Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).
Neil Irwin had an Upshot piece this morning on the likelihood that the U.S. economy will fall into recession in 2016. He argues that a recession is unlikely, but then gives readers a scenario in which it is possible.
I will say first that I agree that a recession is unlikely. Recessions in the past were brought on by the Fed’s efforts to slow inflation with higher interest rates or by the bursting of an asset bubble.
The Fed’s December rate hike was a mistake, but that is not going to cause a recession. And, few of the members of the Fed’s Open Market Committee are wacky enough to raise rates further in a weak economy with no inflation.
While there may have been bubbles in some sectors of the economy, there was nothing like the $10 trillion bubble in the stock market in the late 1990s or the $8 trillion bubble in the housing market in the last decade. None of the various bubbles were driving the economy, so their collapse will not bring about a recession.
The question then is what could bring a recession. Irwin’s answer is that the continuation of low oil and commodity prices leads to downturns in oil exporting countries and loan defaults by energy producers both domestic and foreign. The hurt to the economy from weaker demand is then compounded by the pessimism of consumers and firms. The former cut back on consumption, while the latter cut back on investment. With the Fed paralyzed by already low interest rates, and also its unwillingness to concede the December rate hike was a mistake, the economy slides into recession.
I see this story as highly unlikely. First, while psychology does matter, there is a tendency to hugely over-rate the size of these effects. For years economists and economic writers were telling us that people were reluctant to consume following the collapse of the housing bubble because they were fearful about their economic prospects.
In fact, there was a much simpler explanation. People had lost trillions of dollars of wealth when the housing bubble burst and the stock market plunged. The “wealth effect,” the idea that people spend based on their wealth, is an economic concept that dates back almost a century. Alan Greenspan frequently touted that people were consuming based on the equity generated by the housing bubble.
Why was it a surprise that they cut back their consumption when this wealth disappeared? The evidence that people are now saving their oil dividend is extremely weak and can easily disappear in subsequent revisions to the data. In short, I don’t see a story where people cut back their consumption in a big way because they hear that Russian economy is in trouble.
There may be a bit more of a story on the investment side, but here too the psychological hit in 2008 was hugely exaggerated. If we pull out structures (there was also a bubble in non-residential investment) Investment actually didn’t fall that much in the downturn and fairly quickly got back to pre-recession levels as a share of GDP. This doesn’t mean that bad vibrations from plummeting oil prices can’t have an impact, just that it is not likely large enough to be recession material.
On the Fed, it is important to note that it is far from out of ammunition. In addition to its conventional control of the short-term interest rate, and its buying of long-term bonds under quantitative easing, the Fed can also go the route of targeting long-term interest rates. Under this policy, which has been pushed by Joe Gagnon, a former Fed economist, the Fed would set a target of say 1.0 percent for the interest rate on 5-year Treasury notes. It would commit itself to buying as many notes as necessary to keep the interest rate at its targeted level.
The Fed has not tried this sort of policy in more than half a century, but there is no legal constraint that prevents it from going this route. Presumably its hesitance is the fear that such a policy could spur inflation.
While it is understandable that the Fed must concern itself with inflation, it is important for the public to recognize that it has policy options to boost the economy and lower unemployment that it has chosen not to use. It is simply wrong to say the Fed is out of ammunition.
The NYT had a front page article on how bad debt is threatening world growth. The article focused on China, which it indicated could have as much as $6 trillion in bad debt.
It would have been worth mentioning that China’s government could easily cover the cost of bad debt and keep its economy moving forward. The government’s debt to GDP ratio is very low, its interest burden is less than 1.0 percent of GDP, and it is more worried about deflation than inflation.
In this context, there is no economic reason the government could not put up the money to clear up bad debts. The only obstacles would be political.Add a comment
It’s clear that Bernie Sanders has gotten many mainstream types upset. After all, he is raising issues about the distribution of wealth and income that they would prefer be kept in academic settings, certainly not pushed front and center in a presidential campaign.
In response, we are seeing endless shots at Sanders’ plans for financial reform, health care reform, and expanding Social Security. Many of these pieces raise perfectly reasonable questions, both about Sanders’ goals and his route for achieving them. But there are also many pieces that just shoot blindly. It seems the view of many in the media is that Sanders is a fringe candidate, so it’s not necessary to treat his positions with the same respect awarded the views of a Hillary Clinton or Marco Rubio.
The New Yorker is clearly in this attack mode. It ran a piece by Alexandra Schwartz asking, “Should Millennials Get Over Bernie Sanders?” You can guess the answer.
But the piece runs into serious problems getting there. It tells readers:
“[Sanders’] obsession with the banks and the bailout is itself phrased in weirdly retro terms, the stuff of an invitation to a 2008-election theme party. As my colleague Ben Wallace-Wells points out, we voters under thirty have come of political age during the economic recovery under President Obama. When I graduated from college, unemployment was close to ten per cent; it’s now at five. Sanders’s attention to socioeconomic justice is stirring and necessary, but when his campaign tweets that it’s “high time we stopped bailing out Wall Street and started repairing Main Street,” you have to wonder why his youngest supporters, so attuned to staleness in all things cultural, are letting him get away with political rhetoric that would have seemed old even in 2012.”
Those familiar with economic data know the labor market, which is the economy for the vast majority of the public, is very far from recovering from the recession. While the unemployment rate is reasonably low, this is largely because millions of workers have dropped out of the workforce.
And, contrary to what is often asserted, these are not retiring baby boomers or people without the skills needed in a modern economy. The employment rate of prime age workers (ages 25–54) is still down by 3.0 percentage points from its pre-recession level. Furthermore, this drop is for workers at all levels of educational attainment. Employment rates are even down for workers with college and advanced degrees. Other measures of labor market strength, like the percentage of people involuntarily working part-time, the quit rate, and the duration of unemployment spells are all still at recession levels.
Furthermore, the huge shift from wages to profits that we saw in the downturn has not been reversed. As a result, wages are more than 6.0 percent lower than they would be if the labor share had not changed.
Source: Bureau of Economic Analysis.
If this stuff is hard for New Yorker editor types to understand, if workers lose 6.0 percent of their wages to profit it has the same impact on their living standards as if they faced a 6.0 percentage point increase in the payroll tax. Would the New Yorker think that today’s young people have anything to complain about if they had seen an increase in the payroll tax in 2009-2010 of 6.0 percentage points and which still remains in place today?
If the answer to that one is “yes,” then its editors should be able to understand why millennials in 2016 are unhappy about the state of the economy and why they might find a figure like Senator Sanders attractive.
Eduardo Porter had a piece this morning about how a group of academics on the left and right came together around a common agenda. It is worth briefly commenting on two of the items on which the “left” made concessions.
The first is agreeing that Social Security benefits for “affluent Americans” should be reduced. There are three major problems with this policy. The first is that “affluent Americans” don’t get very much Social Security. While it is possible to raise lots of money by increasing taxes on the richest 1–2 percent of the population, the rich don’t get much more in Social Security than anyone else. This means that if we want to get any significant amount of money from reducing the benefits for the affluent we would have to reduce benefits for people that almost no one would consider affluent. Even if we went as low as $40,000 as the income cutoff for lowering benefits, we would still only save a very limited amount of money.
The second problem is that reducing benefits based on income is equivalent to a large tax increase. To get any substantial amount of money through this route we would need to reduce benefits at a rate of something like 20 cents per dollar of additional income. This is equivalent to increasing the marginal tax rate by 20 percentage points. As conservatives like to point out, this gives people a strong incentive to evade the tax by hiding income and discourages them from working.
Finally, people have worked for these benefits. We could also reduce the interest payments that the wealthy receive on government bonds they hold. After all, they don’t need as much interest as middle-income people. However no one would suggest going this route since the government contracted to pay a given interest rate.
Social Security involves a similar sort of commitment, although many on the right would like to deny this fact. The program is already structured to be highly progressive, the wealthy pay much more money into the program for every dollar they get back. There are many proposals from the left to make the program even more progressive by increasing the taxes paid by the wealthy. This would help to ensure the long-term solvency of the program while maintaining the level of benefits for all workers. There is a serious risk that cutting benefits for middle income seniors will be a first step in the opposite direction, undermining the public support for the program.
The other dubious position in this agenda is the strong endorsement for marriage. While there are enormous benefits from strong relationships, especially for children, the government is not a very good matchmaker. It is not obvious what the government can do to increase the likelihood that two compatible people will remain together in a healthy relationship.
There are plenty of unhealthy relationships, where one member is abusive of the other and often children. In these cases, it is not good to keep couples together and it would be foolish for the government to try.
As a matter of policy, we have to recognize that a large number of children will be raised by single parents. We need policy to ensure that these children are not penalized as a result of their parent’s marital status. Many proposals to promote marriage will at least indirectly have this effect.
Margot Sanger-Katz had a NYT Upshot column arguing that Hillary Clinton and Bernie Sanders plans to have Medicare negotiate drug prices ultimately won’t prove successful in lowering costs because Medicare can’t simply refuse to pay for a drug. There is much truth to this argument, but it is worth working through the dynamics a step further.
The reason why Medicare has to accept prices from a single drug company, as opposed to choosing among competing producers, is that the government gives drug companies patent monopolies on drugs. Under the rules of these monopolies, a pharmaceutical company can have competitors fined or even imprisoned, if they produce a drug over which the company has patent rights.
The granting of patent monopolies is a way that the government has chosen to finance research and development in pharmaceuticals. (It also spends more than $30 billion a year financing biomedical research through the National Institutes of Health.) It could opt for other methods of financing research.
For example, Bernie Sanders proposed a prize fund to buy the rights to useful drug patents, following a model developed by Joe Stiglitz, the Nobel Prize winning economist. Under this proposal, pharmaceutical companies would be paid for their research, but the drug itself could then be sold in a free market like most other products.
In this situation, almost all drugs would be cheap. We wouldn’t have to debate whether it was worth paying $100,000 or $200,000 for a drug that could extend someone’s life by 2–3 years. The drugs would instead cost a few hundred dollars, making the decision a no-brainer.
There are other mechanisms for financing the research. We could simply have the government finance clinical trials, after buying up the rights for promising compounds. In this case also approved drugs could be sold at free market prices.
There are undoubtedly other schemes that can be devised that pay for research without giving drug companies monopolies over the distribution of the drug. Obviously we do have to pay for the research, but we don’t have to use the current patent system. It is like paying the firefighters when they show up at the burning house with our family inside. Of course we would pay them millions to save our family (if we had the money), but it is nutty to design a system that puts us in this situation.
Anyhow, if we are having a debate on drug prices, we shouldn’t just be talking about how to get lower prices under the current system. We should also be talking about changing the system.
Addendum:Add a comment
The NYT had an article on different trade models that are being used to predict the impact of the Trans-Pacific Partnership (TPP). It reported on the projections from a model from the Peterson Institute which shows that the TPP would add 0.036 percentage points to the annual growth for the United States rate over the next 14 years. On the other hand, it reported the projections of a model from Tufts University which showed that the deal would lose economy 450,000 jobs (@0.3 percent of total employment) and slow growth.
It would have been helpful to add a bit of background to this dispute. The model from the Peterson Institute explicitly assumes that the trade deal cannot have an effect on the trade deficit and employment:
“The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.”
This was a conventional assumption in trade models prior to the Great Recession. The view was that if a trade deal led to a change in the trade deficit, currencies values would adjust so that the overall trade balance would not change. Furthermore, even if a rise in the trade deficit did lead to some fall in output and employment, this could be offset by fiscal and/or monetary policy. Therefore economists need not worry about trade’s impact on aggregate output and employment.
In the wake of the Great Recession many of the world's most prominent economists (e.g. Larry Summers, Paul Krugman, Olivier Blanchard) no longer believe that the economy will automatically bounce back to full employment. They now accept the idea of “secular stagnation,” which means that economies can suffer from long periods of inadequate demand. If secular stagnation is a real problem, then there is no basis for assuming that the demand and jobs lost due to a larger trade deficit can be offset by other policies.Add a comment
What else is new? Yep, the deficit is exploding and it will devastate our children and no one will listen:
“Based on the campaign so far, this important conversation seems unlikely. The leading candidates are playing Russian roulette with the nation’s future, assuming that deficits can be ignored because most Americans (or so it seems) would prefer it that way.”
Folks who pay attention to the economy might notice that the interest rate on 10-year Treasury bonds is now under 2.0 percent. Apparently it’s not just the politicians, the financial markets are not too concerned about the deficit either.
As far as the burden on our kids, interest on the debt (net of transfers from the Federal Reserve Board) comes to less than 0.8 percent of GDP. By comparison, interest payments were over 3.0 percent of GDP in the early 1990s condemning us to a decade of stagnation. (Oh wait, doesn’t seem to have worked out that way.)
If we are concerned about helping our kids, how about running larger deficits to employ their parents? More spending on infrastructure, education, health care and other needs would help to make the labor market tight enough so that workers have the bargaining power they need to get higher wages. It would also make the economy more productive in the future.
The risk to our children from having parents without the ability to care for them dwarfs any risk they face from higher interest payments on the debt. But hey, without Robert Samuelson they might not even have someone to tell them about the debt.Add a comment
In today’s column he makes a pitch for Republican tax reform telling readers:
“If there is going to be growth-igniting tax reform — and if there isn’t, American politics will sink deeper into distributional strife — Brady [Representative Kevin Brady, the chair of the House Ways and Means Committee] will begin it. Fortunately, the Houston congressman is focused on this simple arithmetic: Three percent growth is not 1 percent better than 2 percent growth, it is 50 percent better.
“If the Obama era’s average annual growth of 2.2 percent becomes the “new normal,” over the next 50 years real gross domestic product will grow from today’s $16.3 trillion (in 2009 dollars) to $48.3 trillion. If, however, growth averages 3.2 percent, real GDP in 2065 will be $78.6 trillion. At 2.2 percent growth, the cumulative lost wealth would be $521 trillion.”
Of course 3.2 percent growth would lead to much more output than 2.2 percent growth. The problem is that there is no way on earth that any tax reform plan will add a full percentage point to growth. It would be an enormous success if a tax reform plan added 0.2–0.3 percentage points to growth.
While it is nice that Mr. Will can do compounding of growth rates, but we don’t have tax policies that will raise the growth rate by this amount even if we managed to over-ride every interest group that benefits from their special tax breaks.
So it’s nice that Republicans still want to believe in fairy tales, but those who are old enough to remember the Reagan tax cuts and the George W. Bush tax cuts or are slightly familiar with economics know better than to buy Mr. Will’s wild fables.Add a comment
I have tremendous respect for Paul Krugman. I also consider him a friend. For these reasons I am not eager to pick a fight with him, but there is something about his criticisms of Bernie Sanders that really bothered me.
In a blog post last week, Krugman told readers:
“As far as I can tell, every serious progressive policy expert on either health care or financial reform who has weighed in on the primary seems to lean Hillary.”
While I already had some fun with the idea of Krugman revoking the credentials of everyone who works in these areas who does not back Clinton, the appeal to the authority of the “experts” is more than a bit annoying. The reason is that the “experts” do not have a very good track record of late and still have a long way to go to win back the public’s trust.
To start with the obvious, almost none of the experts saw the 2008 collapse coming. Almost all of them dismissed the idea that there was a housing bubble and even the few that grudgingly acknowledged the possibility of a bubble insisted that it could not have much consequence for the economy.
Given the devastation wreaked by the collapse of this bubble, this failure is comparable to weather forecasters missing Hurricane Katrina. Just to be clear, I don’t mean failing to recognize the full severity of the storm, I mean missing the hurricane altogether and forecasting nothing but blue skies for the day it hit. The public could be forgiven for not wanting to trust future forecasts.Add a comment
John Judis has an interesting piece in Vox on the success so far of Donald Trump and Bernie Sanders. They have garnered the support of large numbers of voters who are disaffected with the agenda pushed by the mainstream in both parties. Judis argues that this agenda, which he alternatively describes as “neo-liberal” or “free market,” has been responsible for the rising economic insecurity of the white middle class. This insecurity has led Republicans to embrace Trump’s nationalistic and often racist agenda as well as Sanders’ openly left-wing agenda of a radically expanded welfare state.
There is an important point that Judis leaves out of his story. The policies that have led to so much upward redistribution were not simply “free market,” they were policies that were designed to redistribute income upward.
Starting with trade, the agreements pushed by presidents from both parties did not subject all areas equally to international competition. They quite explicitly put less-educated workers in direct competition with low-paid workers in the developing world by making it as easy as possible to set up factories in Mexico, China, and elsewhere and ship the products without barriers back to the United States. The predicted and actual effect of this sort of trade is to reduce the number of jobs and wages for manufacturing workers. And, by denying workers opportunities in manufacturing, this also puts downward pressure on the wages in the service sectors where former manufacturing workers then looked for jobs.
Real free trade agreements would have made it easier for people in India, China, and elsewhere to train to U.S. standards and then work as doctors, dentists, lawyers and in other highly paid professions in the United States. Instead, the barriers in these professions were largely left in place or even increased.
Driving down the wages of these high-end professionals would have reduced the cost of health care, dental care, and legal services. This raises the real wages of other workers. If the wages of doctors in the United States were reduced to the level of doctors in Europe, it would reduce what we pay our doctors by roughly $100 billion a year. This would be sufficient to add almost $1,000 a year to the paycheck of every worker in the bottom 70 percent of the workforce.Add a comment
It continues to amaze me that we have people simultaneously running around terrified that the robots will take all the jobs and at the same time that we will not have enough workers to support a growing population of retirees. (In some cases, it is the same people.) In the first case, productivity would have to go through the roof for a job shortage to be a problem. In the second case, it would have to go through the floor, since even modest rates of productivity growth swamp the impact of the aging of the population.
Thomas Edsall struggled with this issue earlier this week when a cyber-attack was preventing me from getting in my two cents. Now that I’m back, let me firmly throw my hat in with the middle position.
First, the robots taking all the jobs story is almost absurd on its face. How fast do we think productivity will grow that demand and reduced hours cannot keep pace? Productivity grew at a 3.0 percent annual rate from 1947 to 1973. We saw rapid growth in pay and living standards and very low rates of unemployment. Do we think the story would have looked worse if annual productivity growth was 4.0 percent?
It is almost impossible to imagine a story where productivity growth suddenly jumps from its current rate of less than 1.0 percent annually to a pace so rapid that we are losing jobs left and right due to improvements in technology. It is possible to tell a story where the Fed raises interest rates to slow the economy and job creation even as technology is displacing more and more workers.
That is a plausible story given that we have had several members of the Fed’s Open Market Committee that sets interest rates who have been worried about hyper-inflation. But the problem in that case is crazy-bad Fed policy, not robots taking jobs. And, we do the country a horrible disservice if we imply that the problem is somehow technology rather than the people running the Fed.
On the other side, the techno-pessimists essentially want us to believe that we have few or no opportunities to reduce our need for labor, while still maintaining our living standards. That seems to contradict what I see almost everywhere I go.
To take my favorite easy targets, combined employment in restaurants and retail is just over 27 million out of total private sector employment of 121 million. This comes to a bit over 22 percent. Imagine this was cut in half.Add a comment
The Washington Post is unhappy that support of the TARP appears to be a liability on the campaign trail. After all, it tells readers:
“Then-Federal Reserve Chair Ben S. Bernanke and Treasury Secretary Henry M. Paulson declared it indispensable to prevent another Great Depression.”
Yep, that would be Henry M. Paulson, who was CEO at Goldman Sachs before taking the job as Treasury Secretary. As far as Chair Bernanke’s assessment, it would be interesting to hear why he didn’t explain that the Fed single-handedly had the ability to keep the commercial paper market operating, until the weekend after TARP passed.
While the initial downturn almost certainly would have been steeper had Congress not passed the TARP and we allowed the magic of the market to sink Goldman Sachs and the other Wall Street banks, it is absurd to claim that this would have led to another Great Depression. We know the trick to get out of a Great Depression: it’s called “spending money.”
It took the massive spending associated with World War II to finally lift the U.S. economy out of the last Great Depression, but if we had massive spending on infrastructure, education, health care and other domestic needs in 1931 rather than 1941, we would not have had a decade of double-digit unemployment. Without the TARP and the Fed’s bailouts, we could have instantly reformed Wall Street and recreated a new banking system out of the wreckage which would be focused on serving the real economy.
It is also worth pointing out the absurdity of the claim that “we made money on the TARP.” We lent the banks money at way below the interest rate they would have been forced to pay in the market at the time. Since the rate was higher than the interest rate on government debt, supporters can say we made money, but it’s not clear why anyone should care. It was nonetheless an enormous subsidy to the Wall Street banks.
We could have also lent money at the same interest rate to Dean Baker’s Excellent Hedge Fund, which would have invested in the S&P 500. Dean Baker’s Excellent Hedge Fund would then have made an enormous amount of money at the taxpayer’s expense, but the editorial board at the Washington Post would undoubtedly tell critics to shut up, since the government made money on the deal. Makes good sense, right?
There is one final irony worth noting. This editorial appears right under the one denouncing Bernie Sanders’ “facile” proposals. The original TARP proposal was 3 pages, with most of the ink devoted to saying that no one could sue Treasury over how it spent the money. The package that was eventually approved was more than 700 pages. Furthermore, the initial proposal was for buying devalued mortgage backed securities (MBS) (“troubled assets”) from banks.
In fact, Treasury never bought any of these MBS from the banks. It instead gave relief in the form of purchases of preferred shares of stock. Given how far removed the original proposal was from what actually happened, it seems that Mr. Paulsen’s initial plan certainly would merit the Post’s “facile” award. For some reason that term was never used on the Post’s opinion page.Add a comment
The Washington Post again went after Senator Bernie Sanders in its lead editorial, telling readers that the Senator's proposals were "facile." It might be advisable for a paper that described President Bush's case for weapons of mass destruction in Iraq as "irrefutable" to be cautious about going ad hominem, but this is the Washington Post.
Getting to the substance, the Post is unhappy with Sanders proposal for single payer health insurance which it argues will cost far more or deliver much less than promised. While the Post is correct that Sanders has put forward a campaign proposal rather than a fully worked out health reform bill, it is not unreasonable to think that we can get considerably more coverage at a lower cost than we pay now. After all, there is nothing in our national psyche that should condemn us to forever pay twice as much per person for our health care as people in other wealthy countries. (I have written more about this issue here.)
On financial reform the Post seems to want everyone to think that after Dodd-Frank things are just fine on Wall Street. It apparently has not noticed that the big banks are even bigger than ever and that the financial sector continues to grow as a share of the economy, imposing an ever larger drag on growth. For these reasons, Sanders proposal to break up the big banks makes good sense, as does his plan for a financial transactions tax. The latter would both raise a huge amount of money and downsize the industry. (I have some more comments here.)
Finally, it is worth applying some Econ 101 to the Post’s never-ending complaints about Sanders and other politicians not having a plan to deal with its imagined long-term budget crisis. First, much of the projected shortfall stems from the projected growth in health care costs. (The rate of projected health care cost growth has plummeted in the last five years, but this has not affected the Post’s complaints.)
First if Sanders succeeds in reining in health care then most of the projected budget gap disappears. However there is still the issue of rising costs due to an aging population. Of course this is not new. We have had a rising ratio of retirees to workers for the last half century. For some reason the Post seems to view it as an end of the world scenario if somewhere in the next two decades we were to raise payroll taxes to cover the costs of longer retirements, just like we did in the decades of the fifties, sixties, seventies and eighties.
Fans of basic economics know that it matters hugely more to workers if their before-tax wages keep pace with productivity growth, implying wage gains of 15–20 percent over the course of a decade, than if their payroll taxes are increased by 1–2 percentage points. However, the paper endlessly obsesses on the latter, while almost completely ignoring the former.
The Post almost never discusses the negative impact that unnecessarily restrictive Fed policy has had on wage growth. It also does its best to ignore the impact on the typical workers’ pay of the policy of selective protectionism that we apply in trade (protected doctors and lawyers, exposed manufacturing workers).
The Post gets very upset when political figures like Bernie Sanders raise issues about before tax wage. Instead, it wants workers to fixate on the possibility that they may at some point face a tax increase. And when politicians diverge from the Post’s chosen path, it calls them names.
It’s not surprising that the Washington Post (owned by billionaire Jeff Bezos) would be unhappy with a presidential candidate running on a platform of taking back the country from the millionaires and billionaires. Therefore the trashing of Senator Bernie Sanders in an editorial, “Bernie Sanders fiction-filled campaign,” was about as predictable as the sun rising.
While there is much here that is misleading, it’s worth focusing on the central theme. The piece tells readers:
Add a comment
“The existence of large banks and lax campaign finance laws explains why working Americans are not thriving, he says, and why the progressive agenda has not advanced. Here is a reality check: Wall Street has already undergone a round of reform, significantly reducing the risks big banks pose to the financial system. The evolution and structure of the world economy, not mere corporate deck-stacking, explained many of the big economic challenges the country still faces. And even with radical campaign finance reform, many Americans and their representatives would still oppose the Sanders agenda.”
It looks like the race between Bernie Sanders and Hillary Clinton is really heating up. Yesterday, Paul Krugman told readers:
“As far as I can tell, every serious progressive policy expert on either health care or financial reform who has weighed in on the primary seems to lean Hillary.”
Oh well, so much for those of us backing or leaning towards Sanders. I guess we just have to turn to that old Washington saying, “better right than expert.” In other words, it’s better to rely on people who have a track record of being right than the people who have the best credentials.Add a comment
You probably knew that, but it told readers the story once again in an editorial in which the first paragraph told readers that if the Postal Service were a private company “it would undoubtedly be viewed as insolvent.”
Yes, the Postal Service is losing money, but there are two items that need to be mentioned in this story. First, the Postal Service losses in recent years are primarily the result of a unique accounting method under which the Postal Service is being required to 100 percent prefund its retiree health benefits. There is no private sector company that has such a prefunding level.
It makes a difference. If we look at the Postal Service’s finances from the first 9 months of 2015, we see that it lost $2.8 billion. But a more careful look shows that it paid $6.6 billion to for its retiree health benefits, $4.3 billion of which is to prefund future benefits. Without this payment, it would have shown a profit of almost $1.5 billion.
The other more important point is the absurd restriction under which the Postal Service operates. On the one hand, it is told that it has to be run at a profit, like a private company. On the other hand, it is prohibited from taking advantage of its resources to move into new potentially profitable lines of business.
One obvious line would be postal banking, a service that it used to provide and which other postal services still do provide. With an unbanked population in the tens of millions, the opportunity to have low cost checking accounts and other basic banking services would likely be welcomed especially in low and moderate income communities.
People like Senators Elizabeth Warren and Bernie Sanders have promoted postal banking, as has the Postal Service’s inspector general. This certainly would be a reform worth considering, but of course the competition would not make the financial industry happy.
Note: An earlier version had incorrectly treated the whole sum for retirement health care spending as prefunding, instead of just $4.3 billion.Add a comment
A new study published by the Peterson Institute projects that the TPP will lead to an increase of $357 billion in annual imports when its effects are fully felt in 2030. This increase in imports will be equal to 1.4 percent of projected GDP in that year.
You probably didn’t see this projection in the write-ups of the analysis in the Washington Post, NYT, or elsewhere. That is likely because the study’s authors chose not to highlight it. Instead, in their abstract they told readers that they projected the TPP would increase exports by $357 billion. If you were curious about what happened to imports you had to go to page 7 to find:
“The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.”
In other words, by design the model assumes that trade balance for the United States is not changed as a result of the TPP. This means that whatever changes we see in exports, according to the model, will be matched by an equal change in imports. Unfortunately the implied projection for imports is never mentioned in the study, so some reporters may have missed this implication of the model.
There are several other important issues that may have been missed. First, the model is quite explicitly a full employment model. This means that, by assumption, the model rules out the possibility of the TPP leading to a larger trade deficit that reduces output and increases unemployment.
In prior decades most economists were comfortable with this sort of full employment assumption since it was widely believed that economies quickly bounced back from recessions or periods of less than full employment. In this view, if a trade agreement led to a larger trade deficit it would soon be offset by lower interest rates, which would provide a boost to investment and consumption.
Alternatively, a trade deficit would lead to a lower value of the dollar. A lower valued dollar would make our exports cheaper to people in other countries, leading them to buy more of them. At the same time, it would make imports more expensive for people in the United States, leading us to buy fewer imports. The net effect would be to lower the size of the trade deficit, bringing us back towards full employment.
Unfortunately, in the wake of the 2008 crash, fewer economists now believe that the economy has a natural tendency back to full employment. Many of the world’s most prominent economists (e.g. Larry Summers, Paul Krugman, Olivier Blanchard) now accept the idea of “secular stagnation.” This means that economies really can suffer from long periods of inadequate demand.
From the perspective of secular stagnation, if the TPP does lead to a larger trade deficit, then there is no automatic mechanism that will offset the lost demand and jobs. In this respect it is important to note that the TPP does nothing to address issues of currency management. This would mean that if one or more of the countries in the TPP began running larger trade surpluses with the United States, and then bought up large amounts of dollars to prevent an adjustment of their currency, there is nothing the United States could do within the terms of the agreement.
Unfortunately, the Peterson Institute’s model tells us nothing about whether the TPP is likely to lead to a growing trade deficit for the United States. It has ruled this possibility out by assumption.
There are some other items that are worth noting about the models assumptions. It assumes that 75 percent of the non-tariff barriers that are eliminated through the TPP will be protectionist in nature rather than welfare enhancing consumer, safety, or environmental regulation. That may prove to be to be correct, but it is very big assumption. This means that we will not see many cases where the investor-state dispute settlement (ISDS) mechanism is used to overturn (or more correctly impose penalties) for laws that allow consumers to purchase products they consider safe, such as country of origin labeling for meat. It means that the ISDS will not be used to overturn state or local bans on fracking, even if the purpose is to ensure safe drinking water. And, it means that the TPP will not make it more difficult to impose rules that prevent predatory lending by large financial institutions that happen to be based in other countries.
It is important to note that the bulk of the gains rest on this assumption about the nature of the non-tariff barriers that are overturned. Less than 12 percent of the projected gains are attributable to the reduction in tariff barriers in the TPP (page 15).
It is also worth noting that the study does not appear to factor in the losses associated with higher prices for the items that will be subject to stronger and longer patent and copyright protection. Stronger intellectual property protections were quite explicitly one of the main goals of the deal and were one of the last major issues to be resolved. As a result of the TPP, the countries that are party to the agreement will be paying more for prescription drugs and other protected products. The effect of longer and stronger IP rules is the same as a tariff, except we are talking about raising the price of protected items by many times above their free market price. This is equivalent to a tariff of several thousand percent on the protected items.
It does not appear as though the study has taken account of the losses associated with these implicit tariffs. There may be some offset if greater protection is associated with more innovation, but it would be a heroic assumption to assume this is automatically the case. Furthermore, even if innovation did offset the losses, it would not be done instantly, since there is a long lead time between when research is undertaken and when there is a product brought to market, especially with prescription drugs.
It is also worth noting, in the context of the balanced trade assumption of the Peterson Institute model, if the United States gets more money for its drugs patents and video game copyrights, then it gets less for its manufactured or agricultural goods. The greater income for drugs companies, the software industry, and other gainers from stronger IP protection imply less income for other exporters or import competing industries.
Finally, it is important to put the projected gain of 0.5 percent of GDP as of 2030 in some context. The Post article told readers:
“If those projections [from the Peterson Institute study] are correct, that additional growth would help a domestic economy that has struggled to regain the growth rates of previous decades in the wake of the Great Recession.”
The study’s projection of a cumulative gain to GDP of 0.5 percent by 2030 implies an increase in the annual growth rate of 0.036 percentage points. This means that if the economy was projected to grow by 2.2 percent a year in a baseline scenario, it will instead grow at a 2.236 percent rate with the TPP, assuming the Peterson Institute projections prove correct.
The projections imply that, as a result of the TPP, the country will be as rich on January 1, 2030 as it would otherwise be on April 1, 2030. Of course, other things equal, this would clearly be a positive story, but as noted above, there are reasons for believing that other things may not be equal and that these projections may not prove correct.Add a comment
I was struck to see a news article reporting the estimate from Ireland’s central bank that the economy grew by 6.6 percent in 2015. The article reported that the economy is projected to grow 4.8 percent in 2016 and 4.4 percent in 2017. This is good news for the Irish economy since the country still has a long way to go to recover from its recession.
However what is even more striking is that this growth hugely exceeds what folks like the I.M.F. said was possible in Ireland. If we go back to the I.M.F.’s projections from 2013, they thought the country was 1.6 percent below the country’s potential GDP in 2012. It projected the economy would shrink by 0.3 percent in 2013, leaving the 2.6 percent below its potential GDP. This implies a potential growth rate of 0.7 percent annually.
As it turns out, Ireland’s economy grew by 1.4 percent in 2013 and 5.2 percent in 2014. If we add in the 6.6 percent growth in 2015, Ireland’s economy would now be almost 10 percent above the potential GDP that the I.M.F. projected for 2016. That would be the equivalent of the U.S. economy being $1.7 trillion above its potential level of output in 2016. Furthermore, Ireland’s growth is projected to exceed the potential projected back in 2013 by close to 4.0 percentage points in each of the next two years.
Naturally, we would expect a level of GDP far above potential and a growth rate that is also well above potential growth to lead to soaring inflation. That must explain why Ireland’s inflation rate has been 0.1 percent over the last year. (I know, it’s accelerating, the inflation rate had been negative.)
The reason for this Guinness-free trip to Ireland is to make a point about the widely used measures of potential GDP. They are worthless. They are generated mechanically based on current levels of output and the rate of inflation. If the inflation rate is not falling rapidly then we are close to potential GDP, end of story.
In this case, the I.M.F. appears to have been off by more than 15 percentage points, if we take the current growth estimates and assume hyper-inflation does not break out in Ireland in 2017. This should be a lesson for folks in the United States and elsewhere who are being told that our economy is now at or near its potential level of output. If we accept this view and it is wrong, we are throwing an incredible amount of potential output in the toilet.
And just to be clear, this is not a question of loving growth as an end in itself. This is about millions more people getting jobs. It’s about people in bad jobs who have the opportunity to get good jobs, or at least to get paid better wages in their bad jobs as the labor market improves. And, it is about governments having the resources they need to provide decent education, health care, and drinking water to their people.
This is a huge, huge deal. If the estimates of potential GDP are worthless, then we have reason to believe that we can expand the economy way beyond its current level of output. That should be a license to run very large budget deficits, but given the power of the deficit cult in Washington, that may not be politically feasible at the moment. But at the very least, we should be telling the Fed not to needlessly throw people out of work by raising interest rates.Add a comment
According to a piece [sorry, no link] in Politico this morning, former New York City mayor and multi-billionaire Michael Bloomberg is considering running for president. The piece said that he would probably only enter the race if Bernie Sanders wins the Democratic nomination or if Hillary Clinton hangs on to win the nomination, but “is significantly weakened by Sanders and lurches hard to the left.”
This is the sort of story that people might think was a whacky conspiracy theory dreamed up by someone who had spent too much time listening to Senator Sanders’ tirades about the millionaires and billionaires who run the country. After all, Politico is telling us that one of the richest people in the country is holding out the possibility of entering the race, and possibly throwing the presidency to the Republicans, if the voters nominate the wrong candidate for president or push the right candidate too far to the left.
And, Bloomberg can make this a meaningful threat solely because he is a billionaire. (He does have some standing as a moderately successful 3-term mayor of New York City, but no one thinks that if Bill de Blasio serves two more terms as New York’s mayor, he will be in a position to threaten to run as an independent if he doesn’t like the 2028 Democratic nominee.)
This is certainly getting to be an interesting race now that we have a billionaire threatening the Democrats not to nominate anyone who is too progressive. It is worth noting in this context the origins of Bloomberg’s billions. Unlike a Steve Jobs or Jeff Bezos, who can point to innovations that improved people’s lives as the basis of their billions, Bloomberg made his money by making business information available to traders faster than anyone else.
Bloomberg’s terminals allow traders to be the first ones to get news on the state of Florida’s orange crop or the state of cacao harvest in West Africa. This might not matter much to the world (it’s hard to see a big difference to the economy if the markets take ten minutes rather than one minute to adjust to the news of frost damage to Florida’s orange trees), but it makes a huge difference if you’re trading tens or hundreds of millions of dollars daily in these markets.
For this reason, traders are willing to pay thousands of dollars a month to get access to the Bloomberg terminals, thereby making Mr. Bloomberg one of the richest people in the country. (Senator Sanders’ proposal for a financial transactions tax, which would make short-term trading far less profitable, would be bad news for Bloomberg’s main line of business.)
So there we have it. Put one more item in the corner of the millionaires and the billionaires to add to all the other advantages they have in the political system. If the Democrats move too far left, they will jump in to try to throw the race to the Republicans.Add a comment
Robert Samuelson wades into the turf on the explanations for the recent worldwide stock plunge in his column today. Most of what he says is actually pretty reasonable, but the framing doesn’t make much sense.
He starts the piece by citing the view of several forecasters that the drop in worldwide markets does not indicate a recession is imminent. But then he tells readers:
“But there is a less reassuring interpretation: The global stock sell-off may reflect gloomy prospects for ‘emerging-market’ economies. …
“If this theory is correct, then the worldwide sell-off of stocks represents a logical response to reduced economic prospects.”
It is not clear that these are in any way opposing views. Most forecasts had actually been for very slow growth even before the plunge in stock prices. In fact, we have been seeing slow growth (@2.0 percent) for the last five years. This is very weak for an economy that still has a long way to go to make up the ground lost in the downturn.
As I and others had noted, the stock market was priced high for an economy that was experiencing slow growth and likely to continue to do so for the foreseeable future, absent some major boost in demand. For this reason, the drop in markets from their 2015 highs is totally consistent with the growth projections that the Congressional Budget Office, the I.M.F., and other forecasters have been publishing. In that sense, the markets are not providing new information, but rather coming into line with the existing information we had about the prospects for economic growth.
The other part of Samuelson’s argument makes less sense. He tells readers:
“Oil companies have canceled $1.6 trillion worth of projects through 2019, estimates the consulting company IHS. The loss of these projects (and jobs) represents a drag on the global economy and, to some extent, justifies lower stock prices.”
Okay, losing $1.6 trillion worth of projects over the next four years sounds like a big hit. How large is it? Well, it amounts to $400 billion a year or roughly 0.5 percent of world GDP. That is not trivial, but we have to take account of the other side of the story.
If we assume this is based on a drop in the average price of oil of $60 a barrel from the level of 2 years ago, this corresponds to savings on oil of more than $1.8 trillion a year. If just one quarter of this ends up in additional spending than it more than offsets the hit to the world economy from less money being spent on oil exploration.
If half of the savings, still a conservative number, gets spent on consumption, it would amount to an additional $900 billion in annual consumption spending, more than twice the size of the hit from less spending on exploration. In short, there is good cause to worry about the environmental implications of lower oil prices, but the economic ones are positive for the world as a whole, even if some countries and regions will be very hard hit.
Finally, Samuelson gives us a line that we have heard before:
“The stock slump could be self-fulfilling. The Great Recession was a traumatizing event. Because it was so deep and unexpected, it made both consumers and business managers more risk-averse. With risks now rising and rewards falling, firms and households might cut their spending just a bit — and cause the very slump they’re trying to avoid.”
Actually there is no evidence that consumers and business managers have become more risk averse. Consumers are spending a larger share of their income than at any point in the last three decades, except at the peak of the housing and stock bubbles. If they have become more risk averse, it is not showing up in their spending.
The same applies to business managers. Investment spending as a share of GDP is back to its pre-recession level. It would be great if businesses would invest more, but why would we expect them to?
The source of weakness in the economy is the unmentionable elephant in the center of the room, the trade deficit. We have an annual trade deficit of more than $500 billion (@3 percent of GDP). This is a gap that must be made up by increased spending in one of the other components of GDP. (This is basic accounting – it is inescapably true. If you don’t like it, then you have a problem with logic.)
In the late 1990s we filled the hole in demand with demand created by the stock bubble. In the last decade we filled the hole in demand with demand created by the housing bubble. In the absence of bubble-driven demand we could get back to full employment with larger budget deficits, but that is not fashionable with the politicians and policy wonks in Washington. Therefore, we have to spin out wheels and pretend that the weak economy is a big mystery and come up with all sorts of convoluted stories like Samuelson’s about the trauma of the Great Recession.
One more thing, we owe our large trade deficits to the huge over-valuation of the dollar that we got in the wake of the bailout from the East Asian financial crisis in the late 1990s. This was all the doings of the Clinton administration, which directed the I.M.F.’s bailout of the region.
The failure of the bailout and bubble-driven growth path on which it set the country is why many of us cringe when they hear Hillary Clinton talk about turning to her husband for economic advice in her administration. The last thing we need is another round of bubble-driven growth.Add a comment
World financial markets appear to be in a panic, partly over events in China, and partly over the plunge in oil prices. I will claim no expertise on the former, although people I respect who do write on China seem to think the country is not facing an economic meltdown.
This leaves lower oil prices as the main source of worry. There are some bad stories with lower oil prices. Developing countries that are heavily dependent on oil exports will be badly hit. Also, much of the debt issued by energy companies is likely to go bad. This may have some ripple effects in the financial markets, but is unlikely to set off any general collapses. Also, the energy sectors in the U.S., Canada, and a few other wealthy countries will be badly hurt.
But it is important to remember that lower oil prices also have an upside. Many countries are big net importers of oil. For them, the plunge in prices will free up large amounts of money for other goods and services.
Just to take a few prominent ones, France imports 470 million barrels of oil a year. If we envision average savings of $50 a barrel from the prices of two years ago, that comes to $23.5 billion in freed up money, and amount equal to 0.8 percent of GDP. (That would come to around $150 billion a year in the United States.) Turkey imports 124 million barrels a year, which would imply savings of $6.2 billion a year, or a bit less than 0.8 percent of GDP. Greece imports just under 150 million barrels a year, which would mean savings of $7.5 billion annually or more than 3.0 percent of GDP (equal to $540 billion a year in the U.S.).
These countries, and other big oil importers, should be seeing a spur to growth from the drop in oil prices as more money is ending up in consumers’ pockets. Any discussion of the impact of plunging oil prices on the world economy has to include these positive effects. (Of course the spur to fossil fuel consumption is horrible for the environment.)Add a comment