very expensive. This was the reason that the ACA requires people to buy insurance. (Bizarrely, this became know as the problem of "young invincibles," implying that we needed young healthy people to sign up for the exchanges. Actually it is much more important to have older healthy people sign up for the exchanges, since they pay higher premiums and also have almost no costs.)Add a comment
See, it's all very simple. If a father pays his kid $10 to mow his lawn, no one expects the kid to pay Social Security taxes on the money. It's the exact same thing when people work 40 hours a week for an employer, why would we expect them to pay Social Security taxes on their wages?
That is the nature of the argument Steven B. Klinsky, the founder and chief executive officer of the private equity firm New Mountain Capital, gave in a NYT column in defense of the carried interest deduction. This deduction allows hedge fund and private equity fund mangers to pay taxes at the capital gains tax rate (20 percent) instead of the 39.6 percent tax rate they would pay on normal income.
Klinsky argues that this carried interest loophole really is no loophole at all:
"Let’s say a father and a son go into business together to buy the local lawn mowing company for $1,000. The father puts up the money and the son does all the work of having the idea, managing the partnership and so on. They agree to split the partnership’s future profit 80 percent for the father (as the passive, money limited partner) and 20 percent for the son (as the active, hands-on general partner). If years later, the partnership is sold for a profit, there would be long-term capital gain on that profit. The father would own 80 percent of the profit and pay 80 percent of the capital gains taxes. The son would own 20 percent of the profit and pay 20 percent of the capital gains taxes."
See, when folks like Mitt Romney and Peter Peterson get hundreds of millions of dollars a year from their earnings as private equity fund managers it's just the same as kid who goes into business with his father. There's no reason these people should be taxed like ordinary workers.
As a practical matter, the relevant examples here are realtors, car salespeople, and other workers who get paid on a commission. In all these cases, workers' pay depends on the profit to the owner of the business or the customer. In all of these cases, workers are taxed on their commissions in exactly the same way that other workers are taxed on salaries. This is really not a tough call. There is no reason for the I.R.S. to give workers a tax break just because they are paid on commission.
Apparently, Klinsky thinks that the rules that apply to ordinary workers shouldn't apply to the very rich people who run private equity and hedge funds. At least, that is the only thing that we can reasonably infer from his argument.
Of course, the son in his case should, in principle, have to pay normal taxes on the earnings from his labor just as the kid mowing his dad's lawn should in principle pay Social Security tax on his $10. However, because trivial sums are involved and the enforcement issue would be extremely difficult, we don't worry about these cases. When some of the richest people in the country can get away with paying a lower tax rate than a school teacher or firefighter, it is something worth worrying about.Add a comment
The Fed rate hike gang got excited yesterday about the release of the June Consumer Price Index data. As the NYT reported, a 0.2 percent June rise in the core CPI took the year over year rate to 2.3 percent. That is slightly above the 2.0 percent target set by the Fed, although the Fed uses the core personal consumption expenditure index, which shows a 1.6 percent advance over the last year.
However even the CPI figure can be a bit deceiving. The shelter component (essentially rent and owners' equivalent rent) accounts for over 40 percent of the core index. This component is the factor responsible for the modest increase in the core CPI in recent months. Excluding the shelter component the core CPI actually fell modestly from 1.6 percent to 1.4 percent over the prior twelve months.
Change in the Core CPI, Excluding Shelter Over Prior Twelve Months
Source: Bureau of Labor Statistics.
It is reasonable to exclude shelter when assessing patterns in inflation since its price follows a qualitatively different dynamic than most goods and services. Rent reflects supply and demand conditions in the housing market. The factor driving rent increases is an inadequate supply of housing.
While higher interest rates will in general be expected to dampen inflation by weakening the labor market and putting downward pressure on wages, this would not be the case with rents. Higher interest rates will slow construction and in this way make the shortage of housing worse. For this reason inflation caused by rising house costs would not be a good rationale for raising interest rates.
The piece also touted the Federal Reserve Board's report of a 0.4 percent increase in manufacturing output for June. It is worth noting that this follows a reported decline of 0.3 percent in May. The Fed's manufacturing index is still 0.2 percent below its February level so it is hard to make a case for robust growth in this sector.Add a comment
Sure, everyone knows that $1.3 billion is roughly 9.0 percent of the state's $13.8 billion 2015 budget. That's why the NYT never bothered to put this figure in any context for its readers in an article on how the state is dealing with a sharp falloff in oil revenue.Add a comment
Paul Krugman actually did not make any predictions on the stock market, so those looking to get investment advice from everyone’s favorite Nobel Prize winning economist will be disappointed. But he did make some interesting comments on the market’s new high. Some of these are on the mark, but some could use some further elaboration.
I’ll start with what is right. First, Krugman points out that the market is horrible as a predictor of the future of the economy. The market was also at a record high in the fall of 2007. This was more than a full year after the housing bubble’s peak. At the time, house prices were falling at a rate of more than 1 percent a month, eliminating more than $200 billion of homeowner’s equity every month. Somehow the wizards of Wall Street did not realize this would cause problems for the economy. The idea that the Wall Street gang has some unique insight into the economy is more than a bit far-fetched.
The second point where Krugman is right on the money (yes, pun intended) is that the market is supposed to be giving us the value of future profits, not an assessment of the economy. This is the story if we think of the stock market acting in textbook form where all investors have perfect foresight. The news that the economy will boom over the next decade, but the profit share will plummet as workers get huge pay increases, would be expected to give us a plunging stock market. Conversely, weak growth coupled with a rising profit share should mean a rising market. Even in principle the stock market is not telling us about the future of the economy, it is telling us about the future of corporate profits.
Okay, now for a few points where Krugman’s comments could use a bit deeper analysis. Krugman notes the rise in profit shares in recent years and argues that this is a large part of the story of the market’s record high, along with extremely low interest rates. Actually, the profit story is a bit different than Krugman suggests.Add a comment
Bloomberg is really pushing the frontiers in journalism. In order to give readers a balanced account of a proposal by Representative Peter DeFazio to impose a 0.03 percent tax on financial transactions (that's 3 cents on every hundred dollars) it went to the spokesperson for the Investment Company Institute, the chief investment officer from Vanguard, and an academic with extensive ties to the financial industry. It also presented an assertion on the savings from electronic trading from Markit Ltd. Based on this diverse range of sources, Bloomberg ran a headline:
"Democrats assail Wall Street with plan that may hit mom and pop."
If Bloomberg was interested in views other than those from the financial industry, it might have found some people who supported the tax to provide comments for the article. Or, it might have tried some basic arithmetic itself.
Most research finds that trading is price elastic, meaning that the percentage change in trading in response to a tax is larger than the percentage increase in trading costs that result from the tax. The non-partisan Tax Policy Center assumed an elasticity of -1.25 in its analysis of financial transactions taxes.
This means that it the tax proposed by DeFazio would raise the cost of trading by 20 percent, then trading volume would decline by 1.25 times as much, or 25 percent. Investors would pay 20 percent more on each trade, but would be trading 25 percent less. This means that their trading costs would actually fall as a result of the tax. (With trading at 75 percent of the previous level, but the per trade cost at 120 percent of the previous level, the total cost of trading would be 90 percent of the prior level.)
The only way "mom and pop" get hurt in this story is if they make money on average on their trades. That is a hard story to tell. If mom and pop are lucky and sell their stock when it is high then some other mom and pop are unlucky and buy the stock when it is over-valued. As a general rule, trading will end up being a wash. (If we stopped trading altogether that would be a problem, but the taxes on the table would just raise costs to where they were 10 or 20 years ago.)
Of course there is someone that gets hurt by less trading -- the folks who were making money on the trades -- that's right the financial industry. So, Bloomberg's sources could expect to take a huge hit if Congress were to pass a tax like the one proposed by Mr. DeFazio. Based on the elasticity figure used by the Tax Policy Center and the revenue estimate from the Joint Tax Committee, DeFazio's proposed tax would cost the financial industry more than $50 billion a year. Since it may not sound very compelling to hear a multi-millionaire complain about the prospect of a pay cut, it sounds much better to make up a story about mom and pop investors.Add a comment
The Washington Post reported on new projections on national health care spending by the Centers for Medicare and Medicaid Services (CMS). The projections are that health care costs will outpace the growth of the economy, rising from the current 17 percent of GDP to 20 percent by 2025. It then provides readers with a warning from Katherine Hempstead, a researcher at the Robert Wood Johnson Foundation:
"Even under the rather optimistic assumption that health care spending grow no more quickly than the economy itself; we will, before long, be forced to choose between an unpleasant combination of significant tax increases and/or cuts in defense and non-health spending."
(I believe Hempstead is referring to age-adjusted spending. Per capita spending is virtually certain to rise relative to per capita income, due to population aging.)
There are three points worth noting on these projections. First, the CMS projections have been notoriously inaccurate in the past. In the 1990s, health care spending was projected to be more than 25 percent of GDP by 2030. This doesn't mean the most recent projections will be wrong, but people should know they are highly uncertain.
The second point is that U.S. costs are already hugely out of line with costs in other wealthy countries with no obvious benefits in terms of outcomes. We currently pay more than twice as much per person for our health care as people in other wealthy countries yet rank near the bottom in life expectancy.
As our costs grow further relative to costs in other countries, it will require a strengthening of protectionist measures to sustain this growing gap. In other words, there are huge potential savings from people receiving health care in other countries. (Also, there would be enormous savings from allowing adequately trained foreign doctors to practice in the United States.) If the protectionists ever lose their control of national policy we could see a sharp drop in costs from opening up to trade in health care services. (The potential savings would more than an order of magnitude larger than even the most optimistic projections of gains from the Trans-Pacific Partnership.)
The third point is that the U.S. economy has suffered from a shortfall in demand ever since the collapse of the housing bubble. If this "secular stagnation" continues, then we will not need tax increases and/or spending cuts to pay for health care. If we face a shortfall in demand then we can simply finance additional health care spending with deficits. In the context of an underemployed economy, this will boost growth and create jobs.Add a comment
That's what folks must have been wondering after reading this Bloomberg piece singing the praises of Antonio Weiss's work on restructuring Puerto Rico's debt. The piece told readers:
"Weiss, 49, a former Lazard Ltd. investment banker who spent almost two decades on Wall Street, became a champion for the island’s cause — a debt crisis with a human toll."
A debt crisis having a human toll, imagine that.Add a comment
Eduardo Porter argued in his column that part of the story of growing inequality is a failure of competition policy. The argument is that increased concentration in a number of industries has led to rents being shared by high earning employees in the largest firms. Porter cites research from Jason Furman, the current head of the Council of Economic Advisers, and Peter Orszag, the former chief of the Office of Management and Budget, which support this view.
While Porter mentions a number of firms that might fit this story, he neglected to mention Uber. Uber is striking in that it appears to be trying to form a monopoly by using its political power (it hired David Plouffe, President Obama's chief political adviser, as a lobbyist) to maintain an unsettled regulatory structure in the industry. While Uber is prepared to act in defiance of existing regulations, and then use its power to prevent legal sanctions, smaller competitors are likely to be less comfortable operating in defiance of the law. While a clear set of regulations would help to level the playing field, Uber is working hard to prevent modernized regulations from coming into effect.
This is exactly the sort of situation that leads to concentration of wealth (Uber's stock now has a market value of $68 billion), without generating efficiency gains for the economy. It is a good illustration of the problem noted in Porter's column.Add a comment
It speaks to the truly bizarre nature of political reporting that a person who calls for eliminating most areas of the federal government in the next three decades (exceptions are Social Security, Medicare and Medicaid, and the Defense Department) is viewed as a thoughtful moderate, but that is how the NYT and the rest of the media treat House Speaker Paul Ryan. Somehow, we are supposed to ignore the fact that Speaker Ryan has repeatedly proposed budgets that would eliminate federal funding for education, infrastructure, the Justice Department, the National Institutes of Health and just about every other area of federal spending.
The NYT is worried that the rise of Donald Trump and the conservatives in the House will prevent him from continuing his serious discussions of budget issues. Or at least that is what they claim to be worried about.Add a comment
The media often feel the need to be balanced in its coverage of Republicans and Democrats even when the evidence doesn't lend itself to much balance. We got a strange example of such an effort at balance in a NYT article reporting on a piece on the Affordable Care Act by President Obama that ran in the Journal of the American Medical Association. According to the NYT piece, Obama said that he would like to see larger subsidies for the health insurance policies in the exchanges, that he would like people to be able to buy into a public plan like Medicare, and he would like to rein in the drug companies.
After laying out the changes that President Obama would like to see in the Affordable Care Act the piece tells readers:
"Mr. Obama accused Republicans of 'hyperpartisanship' without saying what he might have done differently."
This assertion makes no sense since the whole article is describing an agenda that President Obama would like to see, if not for the obstruction of Republicans. In other words, Obama was very specific about what he might have done differently, at least according to the article.Add a comment
No, I'm not engaging in name calling, this is based on Barton Swaim's self-description of his abilities in his Washington Post column on the United States being in decline. Swaim, a contributing columnist to the Washington Post complained to readers that the United States is becoming a European-style regulatory state, then added:
"...neither the country’s political class nor its voters seem to care that the national debt has reached literally incomprehensible levels..."
In fact, the numerate among us have little difficulty comprehending the level of debt. If we look at the publicly held debt, it's a bit more than 75 percent of GDP. If we include the debt held by Social Security and other government trust funds it is a bit more than 100 percent of GDP.
Of greater relevance than these debt to GDP figures is the interest burden associated with the debt. Currently this is around 0.8 percent of GDP, after we net out the money rebated from the Fed. This compares to an interest burden of over 3.0 percent of GDP in the early 1990s.
This article referring to the debt by someone who claims that he finds it "literally incomprehensible," follows by a day a NYT column by Steven Rattner who told readers that he found Social Security and Medicare's projected shortfalls "terrifying."
It might be helpful if these papers could insist that the people who write on the debt and deficit have some understanding of the issues, as opposed to people who by their own admission find the topics "literally incomprehensible" or "terrifying." If Swaim had a better understanding of the debt he might have even re-evaluated his thesis that the United States is in decline.
I should add that the United States today has a much larger implicit liability, relative to the size of the economy, in the form of patent and copyright liabilities than would have been the case in prior decades. These are commitments that the government has made of the public's money to the holders of these property claims in order to compensate them for innovative and creative work. Unfortunately, there is no record of the size of these commitments in the government's accounts.Add a comment
Apparently the answer is "no." Steven Rattner used his NYT column to make the important complaint that we are starving large areas of the federal government, leading to a deteriorating infrastructure and poor quality public service. All of this is fine. It has been said a few hundred thousand times, but it can't hurt to say it a few hundred thousand more.
But then Rattner tells us:
"Yes, we needed to bring the deficit down. And yes, we still face terrifyingly large obligations in years to come as baby boomers retire and expect to receive Social Security and Medicare benefits."
And how did he know we needed to bring the deficits down? Is this something he got from his parents? He sure didn't get it from any reasonable assessment of the state of the economy. The problem with overly large deficits is high interest rates and then high inflation rates if we accommodate the high interest rates with easy money. When since the downturn have interest rates been high? When has the inflation rate been too high? It's cute that Mr. Rattner remembers what his parents told him, but it would be nice when giving advise on economic policy if he relied on economics instead.
As far as the "terrifying large obligations": really? We raised Social Security and Medicare taxes in the 1980s. If we raised them by the same amount somewhere in the next three decades these programs would be fully funded for the rest of the century. It's too bad that Mr. Rattner finds this "terrifying."
There is one last point on which I am going to seriously beat up the budget whiners from now on. When we give patent and copyright monopolies to private companies and individuals the government is just as much imposing a tax on future generations as when we hand them government debt. If any budget "expert" ignores these commitments, which run into many trillions of dollars over the next decade, they are either incompetent or dishonest. Either way, anyone who tries to talk about the government deficit without factoring in the size of these obligations does not deserve to be taken seriously.Add a comment
George Will used his column to complain that the Federal Reserve Board is redistributing upward with its low interest rate policy. Since this is a source of confusion that extends well beyond Will, it is worth taking a few minutes to address this issue directly.
The essence of the argument is that low interest rates drive up asset prices like stock and assets, thereby increasing the wealth of people who own these assets. Since the rich own most of these assets, especially stock, the argument is that the higher asset prices are helping the rich at the expense of the rest of us.
Before addressing the logic of this point, it is first worth examining the extent to which asset prices have risen as a result of low interest rates. The pre-recession peak of the S&P 500 was 1576 on October 1, 2007. Since then the market has risen by roughly 35 percent to 2130. The economy has grown by just over 25 percent over the same period. Virtually no one thought there was a stock bubble in 2007. (I warned people about the market at the time, not because of a stock bubble, but rather because I expected the crash of the housing bubble to lead to a severe recession, which the market was not anticipating.)
If the market wasn’t in a bubble in 2007, it’s hard to make the case it faces one today. Also, if there has been a permanent shift to higher profits (which I don’t believe, but many economists claim), then the price to trend earnings ratio would be roughly the same today as it was before 2007.
For those keeping score, the federal funds rate was 5.0 percent in October of 2007 and the 10-year Treasury rate was 4.5 percent. That compares to today’s rates of around 0.3 percent for federal funds and 1.6 percent for 10-year Treasury bonds. If the argument is that low interest rates have given us a stock bubble, the Fed has not bought itself much for its efforts.Add a comment