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).
That is what Binyamin Appelbaum argued in a Upshot column with the headline, “on trade, Donald Trump breaks with 200 years of economic orthodoxy.” The piece points to Trump’s rhetoric in which he claims that other countries are taking advantage of the United States because they are running large trade surpluses with us.
It then turns to an old speech from Milton Friedman saying the opposite is true:
“'Economists have spoken with almost one voice for some 200 years,’ the economist Milton Friedman said in a 1978 speech. ‘The gain from foreign trade is what we import. What we export is the cost of getting those imports. And the proper objective for a nation, as Adam Smith put it, is to arrange things so we get as large a volume of imports as possible for as small a volume of exports as possible.’”
This is in fact the classic economics argument for the merits of trade, but there is an important assumption in the argument which is not mentioned. The assumption is that the trade deficit has no effect on the level of aggregate demand and output in the United States. In the standard economic view, if our annual trade deficit increases by $200 billion we will simply make up this demand elsewhere in the economy.
A combination of higher consumption, investment, and government spending will fully offset the $200 billion reduction in demand resulting from the rise in the trade deficit. This means that total demand in the economy will not change, nor will total employment. There could be some shift in employment, from the import competing industries to the industries that meet the new demand, but in the standard economics story of trade, overall unemployment is not a problem.
This view of trade is less tenable in an economy that faces a chronic shortfall of demand, as is the case in the United States. Most economists now recognize that advanced economies like those in the United States, Japan, and the European Union can have prolonged periods of inadequate demand (a.k.a. “secular stagnation”) leading to unemployment and underemployment.
Since the TARP has come up repeatedly in the debates between Secretary Hillary Clinton and Senator Bernie Sanders, it is worth briefly correcting a couple of major misconceptions. The first one is that we would have had a second Great Depression without the bailout. This assertion requires rejecting everything we know about the first Great Depression.
The first Great Depression was caused by a series of bank collapses as runs spread from bank to bank. The country was much better positioned to prevent the same sort of destruction of wealth and liquidity most importantly because of the existence of deposit insurance backed up by the Federal Deposit Insurance Corporation.
More importantly, the downturn from the collapse persisted for over a decade because of the lack of an adequate fiscal response. In other words, if we had spent lots of money, we could have quickly ended the depression as we eventually did with the spending associated with World War II in 1941. There is no reason in principle that we could not have had this spending for peaceful purposes in 1931, which would have quickly brought the depression to an end.
The claim that we risked a second Great Depression in 2008 (defined as a decade of double-digit unemployment) is not only a claim that we faced a Great Depression sized financial collapse but also that we would be too stupid to spend the money needed to get us out of the downturn for a decade. None of the second Great Depression myth promulgators has yet made that case.
Hey, can an experienced doctor from Germany show up and start practicing in New York next week? Since the answer is no, we can say that we don't have free trade. It's not an immigration issue, if the doctor wants to work in a restaurant kitchen, she would probably get away with it. We have protectionist measures that limit the number of foreign doctors in order to keep their pay high. These protectionist measures have actually been strengthened in the last two decades.
We also have strengthened patent and copyright protections, making drugs and other affected items far more expensive. These protections are also forms of protectionism.
This is why Morning Edition seriously misled its listeners in an interview with ice cream barons Ben Cohen and Jerry Greenfield over their support of Senator Bernie Sanders. The interviewer repeatedly referred to "free trade" agreements and Sanders' opposition to them. While these deals are all called "free trade" deals to make them sound more palatable ("selective protectionism to redistribute income upward" doesn't sound very appealing), that doesn't mean they are actually about free trade. Morning Edition should not have used the term employed by promoters to push their trade agenda.Add a comment
I see that Peter Petri and Michael Plummer (PP) have responded to my blog post on their models projections for the TPP. In essence, they minimize the concern that the TPP or even trade deficits more generally can lead to a prolonged period of high unemployment or secular stagnation to use the currently fashionable term.
Dealing with the second issue first, they argue:
“While trade agreements include many provisions on exports and imports, they typically contain no provisions to affect savings behavior. Thus, net national savings, and hence trade balances, will remain at levels determined by other variables, and real exchange rates will adjust instead.
“A similar argument applies to overall employment. The TPP could affect employment in the short run — a possibility that we examine below — but those effects will fade because of market and policy adjustments. Since there is nothing in TPP provisions to affect long-term employment trends, employment too will converge to these levels, as long as adjustments are completed in the model’s 10 to 15 year time horizon.”
In short, PP explicitly argues that trade agreements neither affect the trade balance nor employment as a definitional matter. They argue that the trade balance is determined by net national savings. They explicitly disavow the contention in my prior note that we cannot assume an adjustment process that will restore the economy to full employment:
“In fact, critics of microeconomic analysis often challenge the credibility of market adjustment even in the long term. Dean Baker (2016) argues, for example, that mechanisms that may have once enabled the US economy to return to equilibrium are no longer working in the aftermath of the financial crisis. But the data tell a different, less pessimistic story (figure 1). Since 2010, the US economy has added 13 million jobs, a substantial gain compared to job growth episodes in recent decades, and the US civilian unemployment rate has declined from nearly 10 percent to under 5 percent. The broadest measure of unemployment (U6), which also includes part-time and discouraged workers, has declined almost as sharply, from 17 to 10 percent, and is now nearly back to average levels in precrisis, nonrecession years.”
As I noted in my original blog post, the PP analysis is entirely consistent with standard trade and macroeconomic approaches, however these approaches do not seem credible in the wake of the Great Recession. The standard view was that the economy would quickly bounce back to its pre-recession trend levels of output and employment. This view provides the basis for the projections made by the Congressional Budget Office (CBO) in its 2010 Budget and Economic Outlook (CBO, 2010). These projections are useful both because they were made with a full knowledge of the depth of the downturn (the recovery had begun in June of 2009) and also because CBO explicitly tries to make projections that are in line with the mainstream of the economics profession.Add a comment
Eduardo Porter noted the rise in income inequality over the last three decades. He then suggests a few policies that could raise incomes for those at the middle and bottom, such as the wage insurance policy recently proposed by President Obama and the Earned Income Tax Credit. While these are reasonable proposals, it is also reasonable to suggest ending the protections that act to raise incomes for those at the top.
For example, we can use trade policy to provide more competition for doctors, dentists, lawyers and other highly paid professionals who occupy the top 1–2 percent of the wage distribution. There are plenty of very bright people in the developing world (and even West Europe) who would be happy to train to U.S. standards and work in the United States at a fraction of the wages of the people who currently hold these positions.
This would directly reduce inequality by eliminating the walls that now sustain the living standards of these highly educated workers. It would also raise the real wages of less-educated workers by reducing the cost of health care and the other services they provide.
We can also use trade policy to reduce the length and strength of patent and copyright protection. This would reduce the cost of drugs and software, further raising the wages of ordinary workers. This would also reduce the income of those at the top, like Bill Gates and the executives in the pharmaceutical industry.
We can also stop using the Federal Reserve Board as a tool to keep down the wages of ordinary workers, which thereby boosts the wages of those at the top. This means not raising interest rates at the first hint of any real wage growth by those at the middle and bottom of the wage ladder.
There are many other policies that could be introduced that would raise the wages of ordinary workers by reducing the income of those at the top. It is remarkable that such policies rarely seem to appear on the national agenda. It is not surprising that this leaves many working class voters resentful.
I see Paul Krugman was taking cheap shots at my heroes while I was on vacation. Krugman argues that Trump is wrong to claim that China is acting to keep down the value of its currency against the dollar. He points to recent efforts to prop up the value of the yuan by selling foreign exchange as evidence that China is actually doing the opposite of what Trump claims. Krugman should know better.
This is a story of stocks and flows. It’s true that China’s central bank is now selling reserves rather than buying them, but it still holds more than $3 trillion in reserves. The conventional rule of thumb is that reserves should be equal to six months of imports, which would be around $1 trillion in China’s case. This means that China’s stock of reserves is more than $2 trillion above what would be expected if it were just managing its reserves for standard purposes.
We should expect the stock of reserves to put upward pressure on the value of the dollar in international currency markets. This is the same story as with the Fed’s holding of $3 trillion in assets. It is widely argued (including by Paul Krugman) that the Fed’s holding of a large stock of assets reduces interest rates, even if it is not currently adding to that stock. The point is that if the private investors were to hold these assets instead of the Fed, they would carry a lower price and interest rates would be higher.
To take the stock and flow China analogy to the Fed, when the Fed raised the federal funds rate in December, it was trying to put some upward pressure on interest rates. But if we snapped our fingers and imagined that the federal funds rate was still zero, but the Fed’s asset holding were at more normal levels, do we think interest rates would be higher or lower?Add a comment
Paul Krugman, who certainly knows better, referred to the "risk of deflation" receding in the euro zone in his blog today. The point is that it doesn't matter if the inflation rate crosses zero and turns negative, the problem is that the inflation rate is too low. It's more too low if we have -0.5 percent inflation rather than 0.5 percent inflation, but this is no worse than having the inflation rate fall from 1.5 percent to 0.5 percent.
As I pointed in my prior post: "The inflation rate is an aggregate of millions of different price changes (quality adjusted). If it is near zero then a very large number of the changes will already be negative. When it falls below zero it simply means that the negative share is somewhat higher. How can that be a qualitatively different economic universe?"
The reason why this matters is that we can get a false complacency over the fact that prices are not falling, just rising very slowly. We should want a higher rate of inflation. And we should not be congratulating the central bankers just because the aggregate measure of inflation is greater than zero.Add a comment
Glenn Kessler, the Washington Post’s Fact Checker, gave former Secretary of State Hillary Clinton three Pinocchios for saying that the Republicans wanted to turn Social Security money over to Wall Street. I am afraid that I see this one a bit differently.
First, as a small point, the piece comments:
“We have explained before that “privatization” is one of those pejorative political labels used by opponents of the Bush plan…”
That’s not how I remember the story. In the 1990s many conservatives openly talked about their plans to “privatize” Social Security. At some point, they apparently ran focus groups and discovered that the term “privatization” did not poll well. At that point, they switched directions and starting talking about “personal accounts,” rather than privatizing Social Security. While the advocates of a policy certainly have the right to assign whatever name they like to the policy, it seems a bit extreme to criticize its opponents for using the term that advocates themselves had used in the recent past.
The piece then notes that President Clinton had openly advocated investing Social Security money in a stock index fund, therefore:
“One could certainly say that the first president who wanted to ‘give the Social Security trust fund to Wall Street’ was Bill Clinton.”
It is worth making an important distinction between the possible meanings of turning Social Security over to Wall Street. On the one hand, there is the possibility of directly investing some of the trust fund in the stock market. On the other hand, there are proposals to turn over the administration of individuals' Social Security to private financial firms. These routes have very different meanings and implications.Add a comment
Neil Irwin had an interesting piece on the Federal Reserve Board’s interest rate policy and its relationship to the stock market. The piece essentially argues that if the Fed were to make its interest rate decision based on economic data that it would hike rates at its next meeting. By contrast if it bases its decision on the stock market, it will leave rates where they are. It also argues that the Fed had acted to prop up the stock market in the 1997 following the East Asian financial crisis.
This is interesting analysis but there are some additional pieces that needed to be added to this puzzle. First, it is far from clear that the stock market was the main concern when Greenspan cut rates in 1997. There was a massive outflow of capital from developing countries following the East Asian financial crisis in the summer of that year.
At that time, many countries in the developing world had fixed their exchange rate to the dollar, as did Russia. This outflow of capital made it difficult for them to maintain the value of their currency. A reduction in interest rates by the Fed helped to alleviate some of the pressure on these currencies. (It didn’t work; most of them eventually devalued their currency against the dollar.)
Greenspan was also concerned about a stock bubble since the summer of 1996. (We know this from Fed minutes.) He decided not to act against the bubble, deciding it would be best to just let the bubble run its course. The recession that resulted from its eventual collapse in 2000–2002 gave us the longest period without net job growth since the Great Depression, at least until the 2008 recession.
Anyhow, while it is clear that Greenspan didn’t act against a stock bubble, it is a bit stronger claim to assert that he deliberately propped it up. It is also worth noting both that the price to trend earnings ratios were far higher in the 1990s (peaking at over 30 to 1) than what we are seeing at present. Furthermore, this was in a much higher interest rate environment, with interest rates on Treasury bonds in the 5.0–6.0 percent range, as opposed to 2.0 percent today. In other words, there was a clear case for a bubble in the late 1990s, which is not true today.Add a comment
The job killers (proponents of Fed rate hikes) seized on some modest upticks in the January inflation data to argue that the economy is near capacity and the Fed should be pushing up interest rates. After all, the core (excluding food and energy) consumer price index (CPI) rose by 2.2 percent over the last year, somewhat over the Fed’s 2.0 percent target. That’s pretty scary stuff.
I’ll make a few quick points here. First, the Fed officially targets the core personal consumption expenditure deflator. That index has risen by just 1.7 percent over the last twelve months, still below the Fed’s target.
Second, the Fed’s target is explicitly an average rate of inflation, not a ceiling. Many of us think that the 2.0 percent target is arbitrary and unreasonably low, but even if we accept this level, the inflation rate has a long way to go upward before the Fed will have even hit this target. We could have 4 years of 3.0 percent inflation and still be pretty much on target over the prior decade.
The third point is that the modest uptick in the inflation rate shown in the CPI is largely coming from rising rents. Here is the index the Bureau of Labor Statistics constructs for a core index that excludes shelter (mostly rent).
Source: Bureau of Labor Statistics.
There is a very small uptick in this index also, but only to 1.5 percent inflation over the last year. (There was a much larger uptick at the start of 2011.) We are still well below the Fed’s 2.0 percent inflation target if we pull out rent.
This matters, because if higher inflation is being driven by rising rents, it is not clear that higher interest rates are the right tool to bring prices down. Every Econ 101 textbook tells us about supply and demand. The main factor pushing up rents is more demand for the limited supply of housing. The best way to address this situation is to construct more housing.
But housing is perhaps the most interest sensitive component of demand. If we raise interest rates, then builders are likely to put up fewer new units. This will create more pressure on the housing stock and push rents up further.
Yes, the fuller picture is more complicated. Zoning restrictions often prevent housing from being built and there are many issues about what type of housing gets built. But as a general rule, more housing means lower rents, and if the Fed’s interest rate hikes lead to less construction, they will likely lead to a higher rate of rental inflation, the opposite of its stated intention.
The moral of the story is that the Fed should keep its fingers off the trigger. There is no reason for concern about inflation in the economy in general and in the one major sector where it is somewhat of a problem, higher interest rates will make the situation worse.Add a comment
Many people have contempt for economists. It is remarkable they don’t have more. Economists can’t even agree on answers to the most basic questions, like is an economy suffering from too little demand or too much demand. If that sounds confusing, this is like a weatherperson telling us that we don’t know whether to expect severe drought or record floods.
Today’s example is Japan. The NYT had a front page story about its declining population. Unlike many pieces on falling populations, this one at least pointed out the positives aspects, such as less crowded cities and less strain on infrastructure. But after making this point, the piece tells readers:
“The real problem, experts say, is less the size of the familiar ‘population pyramid’ but its shape — in Japan’s case, it has changed. Because the low birthrate means each generation is smaller than the last, it has flipped on its head, with a bulging cohort of older Japanese at the top supported by a narrow base of young people.
“One-quarter of Japanese are now over 65, and that percentage is expected to reach 40 percent by 2060. Pension and health care costs are growing even as the workers needed to pay for them become scarcer.”
Okay, this is a story of inadequate supply. The argument is that Japan’s large number of retirees will be making demands on its economy that its dwindling group of workers will be unable to meet.
That’s an interesting story, but anyone who has followed the debates on economic policy in Japan for the last three years knows that the government has been desperately struggling to increase demand. Prime Minister Abe has been pushing both monetary and fiscal stimulus with the hope of getting more spending to spur growth. In other words, Abe is concerned that Japan doesn’t have enough old people with pensions and health care demands to keep the economy fully employed.
Now this is pretty goddamn incredible. It is possible for an economy to face problem of too little demand. That was the story in the depression and I would argue facing most of the world today.
It is also possible for an economy to face a problem of excess demand, as is being described in this article. This is a situation where it lacks the resources needed to meet the demand it is generating. That typically manifests itself in high and rising inflation (clearly not the story in Japan today.)
It is not possible for a country to have both too much aggregate demand and too little aggregate demand at the same time. Maybe the NYT editors should sit down with those covering Japan and figure out which story fits the country’s economy. Until they can decide, maybe they should refrain from reporting on a country’s economy that they obviously do not understand.Add a comment
Are rivers flowing upstream? Has anyone seen four horsemen? Anyhow, it seems that the Washington Post editorial board is now acknowledging that a financial transactions tax [FTT] could be a serious policy. It ran an editorial which included a few derisive comments directed towards Senator Bernie Sanders, who has advocated a financial transactions tax in his presidential campaign, but favorably cited the Tax Policy Center’s analysis and said:
“They [FTTs] represent a ‘tempting’ option that might help the United States raise revenue while curbing speculative excess.”
There are a few points worth adding to the Post’s comments. The Post told readers:
“However, a tax would undoubtedly dampen some productive trading and not necessarily raise that much revenue, the report found — about $50 billion a year, in contrast to the $75 billion figure Mr. Sanders floats.”
As far as the concern for productive trading, the way the tax would reduce this is by raising the cost of trades. However, the cost of trading has fallen sharply over the last four decades. This means that the tax would, depending on the exact rate, only raise the cost of trading part of the way back to where it was four decades ago.
If the tax were set at a 0.1 percent rate on stock, with lower rates for other assets, then it would be raising the cost of trading to the levels of 10–20 years ago. So unless we see much more productive trading in the markets today than we did in the 1990s, we wouldn’t have much to worry about in this respect.
As far as the amount of money that would be raised, this depends hugely on the sensitivity of trading volume to the size of the tax. The Tax Policy Center assumed an elasticity of 1.5, meaning that the percentage drop in trading volume would be 1.5 times the percentage increase in trading costs associated with the tax. This elasticity assumption is certainly at the high end of the estimates in the literature. An elasticity assumption closer to 1.0, which is more in the center of the estimates in the research, implies the tax would raise roughly twice as much revenue.
It is also is worth noting that the 1.5 elasticity assumption used by the Tax Policy Center implies that trading volume decreases by a larger percentage than the increase in costs due to the tax. It would mean, for example, that if the tax raised trading costs by 40 percent, then trading volume would decline by close to 60 percent.
This means investors would reduce their trading by a larger amount than their costs per trade increased. As a result, investors would on average spend less money on trading, even including the tax, than they did before the tax was put in place. In that scenario, the entire burden of the tax is borne by the financial industry in the form of lost trading revenue.
Arguably the 1.5 elasticity assumption by the Tax Policy Center is too high, but if it is correct, it does mean the tax will raise less revenue, but it also means a much larger hit to the financial industry. Insofar as a purpose of the tax is to reduce the amount of resources being wasted by shuffling stock and derivatives back and forth all day, an FTT would have a huge effect in this case.
Since I had been critical of elite economists for using their authority rather than evidence to trash Gerald Friedman’s analysis of Bernie Sanders’ program, I should acknowledge a serious effort to do exactly the sort of analysis I advocated. Christina Romer, one of the four former heads of the Council of Economic Advisers who signed the earlier letter criticizing Friedman’s analysis, along with David Romer (both of whom are now Berkeley economics professors), did a detailed critique of the Friedman analysis.
I could quibble with aspects of their critique, but I would say it is basically right. There clearly is still a large amount of slack in the economy which would allow for 2–4 years of exceptionally strong growth (e.g. 4–5 percent). However, it is very hard to envision a story where this sort of growth rate is maintained for a full eight years of a Sanders’ administration.
Furthermore, many aspects of Sanders’ agenda point to slower growth. For example, universal Medicare and expanded Social Security will make it easier for older people not to work, as will free college for young people. Also, mandated vacations will mean fewer hours per worker, on average. These may all be good things (I happen to think so), but they are likely to mean less GDP growth than would otherwise be the case.
Anyhow, I appreciate that Romer and Romer took the time to do the analysis. We should be having a discussion about how much better the economy can be doing than it is now. This analysis is a step in that direction.
Matt O’Brien had a very good piece on the silliness of the robots taking our jobs story. The basic point is that it is silly to worry about a possible future in which robots are taking our jobs, when we currently face a situation in which people don’t have jobs just because Congress won’t spend the money. I couldn’t agree more.
We can all see the really cool things that can be done by robots and advanced computers, but the fact is they are not doing it now. As Matt notes, productivity growth has been very slow in the last decade, the story of robots taking our jobs is one in which productivity growth is very fast.
There are two points worth adding to Matt’s comments. First, he refers to an often cited analysis that finds 47 percent of all jobs are at risk of being automated over the next twenty years. Sounds pretty scary, right? Well let’s imagine that all of the 47 percent of those at risk jobs gets computerized over the next two decades. (The study just identifies these as “at risk” jobs, a high proportion of which will be computerized, not all of them.)
This rate of computerization would translate into 3.1 percent annual productivity growth. That’s a hair higher than the 2.9 percent annual rate of productivity growth that we saw in the Golden Age from 1947–1973. That was a period of low unemployment and rapid real wage and income growth. If there is a reason that we should be scared in this story it is not because of the productivity growth, but rather an institutional structure that prevents most workers from benefitting from this growth.
Fareed Zakaria used his column in the Washington Post this week to approvingly quote former British foreign minister David Miliband saying:
“The right has no good answer to the problem that globalization erodes people’s identities. The left has no good answer to the problem that it exacerbates inequality...”
Actually, the left has plenty of good answers on inequality, they just get ignored or misrepresented in outlets like the Washington Post.
For example, many progressives (including Senator Bernie Sanders) have long supported a financial transactions tax. This would raise tens of billions of dollars annually that would come almost exclusively out of the hides of the high-flyers in the financial sector. Progressives also want to end the government’s “too big to fail” insurance for the country’s largest banks, a subsidy that gives tens of billions of dollars a year to the country’s biggest banks. When these ideas appear at all in the Post they are completely misrepresented, with the paper bizarrely insisting that financial reform is about preventing the 2008 crisis instead of restructuring the financial sector to better serve the productive economy.
Beyond finance, many progressives are strongly opposed to the center’s protectionist agenda on trade, which would involves continually making patent and copyright protection stronger and longer. These forms of protection are equivalent to imposing tariffs of several thousand percent on the protected items. However since the beneficiaries in the pharmaceutical, software, and entertainment industry tend to be rich and powerful, papers like the Washington Post pretend they are the “free market.”
The Washington Post headlined a Reuters' piece on the Commerce Department's release of January data on durable goods orders "new orders for durable goods increased in January." The first sentence told readers:"New orders for long-lasting U.S. manufactured goods in January rose by the most in 10 months as demand picked up broadly, offering a ray of hope for the downtrodden manufacturing sector."This is more than a bit misleading. The 4.9 percent jump in January looks much less impressive when considered with a 4.6 percent decline in December and a 0.5 percent decline in November. The monthly data in this series are highly erratic.
The large drop reported for December was almost certainly a measurment error and did not reflect an actual decline in orders. This means that the January jump was primarily attributable to the series again more accurately reflecting the true level of orders in the economy. Looking over a longer period, nominal orders are up by less than 1.0 percent over the last year. While this is not a horrible story of collapsing manufacturing, it is wrong to imply there is any evidence of a bounce back in this sector.Add a comment
The confusion on inflation continues. The NYT ran a Reuters piece on the latest inflation data from Japan. The piece began by telling readers:
“Japan's core consumer prices were unchanged in January from a year earlier, suggesting that persistent falls in energy costs will keep inflation well below the central bank's 2 percent target.
“While falling fuel costs may be a boon for corporate profits, low energy prices suppress inflation which in turn may discourage companies from raising wages or the prices of their goods.”
Okay, let’s step back a second. The reason that folks care about having higher inflation is to give firms more incentive to invest. If the goods and services they are selling rise in price by 2.0 percent a year, as opposed to staying flat, then they have more incentive to invest at the same nominal interest rate. We’ll call this 2.0 percent inflation case “Scenario I.”
Now let’s imagine Scenario II. Suppose that the prices of the goods and services firms in Japan produce rise by 2.0 percent a year, as in Scenario I, but the prices of oil and other items that Japan imports fall rapidly. The result is that the overall inflation rate is zero.
Your brainteaser for tonight is: do Japanese firms have any less incentive to invest in the Scenario II than Scenario I?
I should mention that cheap oil is horrible for the environment since it encourages people to use more of the stuff and makes it more difficult to promote clean energy. This may be obvious, but is worth repeating.Add a comment
Jacob Weisberg wasn’t quite straight with readers when he said that Ronald Reagan supported “Keynesian stimulus” in a NYT column on how the Republican Party has changed since the days of Reagan. The Keynesian stimulus took the form of a large permanent tax cut that was highly skewed toward the wealthy. He also had large increases in military spending.
The current crew of Republican presidential candidates seems to be very much in this same mode, also urging large tax cuts that would primarily benefit the wealthy and spending more on the military. Reagan did agree to roll back some of his tax cut when it appeared that deficits were getting too large in 1982 and 1983. We can’t know whether the Republican candidates would be prepared to raise taxes again if deficits were leading to high interest rates and/or inflation, but in their platforms they are very much following Reagan, contrary to what Weisberg claims.
It must be tough for flat earth believers; people insist on rejecting their views on the shape of the earth based on evidence. Robert Samuelson seems to be in the same situation. He used his column to complain about economists not caring about balanced budgets, just because there is no evidence that they should.
The immediate provocation for this diatribe is Doug Elmendorf, the former head of the Congressional Budget Office. Elmendorf used to be a big advocate of smaller deficits, but he now is arguing that Congress take advantage of near record low interest rates to undertake a major infrastructure initiative.
Samuelson concluded his piece:
“Destroyed is the pre-1960s consensus: a crude allegiance to a balanced budget. Since 1961, the government has run annual deficits in all but five years. Allowing for desirable deficits when the economy is well below capacity or when there’s a national emergency, we need to go back to the future. Before making vast new commitments — a la Elmendorf — we should balance the ones we already have.”
Ah yes, the country is being destroyed by deficits. That is why the government has to pay almost 2.0 percent to borrow long-term. And the interest on our horrible debt costs us almost 0.8 percent of GDP in annual interest payments. Sound pretty awful? Interest cost us more than 3.0 percent of GDP back in the early 1990s.
It is amazing that people like Samuelson, and more importantly our politicians in Washington, continue to try to run the government based on nostrums they learned from their parents rather than the real world. Elmendorf changed his view on economic priorities based on evidence.
There is a clear story of how excessive deficits can hurt the economy. They drive up interest rates if the Fed does not accommodate them and they lead to inflation if the Fed does. The rationale is simple: excess deficits cause us to push the economy too hard. They lead to too much demand given the economy’s ability to produce goods and services.
We clearly are not seeing this constraint. There are still millions of unemployed or underemployed workers who would like full-time jobs. This means that the concern about balanced budgets is needlessly keeping these people unemployed. And the weakness of the labor market is keeping tens of millions of workers from having the bargaining power necessary to get their share of the benefits from economic growth in higher wages.
Perhaps even worse, the obsession with deficits prevents us from doing things we really need to do. The neglected items form a long list, from early childhood education and affordable college to keeping the kids in Flint from being poisoned.
But hey, why look at the real world when we have the words of wisdom on balanced budgets that Robert Samuelson learned from his parents.
The NYT had an article this morning on how European tech start-ups were seeing new capital dry up in the same way as Silicon Valley firms. The piece portrayed this as largely a negative event. Undoubtedly, it is bad news for the founders and top employees of these firms, but it’s not clear it is bad news for the economy.
The huge capitalizations of many start-ups has allowed a small number of people to get very rich, however it is not clear that their valuations bore any resemblance to their value to the economy. For example, both Groupon and Dropbox at one point had market capitalizations of more than $10 billion.
While selling coupons over the web and an efficient offsite Internet storage system are both items that will provide benefits to many individuals, so is combining peanut butter and jelly in a single jar. It is not clear that we should expect to see someone becoming a billionaire for coming up with the idea of combining peanut butter and jelly in one jar, nor is obvious that the contributions of many of these start-ups should cause people to become billionaires.
If capital markets are hugely overpricing start-ups relative to their actual value to the economy, as subsequently determined by the market, then they are effectively redistributing wealth from others to the leading actors in these start-ups. Insofar as the money is coming from other wealthy people, this is simply a matter of money going from the old rich to newly created rich. In this case, it need not be matter of concern for the rest of us. However if pension fund assets or money held in mutual funds through individual retirement accounts are going into over-valued start-ups, then this is a redistribution from the rest of us to the new rich.
Insofar as that is the story of the Silicon Valley boom and the parallel boom in Europe, we should applaud the collapse of the price of these companies’ stock. An over-valued stock price has the same impact on the economy as counterfeit money that passes for real. It gives some individuals purchasing power who should not have a claim to it. Catching the counterfeiter and bringing the stock price back in line with the fundamentals is good news. (Of course in an economy that is operating below its capacity like ours, we actually would benefit from the demand that would be generated by a successful counterfeiter, but that is another story.)Add a comment