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).
Neil Irwin has an interesting piece in the Upshot section of the NYT noting factors that people may not consider in deciding between renting and buying their home. One item I would add to the list is the tendency to overstate the value of the mortgage interest tax deduction.
It is common for realtors to push houses on prospective buyers by telling them that their mortgage interest is tax deductible. This is true, but the value of the deduction is only equal to the difference between the household's deductions including mortgage interest and the standard deduction.
Most people will have few deductions other than their mortgage interest deduction. Typically, they may have state income taxes, and that will be pretty much it.
Suppose these taxes come to $5k a year for a couple and their mortgage interest is $10,000 a year. If they are in the 25 percent bracket, they might be inclined to think that they are saving $2,500 a year from their taxes due to the mortgage interest deduction. In fact, since the standard deduction for this couple is $12,600, they are only benefiting to the extent that the mortgage interest deduction puts them above this number. In this case their combined deductions are now $15,000, which is $2,400 above the standard deduction. That will save them $600 a year on their taxes, not $2,500.
Furthermore, as time goes on, interest will be a smaller share of this couple's mortgage payment as the mortgage is gradually paid off. This will reduce the amount that can be deducted against their taxes. This means that the mortgage interest deduction will be of less use to this couple over time.
Many homebuyers are unaware of these facts, these realtors can be misleading. They are worth keeping in mind by potential homebuyers.Add a comment
Roger Cohen tells us it does. In a column drafted in Vietnam, he tells us that the Trans-Pacific Partnership (TPP) is all about shoring up East Asian countries in their resistance to China.
That's an interesting thought. After all, the hardest battles at the end were about getting longer and stronger patent-related protections for the pharmaceutical industry. It's not obvious how that helps us gain solidarity among the people of the region against China.
There is much else in the deal that doesn't obviously help us vis-a-vis China. For example, the Investor State Dispute Settlement mechanism, which institutionalizes the far-right wing legal doctrine of regulatory takings (we have to compensate foreign investors for any law or regulation that reduces their expected profits), doesn't seem like the sort of thing that advances an anti-China coalition.
Nor is it obvious why we would not have had stronger rules of origin requirements. As the TPP is written, China will be able to hugely increase the amount of goods it can export to the United States tariffs free by having them assembled into products in one of the TPP countries. This is not to argue that we should be looking to construct a trade deal to marginalize China, but if that were the point, the TPP would probably not be that deal.Add a comment
That is a headline I would love to see. Of course, Donald Trump would threaten to have them investigated.Add a comment
No, I'm not about to become a charter member of the Robert Samuelson fan club, but he does get the basic story right in his column this morning. The robots are not taking our jobs, or at least not at an especially rapid pace. As Samuelson correctly points out, robots are just a form of productivity growth and productivity growth has been very slow in recent years. This is 180 degrees at odds with the robots taking our jobs story.
In fact, we should want more robots taking our jobs. That would allow more rapid wage growth and/or longer vacations and more leisure, assuming of course that the Federal Reserve Board did not deliberately slow the economy to create more unemployment.
There are a couple of other points worth mentioning on this piece. Samuelson is dismissive of the potential impact of self-driving cars. He tells readers:
"Consider. An opinion survey by Brandon Schoettle and Michael Sivak at the University of Michigan found that only 16 percent of respondents wanted self-driving vehicles; 39 percent preferred “partially self-driving” and 46 percent wanted no “self-driving” features. Safety is one anxiety. Cost may be another. Presumably, car prices would be higher, reflecting the costs of software, sensors and electronics. Will drivers pay the premium, especially when today’s cars last longer than ever? (The average age of today’s vehicles is 11 years, up from five years in 1969, reports the Transportation Department)."
This one completely misses the potential of self-driving cars. If cars are remotely driven, there is no need to own your own car. You can summon a car to meet your specific needs at the time you need it. In other words, if it's just a short trip by yourself, you would presumably summon a small car that uses very little gas (or electricity). If you're going on a longer trip with friends or family, you would summon a bigger car that would allow everyone to be comfortable. Not owning a car could lead to enormous savings, in addition to not needing parking spaces or garage space to house your car.
It's not surprising that people grabbed for a quick survey would not have a clear idea of the potential of this technology. It's unlikely any of us can fully grasp the potential of major innovations. I remember Paul Krugman dismissing the value of the iPad when it first came out. I say this not to trash Krugman, but to point out that even a very insightful economist, who had time to reflect on the topic, had no clue as to use of this new product. Anyhow, put me down as a big optimist on self-driving vehicles.Add a comment
In an article on the decision by Japan's Prime Minister, Shinzo Abe, to delay a long scheduled increase in its sales tax, the NYT told readers:
"Its [Japan's] debt may be large, but it is almost entirely funded by domestic savers, making a crisis like the one in Greece much less likely."
While it is true that most Japanese debt is held domestically, an even more important difference is that Japan's debt is almost entirely in yen. This means that Japan can never be in the situation Greece faced where it was unable to meet payments on its debt. Japan could always print the money to pay the bonds. Greece could not, since it is not allowed to print euros.
There is a risk that printing large amounts of yen would lead to inflation, but that is a very difference situation that the one Greece faces. Also, the idea that Japan will face a risk of excessive inflation at any point in the near future does not seem very plausible.
Add a comment
The Trans-Pacific Partnership (TPP) must be in deep trouble. The NYT has apparently abandoned any pretext of objectivity in covering the trade deal. The second paragraph of a news article on the political obstacles confronting the TPP equated the deal with "the cause of free and open trade." While that may be effective rhetoric for a pro-TPP politician, it has nothing to do with the reality of the deal.
The TPP actually does very little to advance free and open trade, primarily because the trade barriers between the countries in the pact are already low. This is why the International Trade Commission (ITC) found that removal of these barriers would add just over 0.01 percentage point to annual growth over the next 16 years.
In fact, because it increases barriers in the form of longer and stronger patent and copyright protection, the TPP may on net actually increase protectionism among the countries in the pact. (The ITC did not factor in the impact of higher prices for prescription drugs and other protected products in its analysis.)
In addition to these protectionist measures, the TPP may also restrict labor mobility through its clause on industrial secrets. This could require states to enforce non-compete agreements that prevent workers from moving from one company to another or starting their own business.
The TPP also effectively brings in through the backdoor, the far right-wing legal doctrine of regulatory takings. Under the rules in the TPP, foreign investors would have to be compensated for any regulatory action that reduced their profits. This is a major issue for many opponents of the deal.
However, the NYT article ignores the long set of issues around the TPP. It completely equates the TPP with the cause of free trade, using the term "pro-trade" at five different points in the article to describe supporters of the TPP.
The piece also refers to the alleged loss of $300 million in export markets due to a trade deal between Japan and Australia. (It implies this market would be regained with the TPP.) According to the National Cattlemen's Beef Association, this is equal to a bit less than 0.4 percent of current production in the United States.Add a comment
All NYT readers know that protectionism is stupid and self-defeating. It hurts everyone involved. So where were all the economic experts to give the usual lines on protectionism in response to efforts to change the Digital Millennium Copyright Act?
The NYT reported on these efforts without ever once mentioning the economic costs that would be implied by making listeners pay more money for music and the cost that intermediaries like YouTube would have to incur to comply with stronger copyright protection. The failure to mention these costs is remarkable given how space the NYT and other media outlets have devoted to denouncing proposals from Donald Trump to impose higher tariffs and plans by Bernie Sanders to chart a different course for trade policy.
Economics works the same regardless of whether the item in question is a car, a ton of steel, or a song. Imposing barriers that raise the price imposes costs on consumers and the economy. The biggest difference is that in proportionate terms the barriers involved with copyright protection are likely to be far larger than any trade barriers that Trump or anyone else might impose on imported manufactured goods. While the latter are unlikely to exceed 50 percent of the sale price, and would almost certainly be far less, copyright protection can make music that would otherwise be available for free very costly.
To get an idea of how costly such protections can be, New Zealand's government estimated that increasing the length of copyright protection from 50 to 75 years, as required by the Trans-Pacific Partnership, would cost it 0.24 percent of annual GDP, the equivalent of $4.3 billion in the U.S. economy in 2016. It would have been helpful to include some estimates of the costs associated with the stronger protections being discussed in this piece.
It is also worth noting that only a very small portion of the costs associated with this protection is likely to end up in the pockets of the performers. Much of it is simply deadweight loss — the lost benefit that consumers would have had from being able to listen to music at its marginal cost which they will forego now that it is selling at its higher protected price. A large portion will go to costs associated with enforcement, including new locks that would be put in place. And, much would go to intermediaries in the process, including the lawyers and lobbyists working on changing the law.
It is likely that performers will get less than ten cents for every dollar of lost benefits to consumers and their take may well end up being less than one cent per dollar. Unfortunately, the NYT never mentioned these losses at all, ignoring the well-known benefits of free trade.
Yes, musicians and singers need to be paid for their work, but there are more modern and efficient mechanisms for this task.Add a comment
The pressure for a Fed rate hike is building as consumer spending in April came in somewhat higher than expected. Other data remain mixed, with investment notably weak.
The Washington Post ran an article that seemed to support the rate hike agenda. It told readers that the Fed's key measure of inflation, the core personal consumption expenditure deflator, had ticked up in recent months. This is not true.
If we take the measure as being the year over year change, this was just 1.6 percent from April of 2015 to April of 2016. It was 1.7 percent for both January and February.
Add a comment
Before the West Virginia primary, former Secretary of States Hillary Clinton made a comment about how environmental regulations would lead to a loss of jobs in coal mining. The comment was in the context of a commitment to retraining miners and providing aid to hard-hit communities, but her critics have seized on it to say that she wants to get rid of coal mining jobs.
Emma Roller picked up on this theme in a NYT column on how the presidential election will affect candidates lower down on the ticket. Roller quotes Andrea Bozek, the communications director for the National Republican Senatorial Committee:
"'Her [Clinton's] comments on coal are going to really hurt Katie McGinty in Pennsylvania and Ted Strickland in Ohio,' she said. 'That’s a huge issue for voters in those states, and I think you’re going to see a lot of TV ads this summer and fall tying Hillary Clinton’s comments — not only on coal, but on her national security record, economic record — to these candidates as well.'"
According to the Bureau of Labor Statistics, Ohio has a labor force of just under 5.6 million. It has 11,600 jobs in the category logging and mining. This means that just over 0.2 percent of Ohio's workforce would be employed in coal mining if all of the jobs in this category were coal mining. Since the state probably has some jobs in logging and in other types of mining, coal mining would have to be a smaller share of the total workforce.
Pennsylvania has 6,000 people employed in coal mining with a total workforce of 5.9 million. This means that the coal industry accounts for just over 0.1 percent of total employment in Pennsylvania.
It seems questionable that comments relating to an industry that employees between 0.1–0.2 percent of a state's workforce are likely to have much impact on the outcome of an election.Add a comment
Robert Samuelson says it does, using his column, "Good News for the Middle Class," to highlight the findings of the Fed's Report on the Economic Well-Being of U.S. Households in 2015. For Samuelson, the big news is that 69 percent of households said they were “living comfortably” or “doing okay,” up from 62 percent in 2013.
Okay, that one is clearly going in the right direction, although this is not terribly surprising given that we are two years further along in a recovery, which now has a respectable rate of job growth. But this aside, it is hard to view much of the other information in the report as being very positive.
For example, the report finds that:
"Twenty-two percent of employed adults indicate that they are either working multiple jobs, doing informal work for pay in addition to their main job, or both."
"Thirty-one percent of non-retired respondents report that they have no retirement savings or pension at all, including 27 percent of non-retired respondents age 60 or older."
"Forty-six percent of adults say they either could not cover an emergency expense costing $400, or would cover it by selling something or borrowing money."
None of these findings look like good news to me. Samuelson does note the last one on the ability to cover emergency expenses, but strangely tells readers:
"...almost 30 percent of respondents said they’d have trouble covering an unanticipated expense of $400."
The 46 percent figure is in the executive summary.
Some other items that folks may find interesting:
"Just 16 percent of young adults (ages 25 to 34) whose parents both have only a high-school degree or less completed a bachelor’s degree, whereas 65 percent of young adults with a parent who completed a bachelor’s degree have completed one themselves."
This is certainly not a very good story on mobility.
And finally one about the future:
"Twenty-three percent of respondents expect their income to be higher in the year after the survey, down from 29 percent who expected income growth in the year after the 2014 survey."
That one doesn't look great. People's ability to see the economy's future tends not to be very good (probably because they mostly get information from reading what economists say), but this certainly does not suggest optimism about their economic prospects. On net, I don't know if the picture here is good news, but I suppose we can say that it could be worse.Add a comment
It is amazing how often we hear that China is experiencing some sort of crisis because of its aging population. This is supposed to lead to a situation in which it won't have enough workers to support an aging population.
If folks have been following events in China recently its big problem is too few jobs and unemployment. It has closed a number of coal mines in recent years, leading to the loss of tens or even hundreds of thousands of jobs in the coal mining industry. Currently, it is hugely subsidizing its steel exports to keep its steel factories running. Without these subsidies, hundreds of thousands of workers could lose their jobs. There are comparable stories in many other industries.
So China's big problem for the foreseeable future is going to be too many workers, that is 180 degrees at odds with the too few workers story that the demographic crisis people keep pitching, as in this Reuters article that appeared in the NYT today. This piece includes the ominous warning:
"For the first time in decades China's working age population fell in 2012 and the world's most populous nation could be the first country in the world to get old before it gets rich."
Actually, China is pretty close to getting rich. If the I.M.F.'s projections prove correct, then it will be as wealthy as countries like Portugal and Greece by the end of the next decade. (This assumes that the per capita growth rate over the rest of the decade is the same as is projected from 2019–2021.) In an international context, that would count as "rich," and in any case many countries with lower per capita incomes already have high ratios of retirees to workers. Given its extraordinarily rapid growth over the last three and half decades China is far better positioned to care for its population of retirees than almost any other country in the developing world.
Addendum: Numbers for Arithmetic Fans
In response to requests from Twitterland, I will show the simple arithmetic of why China need not be worried about its declining ratio of workers to retirees. This is highly stylized, but it should make the basic point.Add a comment
The NYT had an interesting column on how we can reduce the length of the security lines at airports. (Start with your shoes.) However, the piece left out one obvious factor lengthening security lines: carry on baggage.
Security lines would move much quicker if more people checked their luggage rather than carry it on board. Of course, there is a good reason that people want to carry their bags on board, most airlines charge them $25 per checked bag. (Southwest is a notable exception, allowing two free checked bags per passenger.) So we have airlines carrying through a policy that is making everyone's life miserable to squeeze a few extra dollars out of their passengers.
We can counter the airlines bad behavior. Suppose that TSA charged a $10 fee for each bag that goes through security. That would give people more incentive to check their bags, thereby reducing the length of the security lines. If that is too radical, we can change an absurdity in current law under which airline tickets are subject to a 7.5 percent tax used to fund airport operations, but fees like those for checking bags are not. If there is a planet where this makes sense, I haven't seen it.
Anyhow, trying to get more people to check their bags is a really simple way to reduce the length of the security lines. Southwest is a highly profitable airline, maybe they could provide some management training to their competitors.
Irrelevant sidebar — here's the reference for my title.Add a comment
Yes, what else is new? The basic story is that Robert Samuelson has discovered a wage series that shows, "many workers are actually receiving modest increases." Samuelson tells readers:
"...the study [the one showing modest wage growth] exerts pressure on the Fed to raise interest rates."
The series that has Samuelson so excited is a wage series that tracks the same workers over time. It looks at full-time workers and compares their wages this year with their wages last year. It will exclude anyone who was not employed full-time in both periods and it also will miss anyone who moves, since it is a household survey.
My friend Jared Bernstein has already given a good argument as to why the Fed should not jump on this new series as an excuse to raise interest rates. Let me add three additional points.
First, the gap between this series and the other wage series can be explained by an increased premium for longer tenured workers. More than 4 million workers leave their jobs every month. This series is picking up only the people who stay in their full-time job or leave their job and find a new full-time job, but do not move. That exlcudes a very large segment of the labor force. Suppose this group is getting an increased wage premium. Why is this a rationale for the Fed to raise to interest rates? In this respect, it is worth noting that the wage gains shown by this measure are still almost a full percentage point below the pre-recession pace.Add a comment
That's the question millions are asking, or at least the one they should be asking. The OECD recently did an analysis of the economic consequences for the U.K. if it decides to leave the European Union. It concluded that it would cost the country 5.1 percent of GDP in its central estimate. Other analyses have arrived at similar estimates. Such estimates have been cited by right-thinking people everywhere as a powerful argument against the U.K. leaving the European Union. (It is.)
But Brexit is not the only policy that can cost the U.K. large amounts of output. Since the Cameron government came to power in 2010 it has placed a priority on reducing the budget deficit rather than restoring the economy to full employment. As a result, the U.K. economy is still well below its potential level of output. (The potential has undoubtedly fallen as a result due to weak public and private investment since the downturn and workers experiencing prolonged stretches of unemployment and thereby losing skills.)
To get a simple estimate of the output lost due to Cameron's austerity policies, we can compare the I.M.F.'s projected growth path for the U.K. from 2008, before the severity of the recession was recognized and its current level of output. In 2008, the I.M.F. projected that the U.K. economy would be 26.2 percent larger in 2016 than it was in 2007. (Since the projection only runs to 2013 I have assumed that the growth rate for 2012 to 2013 [2.7 percent] continues for the next three years.) The most recent projection shows that 2016 GDP will be just 9.4 percent higher than the 2007 level.
If we can credit the I.M.F. research staff for knowing what they were doing in their 2008 projections, then the U.K.'s austerity policies have cost it an amount of output equal to 16.8 percentage points of 2007 GDP or more than three times the estimated cost of Brexit. This means that if Brexit is an economic disaster then Cameron's austerity has been three times as costly as an economic disaster.
For the curious ones out there, the I.M.F's projections showed the U.S. economy being 26.4 percent larger in 2016 than in 2007. The most recent projection shows the economy being 12.6 larger. The implied loss of 13.8 percentage points of 2007 is a bit less than the three times Brexit measure.Add a comment
The Washington Post has an article telling readers that a former McDonald's CEO is warning that a $15 minimum wage will lead to widespread use of robots at fast food restaurants. The piece goes on to warn about the danger that robots pose to jobs more generally:
"Robotics and artificial intelligence are hot areas in the technology sector, and the World Economic Forum estimated earlier this year that their rise would cause a net loss of 5.1 million jobs over the next five years.
"Some experts are so concerned about looming unemployment that they are calling for a basic income, a regular stipend to be paid to citizens who are likely to lose their jobs and cannot be retrained."
When robots replace workers it is known as "productivity growth." Productivity growth has actually been incredibly slow in the last decade and has even been negative the last two years.
It is not clear who the "some experts" are (names please), but actual experts know that the economy's problem is too little productivity growth, not too much. Productivity growth allows for higher living standards. With more rapid productivity growth we can either have more goods or services or work fewer hours to have the same amount of goods and services.
Of course this depends on their being enough demand in the economy. Lack of demand can lead to unemployment. It is not hard to create demand. For example, we could have the government spend money. That is not hard in principle, but deficit cultists, like the Washington Post editorial board and much of the leadership in Congress (in both parties) start yelling and screaming about budget deficits.
We could try to get the trade deficit down, for example by lowering the value of the dollar against other currencies, which makes our goods and services more competitive. People in policy positions generally don't like to discuss this policy, which would hurt manufacturers like GE which have relocated much of their production overseas and major retailers like Walmart, which has profited by establishing low-cost supply chains.
We can also take steps to reduce average work time, for example by promoting work-sharing as an alternative to layoffs. We can also push for paid family leave, sick days, and vacations, like they have in other wealthy countries.
And, we could discourage the Fed from raising interest rates to choke off demand. Higher interest rates are a policy explicitly designed to keep people from getting jobs.
In short, there are many ways to ensure that the economy has enough demand to employ workers, but the Washington Post would rather yell about robots.Add a comment
In an article that reports on plans by a new coalition to challenge the financial industry, the Washington Post implied that the financial transaction tax (FTT) supported by the coalition would hurt ordinary investors. The piece told readers:
"The proposed so-called transaction tax has already raised concerns among some on Wall Street. Such a tax would also effect pension funds or other large investors who sometimes trade thousands of stocks a day, they say.
"'While some politicians claim this tax is directed at high frequency trading, the truth is that it would directly hit the pension funds of hard-working teachers, nurses and teamsters,' said Bill Harts, chief executive of Modern Markets Initiative, which represents high frequency trading firms.
"'We don’t understand why unions would support something that would so clearly hurt their membership’s pension funds.'"
It's interesting that the Washington Post chose to turn to a representative of the financial industry as its major source on this proposal. This would be comparable to relying on a spokesperson from the tobacco industry as the main source on tobacco taxes.
If the Post had turned to a more neutral source, like the Tax Policy Center of the Brookings Institution and the Urban Institute, it would have discovered that Mr. Harts is completely wrong. According to the Tax Policy Center's analysis of a FTT, the volume of trading would actually decline by a larger percentage than the increase in trading costs due to a FTT. (In other words, the demand for trading is elastic.)
This means that on average the pension funds of hard-working teachers, nurses, and teamsters would be paying less money on trading costs after the tax was put in place than they do now. The tax would be more than fully offset by lower trading fees paid to the people that Mr. Harts represents.Add a comment
The NYT apparently wants its readers to believe that the economic policies put in place by Shinzo Abe, Japan's prime minister, have been a failure. In an article on G-7 summit meeting it quoted Kenneth S. Courtis, chairman of Starfort Holdings and a former Asia vice chairman at Goldman Sachs Group Inc., as saying that Abe's policies are "viewed mainly as a 'marketing slogan.'" According to Courtis:
"Japan needs to 'take a blowtorch' to regulations and red tape that discourage competition."
It would have been useful to include some actual data in the piece instead of just presenting readers with disparaging comments from someone in the financial industry. According to the OECD, Japan's employment rate has increased by 3.2 percentage points since Abe took office in the fall of 2012. This would be equivalent to an increase in employment in the United States of more than 6.4 million workers.
By comparison, the employment rate in the United States has risen by just 1.9 percentage points over this same period. Articles in the New York Times and elsewhere have often praised the pace of job growth in the United States over this period.
While it is clear that Mr. Courtis is unhappy with the regulatory structure in Japan, the data seem to indicate less need for change than he implies in this article.Add a comment
Eduardo Porter used his NYT column this week to remind us that we have seen people like Donald Trump before and it didn't turn out well. Porter is of course right, but it is worth carrying the argument a bit further.
Hitler came to power following the devastating peace terms that the allies imposed on Germany following World War I. This lead to first the hyper-inflation that we will continue to hear about until the end of time, and then austerity and high unemployment that was the immediate economic environment in which Hitler came to power.
The point that we should all take away is that there was nothing natural about the desperate situation that many Germans found themselves in when they turned to Hitler for relief. Their desperation was the result of conscious economic decisions made by both the leaders of the victorious countries as well as the leaders of the Weimar Republic. (It is not as though the latter had any good choices.) Nothing can excuse support for a genocidal maniac, but we should be clear about what prompted the German people to turn in that direction.
When we look at the rise of Trump and other right-wing populists across Western Europe, we see people responding to similar decisions by their leaders. The European Commission has imposed austerity across the euro zone largely at the insistence of Germany. It is not clear what economic theory explains the infatuation with austerity, but nonetheless it is now the golden rule across Europe. The U.K. has gone in the same direction even though it is not bound by the euro rules. Even Denmark has been making cuts to its health care system and other aspects of its welfare state in spite of the fact that its debt to GDP ratio is less than 10.0 percent and it is running a massive trade surplus.Add a comment
It is a question that goes unasked in a NYT piece that touted the Trans-Pacific Partnership (TPP) as providing the glue for an alliance of the U.S. and East Asian countries against China. While the deal will increase trade between the member countries in some areas, a major thrust of the deal is to increase patent and copyright protections. These increased protections will raise prices in many areas, most importantly prescription drugs.
If the TPP results in some of the poorer countries in the pact paying much higher prices for their drugs (to U.S. drug companies), imposing a large burden on government health care programs or possibly making drugs unaffordable for many citizens, it is not clear that it will make the countries closer allies with the United States. The NYT article does not consider this possibility.Add a comment
Paul Krugman used his column this morning to point out how strong the economy was in the 1990s and how the low unemployment in the second half of the decade allowed for strong wage and income gains at the middle and bottom end of the income distribution. This is all very much on the mark. However, he also distinguished the impact of the stock bubble from the housing bubble by saying that the collapse of the latter had more serious consequences because of the growth of private debt.
There are a few points worth making on this assessment. First the collapse of the stock bubble did have very severe consequences for the labor market. The economy did not gain back the jobs lost in the recession until January of 2005. At the time, this was the longest period without net job growth since the Great Depression. The weakness of the labor market was the reason the Fed kept the federal funds rate at 1.0 percent until the middle of 2004.
If Krugman is pointing to the financial crisis as fallout, then of course the issue of private debt is correct. There were a huge amount of mortgage loans and derivative instruments that could go bad with the collapse of house prices. This was not true in the case of stock prices. It's much more difficult to borrow against stocks than housing. (The evil regulators at work.)
However, when it comes to the real economy, as opposed to the fun of watching collapsing financial behemoths, we don't have any reason to look to debt. The investment boom sparked by the stock bubble was much smaller than the construction boom sparked by the housing bubble. The share of non-residential investment in GDP fell by 2.6 percentage points from its 2000 peak to its 2003 trough. Residential construction fell by 4.0 percentage points of GDP from 2005 to 2010.
In addition, the housing wealth effect on consumption is much larger than the stock wealth effect. This is due to the fact that it is much easier to borrow against wealth and also that housing wealth is much more evenly distributed. Bill Gates probably doesn't increase his consumption much when the value of his stock doubles. Middle income homeowners are likely to spend much more when the value of their house doubles.
In short, while it has become fashionable to cite the importance of debt in explaining the severity of the downturn following the collapse of the housing bubble, it really doesn't fit. The severity of the downturn can easily be explained by the loss of wealth and the end of the construction boom, debt is at most a secondary consideration.Add a comment
The Washington Post's lead editorial is a pitch to defend the "liberal international order." The piece notes the rise of right-wing populist movements in much of the world and includes a swipe at Bernie Sanders "false promise of trade protectionism." Incredibly the editorial goes on to give a pitch for the Trans-Pacific Partnership (TPP) which it describes as a "free-trade agreement."
Of course, the TPP is not a "free-trade" agreement. The reductions in trade barriers provided for in the pact are very limited since most of the barriers between the countries in the pact are already low. (The U.S. already has trade deals with six of the eleven other countries in the pact.) Last week the International Trade Commission projected that the trade liberalization provisions in the TPP will increase income by just 0.23 percent when its effects are fully realized in 2032.
The TPP actually increases protectionist barriers in a wide variety of areas, most importantly by requiring stronger and longer patent and copyright protection. These barriers are likely to have much more impact in slowing growth than the tariff reduction provisions of the TPP will have in increasing growth. In the case of prescription drugs alone the United States will spend close to $430 billion in 2016. It would likely spend roughly one-tenth this amount in the absence of patents and related protections. The difference of $380 billion is more than 2.0 percent of GDP.
The goal of the TPP is raise drug prices in the partner countries closer to U.S. levels and lock in place the high drug prices in the United States. The cost of higher protections in other areas may be comparable.
It is also worth noting that highly paid professionals in the United States, most importantly doctors, will continue to be protected even with the TPP in place. If our doctors' salaries were brought down to European levels it would save patients close to $100 billion a year in health care costs (0.6 percent of GDP). The Post is apparently fine with this sort of protectionism.
If the Post were serious about an agenda to counter right-wing populism it would be talking about economic policies that reversed the upward redistribution of income of the last four decades. This would mean changing trade policy and ending austerity. Instead the Post wants more upward redistribution and then will morally condemn the victims of its policies for not supporting the "liberal international order."Add a comment