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).

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Steven Greenhouse has a great piece in the NYT reporting on how employers are gaining increasing control over their workers' hours as a way to minimize costs. The obvious point, which seems to be lost on proponents of workplace flexibility, is that allowing employers to be flexible on their time demands means that workers cannot make plans in their lives. This requires them to be able to make child care and other arrangements on short notice. This is likely a very important factor in the quality of the lives of millions of workers that has received little attention in discussions of economic policy.

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The NYT badly misinterpreted data suggesting that household debt may soon be rising again. The NYT noted the fact that households may be taking on debt again on net and argued that this may presage an uptick in the economy. In fact, it suggests nothing of the sort.

At any point in time tens of millions of households are taking on new debt by buying homes, taking out student loans, borrowing against a credit card or taking out other loans. At the same time, tens of millions of families are reducing their debt, most importantly by paying down mortgages. In addition, much debt is being eliminated as a result of being written off by creditors, mostly through bankruptcy or foreclosure.

The reason that debt has been falling in the last few years has been due to the large amount of debt being written off, primarily as a result of foreclosures. To get an idea of this magnitude, suppose that 1 million homes a year go through the foreclosure process. If we assume an average mortgage of $200,000 a home (roughly the magnitudes involved), this would imply the elimination of $200 billion in debt each year, assuming that the households taking on new debt were just balanced by the households paying off debt. If the number of foreclosures fell in half to 500,000, and nothing else changed, then the rate at which debt was being reduced would fall to $100 billion a year.

This is primarily the story that we are seeing as the pace of debt reduction slows and is possibly reversed. The number of foreclosures is gradually falling, meaning that the pace of debt elimination through this channel is slowing, however this has little direct impact on the economy. (The foreclosure process does employ people and generate incomes.)

The relevant issue for the economy is the saving rate. While the saving rate is above its near zero level at the peak of the bubble, it has been below its long-term average throughout the downturn. (The adjusted saving rate is a nerd issue having to do with the statistical discrepancy in the national accounts.)

saving-percent-income-10-2012Source: Bureau of Economic Analysis.

The 3.7 percent rate for the third quarter is well below the pre-bubble average of more than 8.0 percent. It would be surprising if the saving rate would fall still lower since most households have very little wealth saved for retirement and the leadership of both parties is proposing cuts in Social Security and Medicare. In short, there is no reason to expect that an upturn in consumption will provide a boost to the economy.

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NPR's Planet Money did a nice piece deflating the nonsense on energy independence. Their crew took the long trip all the way to distant Canada, a country that is energy independent. And, thanks to the fact that they have courageous politicians who are willing to kick environmentalists in the teeth, the free people of Canada only have to pay $4.00 a gallon for gas.

As those of us who took intro economics have tried to explain to the reporters covering the campaign, being energy independent doesn't mean anything unless we are at war and somehow cut off from foreign oil supplies. (If this is our concern then drilling out our oil and gas now is incredibly stupid. That means that it will not be there if we ever face such a crisis.)

Oil prices are determined on world market just like the prices of wheat and corn. When a drought in Asia sends up the price of wheat, we will pay more for wheat in the United States even though we are a huge net exporter of wheat. And, as the Planet Money crew showed us, when the world price of oil skyrockets people in Canada pay more for gas even though they are energy independent, as would we even if we were energy independent.

This basic fact means that when a candidate says that he/she wants to make the U.S. energy independent, they are actually saying either that they don't have a clue about economics, or that they think the reporters covering the campaign are so incompetent that they won't call attention to the fact that they are spewing utter nonsense. 

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Regular Washington Post readers know that the paper has long since abandoned the separation of news and opinion when it comes to promoting its views on Social Security, Medicare and the budget deficit. It again displayed its disdain for normal journalistic integrity with a front page piece trumpeting a study from National Association of Manufacturers (NAM) that warned of the dire consequences from the "fiscal cliff," the Post's sensationalist term for the scheduled ending of tax cuts and sequestration of spending at the end of the year.

The headline of the piece told readers that "'fiscal cliff' already hurting economy, report says." While the article excludes the views of anyone who questioned the claims presented by NAM and its study, many of their assertions are implausible on their face. For example, the first sentence tells readers:

"The 'fiscal cliff' is still two months off, but the scheduled blast of tax hikes and spending cuts is already reverberating through the U.S. economy, hampering growth and, according to a new study, wiping out nearly 1 million jobs this year alone."

This would correspond to a reduction in GDP growth for the year of approximately 0.7 percent. Presumably this falloff is all occurring in the 3rd and 4th quarter. (The Post and other news outlets would have been incredibly negligent if they had failed to report this extraordinary drag on growth in the first half of the year, if it were true.) That means that we are seeing a drag on GDP growth of approximately 1.5 percentage points of GDP in the second half of this year due to the concern over the tax and spending changes at the end of the year. In other words, the Post is telling us that GDP would be growing at around a 3.5 percent annual rate right now if not for the budget deal reached last summer. It would be interesting if they could find an economist not on the payroll of the NAM who would say something like this.

In presenting its list of horror stories about the budget situation the Post tells readers about Mike Kelly, the president and chief executive of Nano­cerox, a defense contractor. The Post tells us that he claims to have "embarked on an aggressive cost-containment strategy nine months ago... laid off four of his 22 employees and converted them to contract workers, froze salaries, renegotiated health benefits and tightened controls on spending."

Of course this may be due to the fact there are likely to be cutbacks in the military budget regardless of how the current budget dispute is resolved. In other words, these cutbacks may have nothing to do with the budget battles themselves but rather stem from Mr. Kelly's assessment that Congress is likely to reduce funding for his product. These are exactly the sorts of cutbacks that advocates of deficit reduction want since they free up capital and labor for other purposes. The Post should have included the views of an advocate of lower deficits who could have pointed this fact out to readers.

The article also highlights the weakness in orders for new capital goods in recent months. This is likely related to uncertainty, but not necessarily of the sort implied by the Post. The tax treatment of investment is up for grabs in the current budget battles. It is possible that investment goods will be taxed at either a higher or lower rate in 2013. If businesses anticipate that the outcome of a deal will allow for a lower tax rate on new investment (for example expensing of capital goods), then they would have good reason to defer investment until after the budget dispute is resolved. While this may affect the timing of investment decisions, its net effect on the economy is likely to be minimal.

At one point the Post article referred to a call for tax increases and spending cuts by a number of CEOs which it described "as part of a long-term plan to tame the $16.2 trillion national debt. "Tame" is a word that is appropriate to dealing with wild animals. Newspapers would use terms like "limit" or "reduce" in reference to the debt.

This comment also may lead to the misleading view that the deficit has been a longstanding problem. In fact the deficits had just before the downturn had been fairly modest and were projected to remain modest long into the future. The reason that the deficits exploded was that economy collapsed as a result of the bursting of the housing bubble.


Source: Congressional Budget Office. 

Finally, the Post never points out that the dire projections for a recession and a sharp uptick in unemployment assume that the higher taxes and lower rate of spending are left in place all year. These are not the predicted results of letting them take effect for a few days in January.


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The NYT deserves credit for pointing out the personal interest of a group of corporate CEOs in the outcome of negotiations over the budget. An article on the Campaign to Fix the Debt  reminded readers that:

"several members of the group, which includes highly paid chief executives of financial and industrial corporations who will stand to pay more if President Obama succeeds in his effort to raise taxes on the wealthy..."

By contrast, the Post ran an article on the same group last week that never noted the personal interest of the individuals involved, instead treating them entirely as a civically minded group focused on the country's future.

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Robert Samuelson was sufficiently outraged by a NYT editorial claiming that the government creates jobs that for the first time in his 35 years as a columnist he felt the need to attack a newspaper editorial. Samuelson called the NYT view "the flat earth theory of job creation" in his column's headline. Since on its face it might be a bit hard to understand -- there are lots of people who do work for the government and get paychecks -- let's look more closely at what Samuelson has to say on the topic. 

Samuelson tells readers:

"It’s true that, legally, government does expand employment. But economically, it doesn’t — and that’s what people usually mean when they say 'government doesn’t create jobs.'

What the Times omits is the money to support all these government jobs. It must come from somewhere — generally, taxes or loans (bonds, bills). But if the people whose money is taken via taxation or borrowing had kept the money, they would have spent most or all of it on something — and that spending would have boosted employment."

Okay, so we can at least agree that all of those people working as teachers, firefighters, forest rangers etc. do legally have jobs. That seems like progress. But let's look at the second part of the story:

"the money to support all these government jobs. It must come from somewhere."

Yes, that part is true also. But the last time I looked, the money to pay workers at Apple, General Electric, and Goldman Sachs also came from somewhere. Where's the difference?

Samuelson tells us that if the government didn't tax or borrow or the money to pay its workers (he makes a recession exception later in the piece) people "would have spent most or all of it on something -- and that spending would have boosted employment."

Again, this is true, but how does it differ from the private sector? If the new iPhone wasn't released last month people would have spent most or all of that money on something -- and that spending would have boosted employment. Does this mean that workers at Apple don't have real jobs either?

The confusion gets even greater when we start to consider the range of services that can be provided by either the public or private sector. In Robert Samuelson's world we know that public school teachers don't have real jobs, but what about teachers at private schools? Presumably the jobs held by professors at major public universities, like Berkeley or the University of Michigan are not real, but the jobs held at for-profit universities, like Phoenix or the Washington Post's own Kaplan Inc., are real. 

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Adam Davidson's NYT magazine piece featured the views of a number of economists as to what the U.S. economy will look like at the time of the next presidential election in 2016. Two of the experts seem to be describing a world in which the United States has become increasingly protectionist:

"by 2016, Frieden and Bremmer noted  [Jeffrey Frieden, a professor at Harvard and Ian Bremmer, president of the Eurasia Group], the U.S. will be adjusting to an economy in which inequality is a structural fixture. There will be millions who are unable to get work, and tens of millions more who will have to adapt to lower income. Meanwhile, those with college and advanced degrees will experience a country that has rebounded. Their incomes will grow."

Of course the main reason that workers at the top of the income distribution have seen their wages rise is that they continue to be largely protected from international competition. Our doctors are paid roughly twice as much as their counterparts in wealthy countries like Canada and Germany and several times as much as doctors in India, China and elsewhere in the developing world. Doctors from these countries would be happy to train to U.S. standards and work for half the pay that U.S. doctors receive, but are prevented from competing with our doctors by professional barriers. If protectionists did not dominate economic policy, the country could save hundreds of billions of dollars each year in health care costs and in the cost of other highly paid professional services. Frieden and Bremmer may well be right that protectionists will continue to control policy due to their outsized political power, but it is worth noting that this is political outcome, not a result driven by economics. (It is worth noting that rising wages for college grads would be a change. They have seen stagnant or declining wages over the last decade.)

It is also worth noting that the growth story in this piece might not prove accurate. It points to foreign pharmaceutical sales as a major growth sector for the U.S. economy, noting that the domestic market is likely to diminish in importance. This is very questionable. Drugs are actually very cheap. There are few drugs that would sell for more than $10 in a free market. The reason that drugs are expensive is because of patent protection and other restrictions on competition such as data exclusivity.

The United States has been able to get other countries to accept these extremely costly forms of protection as a quid pro quo for gaining access to the U.S. domestic market. However if the U.S. domestic market is no longer seen as a big prize internationally (a main thesis of the piece), then other countries are unlikely to go along with paying U.S. drug companies patent protected prices. There would be no offsetting gain to compensate for this huge drain on foreign economies.

It is also worth noting that the main reason that we have a dispute over currency values with China is because they want to be able to sell their goods at a low cost in the U.S. market. If China no longer cares about the U.S. market as a main export destination for their goods, it will presumably have no objection to the value of the dollar dropping against the yuan. This should be a boon for the manufacturing sector in the United States since it will mean that our goods are far more competitive in the world economy.

The piece also says that China will probably not surpass the size of the U.S. economy until the 2020s. The latest projections from the I.M.F. show China's economy exceeding the size of the U.S. economy on a purchasing power parity basis by 2017.

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Nicholas Kristoff uses his column to take a shot at Mitt Romney's economic policies. While the basic point, that austerity will lead to slower growth and higher unemployment, is correct, placing Germany as a basket case alongside the U.K. is not. While the U.K. has aggressively cut its budget deficit, Germany has not been as ambitious in this respect. (Its deficit had not been as large.)

Germany is primarily feeling the effects of budget cuts in the other euro zone countries, which are largely coming at its own insistence. In this case, Germany is in the same sort of situation as Ohio would be if Pennsylvania, Michigan and Ohio's economy all went into recession. The effect has been to sharply slow Germany's growth, although since the start of the recession, Germany's growth has been roughly equal to that of the United States (somewhat higher on a per capita basis). By contrast, the U.K. has seen sharply lower growth, its economy is still smaller than it was before the downturn began.

In spite of having comparable growth, the unemployment rate in Germany is more than 2 full percentage points below its pre-recession level. By contrast, the unemployment rate in the United States is 3.3 percentage points above its pre-recession level. The difference is that Germany encourages employers to reduce workers' hours rather than lay them off. The result is that many workers are putting in fewer hours, but still have jobs in Germany. The government makes up for most of the lost pay with money that would otherwise have gone to unemployment benefits.

While close to half of the states have work sharing programs as part of their unemployment insurance program, the take-up rate is very low. The Obama administration has attempted to increase take-up by having the federal government pick up the cost for the next two years. (This measure was attached to the bill that extended the payroll tax cut.) However, because most state budgets are so flush, there has been little interest in getting this money from the federal government.


[Addendum: The comment about flush state budgets is a joke. I can't imagine why cash strapped states wouldn't look to get free money from the Feds. I suspect inertia, which is by far the most important force in politics and policy.]

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The Washington Post has long given up any pretense of objectivity in its news section on issues like Social Security, Medicare and the budget deficit. It routinely hypes deficit as a problem in a way that is inconsistent with the data and make assertions about the cost trajectory of Social Security and Medicare that are at least misleading, if not actually wrong.

In keeping with this pattern, the Post began an article reporting on an interview that President Obama had with the Des Moines Register by referring to the "the nation’s in­trac­table budget problems." Of course the nation's budget problems are not "intractable." The large deficits came about entirely because of the economic plunge following the collapse of the housing bubble as fans of Congressional Budget Office projections well know.


Source: Congressional Budget Office.

As can be seen the deficits were relatively modest until the economy collapsed in 2008 and were projected to remain modest well into the future. The debt to GDP ratio had been falling, which means deficits of this size could be sustained forever. This was true even if the Bush tax cuts did not expire at the end of 2010, although the budget was actually projected to turn to surplus in fiscal 2012 if the tax cuts did expire. It is also worth noting that the interest burden as a percent of GDP, at 1.6 percent, is near a post-war low, so the deficit is not currently presenting a problem to the economy in any obvious way.

The evidence is quite clear, the problem is a collapsed economy which has led to tens of millions of people being unemployed or underemployed. This has also led to much higher deficits. Rather than being a problem, these deficits are supporting demand right now, since there is no private sector demand to replace the $1.2 trillion in annual demand that was generated by the housing bubble.

Those advocating lower deficits in the current economic environment are advocating slower growth and higher unemployment. The fact that these people enjoy considerable political power and access to the media can be viewed as an intractable problem. 

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Bloomberg had a lengthy article warning of looming doctor shortages in the years ahead. Remarkably the piece never once mentioned the possibility of bringing more foreign doctors in the country.

Doctors in the United States get paid on average close to twice as much as their counterparts in Canada, Germany and other wealthy countries. The gap between the pay of doctors in the United States and in the developing world is considerably larger. As a result, if we eliminated the barriers that made it difficult for foreign doctors who train to our standards from practicing in the United States, we could count on a large number of foreign physicians entering the country. (It would be a simple matter to have a modest tax on the earnings of foreign physicians in the United States that would be repatriated to their home countries. This could be used to educate more doctors, thereby ensuring that the home country benefited from this arrangement as well.)

We could also make it easier for people in the United States to get medical care elsewhere, for example by standardizing liability rules to ensure that patients will have recourse in the event of malpractice and also establishing governmental licensing agencies to ensure the quality of care in other countries. Also, Medicare could have enormous savings if it allowed beneficiaries to buy into the lower cost health care systems of other countries. Having more people getting medical care in other countries will reduce the demand for doctors in the United States.

[Thanks to Steve Hamlin for calling this one to my attention.]

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David Leonhardt tells readers today that income inequality is primarily due to technology and globalization. It is possible to tell the story of technology if you are prepared to jump over a few hoops. (The big problem is that economists confidently told us in the 90s that technology favored people with college degrees. In the last decade it seems to only favor people with advanced degrees. If that sounds like a "make it up as you go along" story, welcome to the state of modern economics.)

However, the globalization story requires even more hand-waving. The simple story is that we have hundreds of millions of people in developing countries who are prepared to work for a fraction of the wages of our manufacturing workers. This has caused us to lose millions of manufacturing jobs, depressing the wages of both the remaining workers in the sector and the workers in other sectors who must compete with displaced manufacturing workers.

This is undoubtedly a true story. However the part of globalization that economists seem to have difficulty understanding is that there are also tens of millions of potentially highly educated workers in the developing world who are willing to work for much lower pay than their counterparts in the United States. For example, while the average doctor in the United States gets close to $250,000 a year, there would be no shortage of doctors in India, Mexico, China and elsewhere who would be happy to train to U.S. standards and work for half this wage. The same would be true of lawyers, dentists, economists and all the other highly paid professions.

The reason that huge numbers of foreign professionals have not come to the United States and depressed the wages of the highest earning workers in the United States is that we have a large number of professional and legal barriers that make it difficult for foreign professionals to work in the United States.

(Note the use of the word "difficult," rather than "impossible." Economists often believe that because they know an Indian economist who teaches at a major university they have proven that there are no obstacles to foreign professionals working in the United States. This is sometimes referred to as the "Mexican avocado" theory of international trade. According to this theory, if I can buy an avocado grown in Mexico at my local supermarket I have proven that there are no barriers to imports of agricultural goods in the United States. This is of course a ridiculous view, but one that nonetheless usually arises in any discussion of professional barriers.)

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Eduardo Porter has an interesting column on Governor Romney's threat to declare China a "currency manipulator" on day 1 of his administration. He makes the point that the real value of China's currency has risen substantially against the dollar in the last two years. He also notes that China is not the only country that deliberately props up the dollar relative to its own currency. Most importantly, he points out (as I have frequently noted) that declaring China a currency manipulator does nothing by itself. Inevitably the outcome of the currency issue would depend on a process of negotiation with China.

This is all true. However in the process of making his case, Porter takes advantage of a study by Gary Hufbauer on the cost of U.S. tariffs on imports of tires from China, which is more than a little suspect. Hufabauer, who is famous for predicting that NAFTA would create 250,000 jobs by increasing the U.S. trade surplus with Mexico, calculated the country paid over $900,000 for each job it saved in the tire industry as a result of the tariff. Most of this money was paid to other countries, since most tires are imported. He concluded that the net effect of higher tire prices was a modest loss of jobs, since consumers had less money to spend on other items. In addition, China retaliated by imposing barriers on imports of chicken parts that Hufbauer calculates reduced exports by $1 billion.

There are several aspects to Hufbauer's analysis that are very questionable. The most important is that he ignored the timing of the tariff. It was imposed in September of 2009, just as the car industry was recovering from its recession lows. Hufbauer attributes all the rise in tire prices in the fall of 2009 to the tariff. However, car prices more generally also rose in the fall of 2009 in response to the pick-up in demand. At the time the tariff was imposed in September of 2009 car prices were actually somewhat lower than their level of two years earlier. (They have risen by about 7 percent in total since the time the tariff was imposed.) Hufabuer makes no effort to control for the uptick in car demand in assessing the impact of the tariff on tire prices, which means he has almost certainly overstated its impact.

Hufbauer also makes a point of noting the open retaliation by China -- its tariffs on imports of chicken parts -- without taking into account the possibility that the threat of tariffs affected China' behavior in other areas. It is possible that China has limited the subsidies it has applied to other export industries in response to the tariff on tires. This would have reduced their exports to the United States and increased employment in other industries. China would of course not advertise the fact that it was responding to a tariff by adjusting its behavior in other areas.

Whether it did or not would change its behavior in other areas would require a close examination of China's conduct. Hufbauer simply assumed that there was no response to the tariff other than the public retaliation on imports on chicken parts.

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The Washington Post had an article highlighting the Fed's commitment to continue to buy long-term bonds for the foreseeable future, even if the economy looks somewhat better. It then gives a list of what it presents as relatively positive recent economic reports and says that the Fed intends to still continue its bond buying policies.

One of the items on this list is a forecast that the economy will grow 2.0 percent in the third quarter. It is difficult to view this as positive. The Congressional Budget Office puts the economy's potential growth rate at 2.4-2.5 percent. This means that with a 2.0 percent growth rate the economy is falling further below its potential. With a gap that is already close to 6.0 percent of GDP we should be seeing growth rates that far exceed the economy's potential rate of growth in order to get us back to potential GDP and full employment.

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I'm not kidding. Charles Lane's column in the Washington Post is quite literally complaining about the fact that the Washington Post stands to lose business to the postal service. Lane is upset that the postal service has contracted with a major distributor of ads to use the mail service to bring the material to people's houses. Previously this material was distributed largely by newspapers like the Washington Post, which means that the Post and other newspapers stand to lose from the deal.

Lane is openly upset about this. He wants the post office to go out of business because he has decided that it is technologically obsolete.

Of course any business will eventually become technologically obsolete if it doesn't adapt. Congress has largely put the post office into an impossible squeeze where it has insisted that it be run at a profit, along business lines, while at the same time it has consistently given into whiners from rival businesses, like Lane, who get upset any time they face being out-competed by this 19th century relic.

Businesses tend to get their way since they use their political connections to rein in the post office. For example, about a decade ago the postal service ran a very successful set of ads that highlighted the fact that its express mail was about a quarter of the price of the overnight delivery services of Fed Ex or UPS. The two competitors went to court to stop the ads. When the court told them to get lost, Fed Ex and UPS went to Congress and stopped the ads.

The post office used to provide banking services to much of the population. However, the wizards in the financial sector didn't like the competition, so they had it shut down.

Now we have Charles Lane and the Washington Post complaining that the technologically obsolete postal service is undercutting it in its ability to deliver junk ads to people's homes. Market economies are so tough!



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Paul Krugman and Ezra Klein both say, following Joe Gagnon, that the time for criticizing China for "currency manipulation" has passed. This is partly true in the sense that China's currency has risen substantially in real terms against the dollar over the last few years. However this does not mean either that the relative value of the dollar and the yuan is now at a sustainable level or that China is not continuing as a matter of policy to prop up the dollar against its currency.

To see the former point, it is important to remember that China is a fast growing developing country. Ordinarily such countries are expected to run large trade deficits. The idea is that capital can be better used in fast growing countries like China than in slow growing wealthy countries. Since capital will get a higher return in developing countries, we expect capital to flow from rich countries to poor countries. The flow of capital would imply a trade deficit for developing countries. Effectively this trade deficit would allow developing countries to sustain consumption levels even as they build up their capital stock. 

China, along with many other fast developing countries, is running a large trade surplus. This is not sustainable. To see this point imagine we have a developing country that is growing at the rate of 7 percent annually, the slower rate of growth that China is now seeing. Suppose it sustains a trade surplus of 3.5 percent of GDP, roughly the amount projected by the IMF for the next five years. For simplicity we'll make the United States the only other country in the world and have it grow at a 2.5 percent annual rate.

If China and the U.S. start at the same size, after 20 years China's annual trade surplus will be equal to 8.3 percent of U.S. GDP. To have sustained this surplus it will have bought an amount of assets that exceeds 100 percent of U.S. GDP in 2032. If we carry this out another twenty years then the annual deficit in the U.S. will be 19.5 percent of GDP and China's holdings of U.S. assets will exceed 300 percent of 2052 GDP. Clearly this does not make sense and we will not see these sorts of deficits running in the wrong direction indefinitely.

As far as the second part, China is still accumulating U.S. assets as part of an official policy of pegging its exchange rate. In other words it is deliberately propping up the dollar against its currency.

The point that Gagnon makes is that China is not alone in this exercise and it is not even the biggest culprit, relative to the size of its economy. In this sense the China-bashing that Governor Romney and other politicians have practiced is inappropriate.

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Almost five years after the start of the recession we still have close to 25 million people who are unemployed, underemployed, or who have given up work altogether. Given that this is ruining the lives of millions of workers and their children we might think that this is the country's most important problem. Fortunately, we have National Public Radio (NPR) to set us straight.

NPR presented a segment this morning that is largely based on the views of Nariman Behravesh, the chief economist of the forecasting firm IHS Global Insight and author of Spin-Free Economics: A No-Nonsense, Nonpartisan Guide to Today's Global Economic Debates. The last part of the segment told listeners:

"But going forward, America's role in the world will be largely shaped by how well Congress handles the budget deficit problems in coming months, he [Behravesh] said. As other countries, especially in Europe, grapple with the problem of too much government debt, people around the world are looking to the United States for moral leadership, he said.

"If the United States shows that it's possible for democracies to discipline themselves and control their debts, then its economic and soft power may surge ..."

Wow, isn't that impressive. So Europe, China and the rest of the world will be really impressed if the United States throws even more people out of work as long as it reduces its budget deficit! That's interesting, had it not been for NPR I never would have known people in the rest of the world thought this way. 

It is an especially bizarre way to think since the large budget deficits of the last few years are almost entirely due to the downturn that followed in the wake of the collapse of the housing bubble. The chart below shows the actual deficit for 2007 and the projections for 2008-2012 that the Congressional Budget Office made in January of 2008, before it recognized the impact of the collapse of the housing bubble on the economy. It also shows the actual deficits for these years.


Source: Congressional Budget Office.

As can be seen the deficit was actually quite modest prior to the collapse of the housing bubble and was projected to remain small in the year ahead. In fact, it was projected to turn to a surplus in fiscal year 2012 after the expiration of the Bush tax cuts, although even if the tax cuts had remained in place, the deficits would still have been consistent with a declining debt to GDP ratio.

There were no big new programs that exploded the deficit in 2008 and 2009, rather the collapse of the economy caused tax collections to plunge and spending on transfer payments like unemployment insurance and food stamps to increase. In addition, the one-time spending and tax cuts in the stimulus also added to the deficit. However, there were no substantial permanent changes to underlying tax and spending policies that would have led to permanently larger deficits.

In short, NPR wants its listeners to believe that a deficit that is attributable to a collapsed economy is a bigger problem than the collapsed economy itself. That takes great insight!


[Thanks to Joe Seydl for calling this one to my attention.]


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Robert Samuelson goes after the Affordable Care Act (ACA) in his column today. Remarkably, he is almost half right. His target is the provision that larger employers must provide insurance for full-time employees, which he says could amount to $5,000 a year. He tells readers that this provision will both lead to less hiring and also encourage employers to keep workers' hours below the 30 hour cutoff, both of which would be undesirable outcomes.

This is partly right, but only partly. The ACA does not actually require larger employers to buy insurance policies for their workers. It gives them the option of paying a penalty of $2000 per worker, with the first 30 workers being exempt. This means that an employer of 60 workers who did not want to offer insurance would face a penalty of $60,000 or $1,000 per worker. (One thousand dollars is only one-fifth of Samuelson's $5,000 number, but if we give him the marginal cost of hiring another worker we get to 40 percent, which is almost half.)  

For a full-time worker this $1,000 penalty would come to 50 cents an hour. That is much smaller than recent increases in the minimum wage which have not been associated with any job loss according to a number of academic studies. Therefore, we might conclude that Samuelson's concerns about the ACA causing job loss have little foundation outside of Washington Postland.

However there is still the issue of gaming the system. Some employers will undoubtedly be happy to save themselves $2,000 by reducing their workers' hours from just over 30 per week to just under 30 per week. This would be bad news for workers at low-paying jobs who likely need these hours. 

While Samuelson wants to throw up his hands and say we therefore should get rid of Obamacare, more serious people would say that we could look to amend the bill to have the penalties based on hours worked rather than the number of full-time workers. This provision on full-time workers was put in place by an amendment to the Senate bill. The original House bill had a more reasonable provision and it would not be difficult to design an amendment that did not base penalties on the number of full-time workers, but rather total hours worked. For those familiar with arithmetic, such calculations are not difficult.

There is another important point on this topic that Samuelson apparently missed. Historically insurance was provided as a per worker benefit, making it a fixed overhead cost. (It is increasingly common for employers to pro-rate its payment for insurance based on hours worked, but this practice is still the exception.) This meant that employers would rather have workers put in longer workweeks, possibly even paying an overtime premium, rather than hiring additional workers and paying for health insurance.

This is a major distortion of the labor market from the current system. It is undoubtedly one reason that full-time workers in the United States put in 20 percent more hours a year on average than do workers in western Europe. The notion that we somehow have a perfect labor market now, into which the ACA will introduce distortions, is absurd on its face.

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That is what readers of his column will conclude when they see him saying:

"Europe is a different story. The bubble years allowed much of Europe to avoid making the kind of structural changes necessary to put its social welfare system on a sustainable fiscal path and reform its labor and product markets. The euro crisis — which is both a banking crisis and a sovereign debt crisis — has forced Europeans to begin addressing those issues. But the noisy process will take years to complete, if for no other reason than it requires Europeans to accept, at least in the short run, a lower standard of living."

Of course this is completely wrong. The countries with the well developed welfare states, Germany, Denmark, Sweden, the Netherlands are doing fine. The countries that are in crisis, Spain, Greece, Portugal, Ireland, have the least developed welfare states among the older EU countries. Also, there is nothing about the crisis that requires Europe on the whole to have a lower standard of living. In fact, the best resolution of the crisis involves Germans seeing higher wages and a higher standard of living. While this may imply a modest relative decline in the standard of living of the crisis countries (imports from Germany would cost more), it would lead a greatly improved standard of living from current levels.

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The Washington Post rarely tries to conceal its contempt for unions or middle class workers. In keeping with this spirit it ran a column today that was intended to scare readers about the extent to which public sector pensions will impose a burden on taxpayers in the years ahead. The column projects that the unfunded liabilities of public sector pensions will require:

"on average, a tax increase of $1,385 per U.S. household per year would be required, starting immediately and growing with the size of the public sector."

Now that's pretty scary, right? It sure looks like we better go after those public sector workers and their generous pensions.

The column, by two finance professors, Robert Novy-Marx of Rochester University and Joshua Rauh from Stanford, uses two simple tricks to generate its scary projections of household liabilities. First is assumes that pensions will receive impossibly low returns on their assets. The piece notes:

"These finding were calculated assuming that states invest somewhat cautiously and achieve annual returns of 2 percent above the rate of inflation. But even if states continue to make massive bets that the stock market will bail them out, and if the market were to perform as well over the next 30 years as it did over the past half-century (an unprecedented bull market), the required per-U.S. household tax increase would still amount to $756 per year."

Actually, all the stock market has to do to get us to this $756 per year figure is to grow at the same pace as the economy. Using the standard growth projections from the Congressional Budget Office and other official forecasters, if the price to earnings ratio in the stock market remains constant over the next 30 years then we will see the lower liability figure than the pension funds themselves project.

This is hardly a heroic assumption. In fact, unless Novy-Marx and Rauh want to dispute the official growth projections, it is almost impossible to construct scenarios in which stock returns will come in much below the levels assumed by the pension funds.The point is simple, it was absurd to project high returns in the stock market in the late 90s, when the ratio of stock prices to trend earnings was over 30 to 1 or even in the last decade when it was still over 20 to 1. However with a current ratio that is close to the historic average of 15 to 1, real returns of 7 percent are very reasonable. People who understand the stock market and saw the stock bubble could have explained this fact to Post readers, but such views are excluded from the pages of the Post in order to avoid embarrassing its writers, editors, and columnists, all of whom completely missed both the stock and housing bubbles.

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In his latest blogpost Paul Krugman makes the point that the recoveries from financial crises have in general been slow and difficult, but that they need not be. The point is that this downturn is not like the severe downturns in the 74-75 or 81-82, because they were both driven by the Fed raising interest rates to combat inflation. That left the obvious corrective step of lowering interest rates, which in both cases prompted a swift recovery.

That option does not exist today because this downturn was brought about a collapsed housing bubble, not the Fed raising interest rates. Okay, I just gave my addendum to the Krugman story. Yes, we did have a financial crisis in the fall of 2008. This crisis did hasten the pace of the downturn, but it was and is not the story of the recession. We would be in pretty much the same place today even if the financial crisis had not happened.

It is difficult to see any obvious way in which the current state of the financial system is seriously impeding recovery at this point. Unlike Japan, mid and large size firms in the United States have direct access to capital markets and are now able to borrow at record low interest rates. While some potential homebuyers are finding it more difficult to get mortgages than in the mid-90s (that's the relevant comparison, not the nuttiness of the bubble years), the impact of restoring 90s era credit conditions for homeowners on the housing market would be trivial, especially if it went with mid-90s interest rates. In short, the problems of the economy are not directly related to the financial crisis.

Nor are they directly related to indebtedness. The ratio of current consumption to disposable income is still high by historical standards, not low. While the consumption share of disposable income is not at the peak of the stock bubble of the housing bubble, when the saving rate was near zero, it remains far above the average for the 60s, 70s, the 80s or even the 90s. There is simply no reason to expect consumption to return to bubble levels when the bubble wealth that drove it has disappeared.


Source: Bureau of Economic Analysis.

This gets to the more fundamental story of a recession driven by a collapsed housing bubble. We were able to reach near full employment at the peak of the bubble as a result of demand created by an extraordinary construction boom and consumption boom. The overbuilding of the bubble years led housing construction to fall well below trend levels. With the excess supply now being eroded by a growing population, housing construction will return to trend levels, but not the levels of the bubble years. This leaves a gap in demand of roughly 2 percentage points of GDP or $300 billion. 

Consumption has already returned to a reasonable, if not excessive, share of disposable income. Are most households saving enough for retirement? The answer is almost certainly not, especially given the stated desire of the leadership of both parties to cut Social Security and Medicare benefits. This means that we have zero reason for expecting the consumption share of disposable income to go still higher, absent the return of another bubble.

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This little factoid would have been worth including in a front page Washington Post news article reporting business executives' expressed concerns about the end of the year budget situation. The article tells readers that the executives warned of dire consequences, including another debt downgrade and higher interest rates on government bonds, if the budget situation is not resolved quickly. An early resolution is more likely to leave the Bush tax cuts for the wealthy in place, since it would be easier politically to extend them before the end of the year than to reinstate them after they expire on January 1.

Since these executives have a large personal stake in how the tax battles are resolved it would have been appropriate to remind readers of that fact. It is possible that this could influence what they say on the topic. The Post would usually make a point of noting much smaller and more indirect conflicts of interest.

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