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).
David Brooks told us again today that he doesn't like Social Security and Medicare. He does this frequently in his columns although usually while he ostensible makes some other point.
Today's other point is that the country is less forward thinking in the past. A main piece of evidence in this regard is the money that we are spending on Medicare and Social Security.
"The federal government is a machine that takes money from future earners and spends it on health care for retirees. Entitlement spending hurts the young in two ways. It squeezes government investment programs that boost future growth. Second, the young will have to pay the money back."
Both parts of this are of course wrong. Brooks assumes that the federal government would be able to collect the same tax revenue if it didn't have Medicare as if it did. That is implausible. Medicare is an enormously popular program for which people are willing to tax themselves. It is not likely that if we nixed Medicare that we could raise the same tax revenue and simply use the money for something else. (We would at least have to change the name for the designated Medicare tax.)
It is also important to note that the excessive spending for Medicare is not due to the fact that seniors in the United States are getting such good care, but rather that we pay more than twice as much per person as people in other wealthy countries. If we paid the same as people in other wealthy countries then we would be looking at long-term budget surpluses, not deficits. In this sense it is not a question of transferring money from future earners to give to retirees, it is a question of taking money from future retirees to pay drug companies, doctors, and others in the health care industry.
It is also inaccurate to say "the young will have to pay the money back." Of course the debt never literally has to be paid back, the government debt has grown in nominal terms almost every year in the last century. Even the interest will be paid from some future earners to other future earners so government debt ends up being a transfer within generations, not between generations.
The piece also includes a couple of other items about a lack of future orientation that are between bizarre and wrong. Brooks tells readers:
"Banks can lend money in two ways. They can lend to fund investments or they can lend to fund real estate purchases and other consumption. In 1982, banks were lending out 80 cents for investments for every $1 they were lending for consumption. By 2011, they lent only 30 cents to fund investments for every $1 of consumption."
No data source is cited for this statistic, however if Brooks is just referring to bank lending (as opposed to all credit) then the obvious explanation would be the development of the junk bond market. Many mid-sized and even large firms that would have been dependent on bank loans for investment in 1982 (the middle of the recession -- a year when housing was hugely depressed) can now borrow directly in capital markets without going to banks. It is not clear what this tells us about the country's future orientation.
He then adds:
"Increasingly, companies have to spend their money on retirees, not future growth. Last week, for example, Ford announced that it was spending $5 billion to shore up its pension program. That’s an amount nearly equal to Ford’s investments in factories, equipment and innovation."
This one is a real head-scratcher. Has Brooks missed the plunge in defined benefit pensions over the last three decades? How about the rapid disappearance of employee health care coverage? The trend here seems to be going rapidly in the other direction. Pensions are of course are part of workers' compensation, just like pay. Companies are supposed to put aside money at the time pension liabilities are accrued, so a properly managed pension fund does not imply a drain on the future.
Of course the country does seem to have shortage of people with proper skills in finance, so many companies do have underfunded pensions. However this has little to do with preferring the present over the future, as opposed to a simple lack of skills in an important sector of the economy.
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Robert Samuelson is worried that S&P is being persecuted by the Justice Department which is suing the company for mis-rating tens of billions of dollars of mortgage backed securites. He argues that S&P was suckered by the housing bubble just like everyone else.
While the claim that they believed that house prices could only rise is probably true (most economists and policy types believed this in the years 2002-2006 -- you don't get fired in economic policy work for making huge mistakes) that has little to do with the charges leveled by Justice Department. These charges claim that S&P changed its rating model in order to get more business. If S&P did not alter ratings to get business then the Justice Department will probably not get far with its case.
There is no inconsistency between the claim that actors in the financial industry both believed in the bubble and committed fraud, as Samuelson seems to think. In a rising housing market every mortgage is a good mortgage. Even if the borrower never makes a single payment, the lender ends up in possession of a home that has risen in value and can likely be resold to cover the cost of the mortgage. This could mean that lenders issue mortgages without proper underwriting (e.g. they make up information) because they know that there will be plenty of potential buyers for the mortgage. The investment banks go along with the hoax because everyone is making money. So do the rating agencies and the captive regulators. The fact that all of these people might be clueless about markets and the economy hardly precludes the possibility that they committed massive fraud.
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As opposed to alternatives like macroeconomists who lack skills in running the economy? Mankiw asserts as a fact that technology is responsible for the upward redistribution of income over the last three decades, but it is not clear that the evidence supports his story. After all technology had a much larger impact in increasing productivity in the decades from 1947 to 1973 yet workers shared in these gains more or less equally.
If technology explains the shift those who try to explain the timing of the process, like M.I.T. professor David Autor, have had a difficult time making their case. The villains that some of us would point to are anti-union measures by government and businesses that have weakened workers' bargaining power, trade policy that was designed to put less-educated workers in competition with people in the developing world while largely protecting the most highly educated workers, patent and copyright policy that increased the rents pulled out of the economy for these monopolies, and macroeconomic policy that has led to more unemployment in the last three decades than in the early post-war period. High unemployment tends to disproportionately hit less educated workers, both by having more impact on their probability of being unemployed and reducing their wages.
It is easy for Harvard economic professors to assert that technology is the cause of inequality. It is much more difficult for them to produce the data to prove their case.Add a comment
Economists and other policy types are working hard to maintain the absurdity that the housing bubble was hard to see. Hence we have Federal Reserve Board Governor Jeremy Stein pontificating on how the Fed should deal with bubbles and the Post playing along with the gag.
Let's just run through the basic facts. Nationwide house prices had sharply departed from a 100 year long trend in which they had just kept pace with the overall rate of inflation. At the peak of the bubble in 2006 they were more than 70 percent above their trend level. Housing construction rose from its average of 3-4 percent of GDP to over 6.0 percent of GDP. This was at a point when the demographics would have led observers to expect a drop in construction since the baby boom cohort was seeing their kids move away from home and would have been looking to downsize. On top of this, the vacancy rate was already at record levels as early as 2002. It kept rising to new record highs year by year after that.
The savings rate had dropped from a pre-stock bubble average of more than 8.0 percent to near zero at the peak of the bubble. Again, the demographics with the baby boom cohort in its peak saving years would have led one to expect a rise in the savings rate.
Any economist who could look at these monstrous divergences from normality and not recognize a bubble really needs a new line of work. And this is before we even talk about the explosion of the subprime market, the Alt-A market, and the huge number of homeowners buying houses with no money down.
Folks this was really really easy. The economists and other policy types who are trying to say it was difficult to see are just covering their rears.Add a comment
That is undoubtedly what readers of Matt Yglesias' blogpost on immigration and retirement income are saying. Matt correctly notes that an economy cannot collectively save for a generation's retirement in the sense of putting aside the goods and services that the generation will consume in retirement. His conclusion is that we need large numbers of new workers to support our current or soon to be retired population. This leads him to call for a much larger number of immigrants.
While we may want more immigrants, the need to support a larger retired population should not rank high on the list of reasons. According to the Social Security trustees projections, a more rapid pace of immigration will make little difference to the program's finances. This is due to the fact that immigrants will also get benefits. Since they tend to work for lower pay during their working lifetime, and the program's payout structure is highly progressive, the net gain from more immigrants is limited. Increasing the projected immigration level by 30 percent reduces the projected long-term shortfall by less than 10 percent.
On the other hand, suppose that real wages grow roughly in step with productivity. If we saw real wage growth of 1.5 percent annually, then the tax increase needed to meet the projected 75-year shortfall would be equal to 4.6 percent of projected wage growth over the next 30 years. Suppose we got real kinky and imagined we saw some of that 2.0 percent annual wage growth that we had in the golden age (1947-1973). Then the tax increase need to main the program's solvency would be equal to just 3.2 percent of projected wage growth over the next 30 years.
The story here is straightforward. We expect retirees' income to be related to their living standards in their working lifetime. If wages grow rapidly then it is easy for a smaller number of workers to support a growing population of retirees while still ejoying a rise in living standards. This is the way the world used to work. It might not be easy for political reasons to get back to that world, but we should at least know that such a world did once exist and is still possible.Add a comment
The trade deficit has been rising throughout the recovery. For arithmetic fans this is bad news. It means that the United States has net negative savings. That in turn means that either the government must run deficits or the private sector must have negative savings. There is no way around that fact, which means that people unhappy with the budget deficit should be unhappy about the direction of trade.
The December data showed a sharp drop in the trade deficit for the month. This was hailed by the Obama administration as good news, showing the success of its trade policy. It also touted the fact that exports hit a record level in 2012, as did the export share of GDP. The Post dutifully reported these Obama administration boasts.
It would have been helpful to provide readers with a bit of background. The $10.1 billion drop in the trade deficit reported for December followed a $6.5 billion rise in November. Trade data are highly erratic, with large changes in one month often followed by sharp changes in the opposite direction the next month. For example, the deficit reportedly fell by $7.7 billion last February but then rose by $7.2 billion in March. The average trade deficit for the last three months is actually $1.5 billion higher than for the prior three months, indicating that the deficit has been moving in the wrong direction.
While it is true that we set a record for exports last year, we set records for exports most years. The economy generally grows and the trade share generally grows as well. We also set a record for imports in 2012. Boasting about record exports is not very different than boasting about the sun rising. As far as the export share, the "record" of 13.90 percent compares to 13.89 percent in 2011.
This piece refers to the "free trade" agreement with South Korea. While it was called this by the administration, since many aspects of the deal had nothing to do with free trade and some actually involved increased protection (i.e. patents and copyrights), it would more accurately be described as simply a "trade" agreement. This step towards increased accuracy also saves space.Add a comment
The Post has an article implying that many more people are opting for leisure in the United States than in the past and that this fact could even explain income inequallity. Neither of these assertions is very plausible. The United States has seen a much smaller reduction in work time over the last three decades than any other wealthy countries. Furthermore, countries that have seen steeper reductions in work time have seen much smaller increases in inequality.Add a comment
He presented a quote from Mario Draghi, the President of the European Central Bank:
"'The exchange rate is not a policy target, but it is important for growth and price stability. We want to see if the appreciation is sustained, and if it alters our assessment of the risks to price stability.'"
He then added:
"And with that, the euro fell more than half a percent against the dollar—even though Draghi was really more stating a fact from Economics 101 than signaling some major new policy plans by the central bank."
Actually the exchange certainly can and often is a policy target. There are many central banks, most notably China's, that quite explicitly target their exchange rate. Other central banks have often taken steps that clearly seem to have the purpose of raising or lowering the exchange rate, as was the case with this statement.
While a central bank can opt to ignore the exchange rate, that would be a specific policy decision. It is not a basic principle from economics textbooks.Add a comment
An article on Hewlitt-Packard's decision to require suppliers in China to not use involuntary labor from students told readers:
"Enforcing workplace rules in China has always been difficult, as even Chinese laws on labor practices are flagrantly ignored by some manufacturers as they struggle to keep up with production demand amid labor shortages. The Chinese government announced last month that the nation’s labor force had begun to shrink slowly because of the increasingly rigorous one-child policy through the 1980s and 1990s."
In a market economy, firms that can't operate profitably paying the prevailing wage are supposed to go out of business. This is what happened to millions of small farms in the United States between 1860 and 1960. These farms could not afford to pay wages that were competitive with the wages that workers could get in manufacturing.
If the NYT were covering this process today presumably it would be complaining about the labor shortage resulting from the failure of people in the United States to have enough children. Of course to workers at the time this process implied an enormous improvement in living standards. The same will be the result of the news that the NYT seems to think is so dire, that China's labor force is now shrinking.Add a comment
Robert Samuelson is looking at the latest projections for the budget and the economy from the Congressional Budget Office (CBO) and struggling with their implications for the deficit. He presents the three reasons that CBO gives for reducing the debt from the projected levels:
1) fear of financial crises;
2) crowding out of investment;
3) we may need to borrow more in the future to cover the costs of a war or natural disaster.
It's worth briefly addressing these concerns, but first we need to note that CBO's track record on the economy in recent years has been nothing short of abysmal. If you want some cheap fun, take a look at CBO's projections for the economy from Janaury of 2008 (Table E-1). Get a load of that 4.8 percent unemployment rate that we are supposed be enjoying right now following three years in which GDP growth averaged 3.3 percent (and that's with no recession in 2008-2009).
CBO's predictive ability had not improved much a year later when the economy was in the middle of the free fall following the collapse of Lehman. Its projections from March of 2009 hugely underestimated the severity of the downturn and projected that the economy would have largely bounced back to full employment by the end of 2011, even if there was no stimulus from the government or extraordinary measures taken by the Federal Reserve Board.
These projections were about as wrong as they could possibly be. We would have done every bit as well finding a drunk person on the street and asking him for his economic forecasts for the next five years.Add a comment
The Washington Post, along with most other news outlets, reported without comment that the United States Postal Service (USPS) lost $15.9 billion last year. Some comment would have been appropriate since almost 70 percent of this shortfall is due to a payment of $11.9 billion to the postal workers' retiree health fund.
This is noteworthy because Congress has required that the Postal Service prefund its retirement fund at a level that has no match in the private sector. It also mandated that it build up to its targeted prefunding level in just 10 years making the burden much greater. In addition, the USPS is required to invest these funds, as well as its pension, exclusively in government bonds. In contrast, private sector competitors like UPS invest largely in equities which provide a much higher return on average. The result is to place an enormous burden on the Postal Service putting it at a serious competitive disadvantage. (Here's more on this one.)
Congress has put the Postal Service in an impossible situation. It has imposed restrictions, like the requirement that all assets in its pension and retiree health fund be invested in government bonds,that substantially raise its costs relative to competitors. It has also prohibited USPS from getting into new lines of business that take advantage of its resources in order to protect private sector companies from competition. However it still expects the USPS to be run at a profit.
Clearly the Post Service would face difficulties in any case as technology has led to a shift away from first class mail, the system's main source of revenue. However the restrictions that Congress imposes makes it impossible for USPS to adjust to changing economic conditions.Add a comment
The NYT told readers that a widely expressed concern about losing jobs to "cheap foreign labor .... does not bode well for political support for an amnesty program now being discussed in Washington." It's not clear that this would be the case. One of the factors that reduces the wages of undocumented workers is their legal status. Undocumented workers are likely to get lower pay because they risk deportation if they try to unionize or take other measures to increase their wages and improve their working conditions. If U.S. citizens want to reduce the competition from undocumented workers then they logically should support measures that change their legal status so that they are in a position to increase their wages.Add a comment
The NYT reported on cuts in military spending that Secretary of Defense Leon Panetta said could happen if the sequester goes into effect on March 1. The NYT referred to these cuts as "forced," implying that they were required by the sequester.
This is not accurate. The sequester requires a cut in military spending of approximately 6 percent. The specific cuts chosen presumably reflects the fact that Mr. Panetta views the items to be the least important to the country's defense. Alternatively, it is possible that Panetta has decided to highlight possible cuts that would provoke the maximum political reaction. In either case the cuts were selected by him, they were not forced by the sequester.Add a comment
The Huffington Post reported on a recent paper published by the St. Louis Federal Reserve Bank that produced evidence showing that patents impede innovation and growth. Maybe other news outlets will be allowed to talk about such isssues one day.Add a comment
No, I am not kidding. Steven Davidoff has a DealBook column touting the fact that Hostess Twinkies are likely to survive as a product, even though the company that makes them has gone bankrupt. The Twinkie brand, along with other iconic brands owned by the company, will be sold off in bankruptcy to other companies who expect to be able to profitably market them. Of course there is no guarantee that they will restart the old factories and rehire the Hostess workers, likely leaving them out in the cold.
There are two major issues here. First, in the United States firms can in general fire workers at will. This means that if they can find workers elsewhere in or outside the country who will work for less, then they can dump their current workforce and hire lower cost labor. This happens all the time. Most other wealthy countries require some sort of severance payment to longer term workers, but the United States does not.
Bankruptcy only changes the picture in this respect in cases where you have union contracts, which was the situation with Hostess. Bankruptcy voids these contracts allowing the company to change terms of employment and discharge workers in ways that would have prohibited under the union contract.
The other issue with bankruptcy is that it eliminates the company's pension obligations. While pensions are guaranteed by the government, the guarantee is not 100 percent. This means that a bankrupt company can leave many workers with sharply reduced pensions. In principle the pension is supposed to be a privileged creditor, standing at the front of the line to get the proceeds from the sale of Twinkies and other brands. However, it doesn't always work out this way. It remains to be seen what the situation will be with Hostess.Add a comment
One of the arguments that the Wall Street boys put forward to preserve their too big to fail subsidy from the government is that if we broke up the behemoth banks then big corporations would turn to foreign banks for many of their financial needs. The Post presents this assertion as a serious argument in a Neil Irwin column reporting on a paper arguing the case for big banks.
It is difficult to understand why anyone should give a damn if corporations get financial services from overseas. We import clothes and steel, what's the problem if we import financial services? Maybe the Wall Street whizes just need a lecture on how free trade benefits everyone. Their argument that we should be concerned that we are importing financial services is probably less compelling than the argument that we should be concerned that we are importing clothes. (Do we really want to be like Ireland or Iceland with hugely out-sized banks that we are stuck bailing out?) Maybe if we can teach the Wall Street boys intro economics we will finally be able to break up too big to fail banks.Add a comment
Currently net interest rate payments are 1.4 percent of GDP. The Congressional Budget Office (CBO) projects this will rise to 3.3 percent of GDP by 2023. This 1.9 percentage point rise in projected interest payments is by far the largest cause of projected increases in deficits over the decade. In addition, the interest refunded from the Fed to the Treasury is projected to fall by 0.3 percentage points, meaning that higher interest costs are projected to add a total of 2.2 percentage points to the deficit.
This rise is noteworthy because it is almost entirely due to higher interest rates rather than large debt, since the debt to GDP ratio is projected to be only marginally higher in 2023 than it is today. The projection of higher interest rates is in turn a projection about Federal Reserve Board policy. In other words, CBO projects that the Fed's decision to raise interest rates over the next decade will be the main factor pushing deficits higher.
The Post somehow missed this one.Add a comment
"gigantic youth bulges under the age of 30, increasingly connected by technology but very unevenly educated."
This would be news to China. The country adopted its one child policy back in the 1970s leading to sharp drop in birth rates. Since that was more than 30 years ago, it means that China actually has a relatively small share of its population under the age of 30. Friedman seems to show some recognition of this fact later in this column when he notes:
"'India today has 560 million young people under the age of 25 and 225 million between the ages of 10 and 19,' explained Shashi Tharoor, India’s minister of state for human resource development. 'So for the next 40 years we should have a youthful working-age population' at a time when China and the broad industrialized world is aging. According to Tharoor, the average age in China today is around 38, whereas in India it’s around 28. In 20 years, that gap will be much larger."
Of course if Friedman had thought about the implication of Tharoor's comment he would realize that it means that China doesn't have a youth bulge. But that would mean reading through his column and thinking about it for a few minutes. (Friedman's claim that India somehow benefits from its huge population growth is whacky -- at least if you care about the living standards of people in India.)
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Okay all of you liberals who thought that the deficits were due to too little tax revenue and all you economists who pointed out that the large deficits were due to a collapsed economy, you're wrong. The United States has a spending problem the NYT said so.
A NYT article on President Obama's speech on the budget told readers:
"New deficit projections will define the scope of the nation’s spending problem."
See, it's a spending problem!
I see from readers' comments that the NYT has apparently fixed the spending problem in subsequent edits. It still tells readers:
"the budget office once again emphasized that the deficit will rise later in the decade, beginning in 2016, and continue do to so as the population ages and health care prices rise."
While Social Security is projected to rise modestly as a share of GDP and health care costs a bit more so, the largest reason for the projected rise in deficits from 2013 to 2023 is higher interest payments from the government. Net interest is projected to rise from 1.4 percent of GDP this year to 3.3 percent of GDP in 2023. This projected 1.9 percentage point increase in interest payments is by far the largest component driving the projected increase in the deficit over the decade.
In fact, the actual increase is somewhat larger since the amount of money that the Federal Reserve Board refunds from its holdings of government bonds is projected to drop from 0.5 percent of GDP at present to 0.2 percent of GDP in 2023. This drop of 0.3 percentage points of GDP, added to the 1.9 percentage point rise in net interest implies that higher interest costs will add 2.2 percentage points to the deficit in 2023.
This would have been worth mentioning both because it tells readers why deficits are rising and also because the rise in interest rates is a matter of policy. The CBO projections assume that the Fed will decide to raise interest rates. It is not something that just happens by itself.
(Morning Edition committed the same sin.)
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It's so difficult when you run a major national newspaper to find out about the laws passed by Congress and signed by the president. Clearly that would be the conclusion drawn by readers of the NYT and Washington Post's coverage of a suit brought by the Justice Department against S.&P. over its ratings of mortgage backed securities during the housing bubble.
Both pieces note the obvious conflict of interest of having the rating agencies paid by the issuer. This gives the agency an incentive to provide a strong rating in order to continue to get business from the issuer.
The Franken Amendment to the Dodd-Frank bill eliminated this conflict by requiring an issuer to contact the Securities and Exchange Commission (SEC), which would then arrange for a rating agency to be assigned. By taking the hiring decision away from the issuer, the rating agency would no longer have an incentive to falsify its assessment.
It is incredible that neither article mentioned the amendment. It won an overwhelming majority of votes in the Senate, attracting bi-partisan support. It would have gone into effect with the rest of the bill, except that Barney Frank, then head of the House Financial Services Committee, arranged to delay its enactment by requiring a SEC study (i.e. he had the SEC use taxpayer dollars to figure out what it would mean to have the SEC call a bond rating agency rather than the issuer).
The SEC did finally complete its study in December of 2012, but the final status of the Franken Amendment is not yet clear. It would be helpful if these papers could hire reporters who know how to find out the status of laws passed by Congress.Add a comment
The cause for complaint this morning is Japan where the new Prime Minister, Shinzo Abe, has plans for an ambitious new stimulus program. This makes Samuelson unhappy since he is much more fond of the sort of austerity that has given Greece a 26 percent unemployment rate or now threatens the United Kingdom with a triple dip recession.
Samuelson tells us that Abe’s plan won’t work because it doesn’t address the structural problems in Japan’s economy, especially in its service sector. Samuelson notes that Japan has had several stimulus programs over the last two decades. He tells readers:
“The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan.”
Yes, this is where we can see that Samuelson is badly confused. Japan did have asset bubbles, but that was back in the 1980s. At the that time the country was not pursuing any stimulus at all. In fact, it had balanced budgets and a very low debt to GDP ratio.
As far as inflation, here again someone has to introduce Samuelson to the data. Japan’s problem is the opposite of inflation. Its consumer price level in 2012 was about 3 percent lower than it had been in 2000, implying an average annual rate of deflation of 0.3 percent.
In fact one of the most intriguing ways that Abe hopes to boost the economy is to have the central bank deliberately target a higher rate of inflation, committing itself to buy as many assets as necessary to raise the inflation rate to 2.0 percent. It is difficult to understand how Samuelson could think Japan has a problem with inflation.
Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.
This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio.
(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)
It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.Add a comment