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).
The election of the conservative candidate to the presidency in Argentina has been cause for celebration in mainstream Washington, as typified by this Washington Post editorial. I won't claim to know which candidate offered the better path for the country going forward, but we should not let the Washington Post types rewrite the past.
The governments led by the Kirchners have much to show for their twelve years in power. Nestor Kirchner took power in May of 2003, just as Argentina was beginning its recovery from its dramatic default and devaluation at the end of 2001. The I.M.F. was insisting that Argentina return to the austerity path that had led to a horrible recession in the years from 1998 to 2001. Its per capita income had already declined by more than 15 percent at the point of the default making the downturn more than four times as severe as the 2007–2009 recession in the United States. Kirchner said no deal.
Instead he pursued policies to promote growth and employment, with an emphasis on helping those at the bottom end of the income distribution. To the great consternation of the folks at the I.M.F. (where Argentina became known as the "A-word"), his policies largely succeeded. While the I.M.F. kept predicting economic collapse, Argentina's economy grew rapidly. By the middle of 2003 it had already made up all the ground lost following the default and by the end of 2004 its per capita income was above the pre-recession level. And, it was much more evenly distributed.Add a comment
I'm a big fan of mass transit, bikes, and walking, but bad numbers are not the way to get people out of their cars. Someone came up with the statistic that the rate of traffic fatalties is 1.07 deaths per million vehicle miles traveled. Then, the NYT, ABC, NBC, Bloomberg, and AP all picked up this number.
Think about that one for a moment. The average car is driven roughly 10,000 miles a year. If you have 20 friends who are regular drivers, these news outlets want you to believe that one will be killed in a car accident every five years on average. Sound high?
Well, the correct number is 1.07 fatalities per 100 million miles according to the National Highway Traffic Safety Administration, so they were off by a factor of 100. So be careful driving this holiday weekend, but the risks are not quite as great as some folks are saying.
Thanks to Robert Salzberg for calling this one to my attention.Add a comment
The usually astute Greg Ip gets derailed in a high production values piece that tries to tell us that our problems stem from not having enough kids. For those left scratching their heads while sitting in traffic jams or standing in over-crowded subway cars, the basic story is that we somehow don't have enough workers to do all the work. (Where are those damn robots when we need them?)
Anyhow, the piece starts out quickly on the wrong foot:
"Ever since the global financial crisis, economists have groped for reasons to explain why growth in the U.S. and abroad has repeatedly disappointed, citing everything from fiscal austerity to the euro meltdown. They are now coming to realize that one of the stiffest headwinds is also one of the hardest to overcome: demographics."
Umm no, those of us who warned of the housing bubble and predicted that the resulting downturn would be hard to reverse saw the weak growth as a 100 percent predictable problem from a shortfall in aggregate demand. There was no source of demand to replace the construction and consumption demand driven by the bubble.
And, I don't recall being at all troubled by slower aggregate growth, the issue was that we were seeing insufficient growth to fully employ the population. The United States and many other wealthy countries have seen a sharp decline in the employment to population ratio. This is true even when we look at the employment to population ratio for prime age (ages 25–54) workers. This is down by three full percentage points from its pre-recession peak and by more than four percentage points from its 2000 peak. It is pretty hard to explain the drop in the percentage of people working by demographics.
We later get the strange statement:
Add a comment
"Simply put, companies are running out of workers, customers or both. In either case, economic growth suffers."
There is an ongoing myth about the downturn and the weak recovery that consumers unwillingness to spend has been a major factor holding back the recovery. An article in the Washington Post business section headlined, "heading into the holidays the retail industry faces a cautious consumer," draws on this myth. The reality is that consumers have not been especially reluctant to spend in the downturn or the recovery as can be easily seen in this graph showing consumption as a share of GDP.
As can be seen, consumption is actually higher relative to GDP than it was before the downturn. It even higher relative to GDP than when the wealth created by the stock bubble lead to a boom in the late 1990s. The only time consumption was notably higher relative to GDP was in 2011 and 2012 when the payroll tax holiday on 2 percentage points of the Social Security tax temporarily boosted people's disposable income relative to GDP.
(Those who see an upward trend need to think more carefully about what is being shown. Consumption can only continually rise as a share of GDP if investment and government spending continually fall and/or the trade deficit expands continually relative to the size of the economy. Standard models do not predict either event and both would be quite strange if true. It is also worth noting that the consumption share of GDP fell sharply in the 1960s due to the growth of investment and government spending.)
The weak consumption story is one of the myths that makes the housing bubble far more complicated that it actually is. The basic story is that housing construction, and the consumption driven by housing bubble generated equity, were driving the economy before the bubble burst in 2006–2008. When the bubble burst, the over-construction of the bubble years led to a huge falloff in construction and a temporary drop in consumption.
There was no component of demand that could easily fill this gap, which was on the order of six percentage points of GDP (@$1.1 trillion annually in today's economy.) The stimulus went part of the way, but it was too small and faded back to near zero by 2011.
The problem of the continuing weakness of the economy is that we still have nothing to fill this demand gap. Housing has come back to near normal levels, but not the boom levels of the bubble years. If anything, consumption is unusually high, driven by house and stock prices that are above trend, even if not necessarily at bubble levels.
The one sure way to close the demand gap is to reduce the trade deficit, most obviously by getting down the value of the dollar. Unfortunately, the powers that be in Washington don't talk about currency values, hence there are no provisions on currency in the Trans-Pacific Partnership. (There is an unenforceable side agreement.) We could try to get to full employment with shorter work weeks and years, through measures such as work sharing, paid family leave, and paid vacations, but this route is also largely off the agenda.
Anyhow, we don't have cautious consumers and we don't have any mysteries about the economy's ongoing weakness. We just have a lot of confusion generated by the media in discussing the topic.Add a comment
NPR had a piece on the horrible inflation of the 1970s and how the country was rescued by the herioics of Paul Volcker who was Fed chair at the time. The piece raises several points that could use a bit more context and leaves out some important information.
First and most importantly, the piece implies a world that did not exist. It begins with a discussion of a speech by President Gerald Ford in 1974. It told listeners:
"Inflation was the silent thief, and every year it got worse. Inflation got worse. It went from 10 percent to 11 percent to 12 percent. It wasn't clear exactly why and no one could agree on a simple way to fix it."
Neither part of this story is especially true. Inflation was hardly silent. It was widely reported, so people did know about it. Nor was it obviously a thief. Many, perhaps most, wage contracts were indexed to inflation, which meant that wages rose more or less in step with prices. While this was not true for everyone, a substantial segment of the population was able to insulate itself from the effects of inflation. This is one of the factors that made it harder to contain inflation.
It is also not true that no one knew how to fix it. Higher unemployment reduced workers' bargaining power and lowered demand in the economy. This slowed inflation. In fact, the skipping from Gerald Ford to Paul Volcker, mispresents the actual course of inflation over this period. Inflation did in fact come down. After peaking at 10.4 percent in 1974, it fell back to 5.5 percent in 1976 before it started to rise again. The main factor bringing inflation down was a steep recession in 1974–1975, so the method for bringing inflation under control was not quite as difficult to figure out as the piece implies.Add a comment
By Dean Baker and Evan Butcher
We all know how hard it is to get by in today’s competitive economy. That’s why billionaires need special help. The Wall Street folks got their multi-trillion bailout in the form of below market interest rate loans when their greed and incompetence would otherwise have put them into bankruptcy. The drug companies get longer and stronger patent monopolies both here, and with trade deals like the Trans-Pacific Partnership, around the world. And, Jeff Bezos and Amazon get tens of billions of dollars in handouts in the form of an exemption from collecting the same sales tax as his mom and pop competitors.
The basic story here is simple. States require that stores collect sales tax on the items they sell. This applies to every mom and pop book store or clothing store, as well as huge retailers like Walmart and Costco. Amazon, along with other Internet only retailers, has been able to escape this requirement in most states through most of its existence.
While Amazon was acting legally, this loophole in the law makes zero sense from an economic perspective, and even less from a moral perspective. From an economic perspective, it makes no sense for the government to effectively subsidize on-line businesses that operate out of state at the expense of businesses that operate and employ people in the state.
And, make no mistake; the exemption from the requirement to collect sales tax is a subsidy. The tax is directed at the customer, the retailer is performing a service for the government. Effectively, the exemption is allowing the retailer to profit by charging a price that is equal to the price a competitor charges plus the tax. For example, if a television sells for $400 in a state with a 5 percent sales tax, the Internet competitors can sell the same television for $420 and be charging no more than its brick and mortar competitors. They then put the extra $20 in their pockets.
This is the story of duty-free shops at airports. Generally the price on tobacco and liquor at these stores is comparable to prices in other stores. The difference is that the money the other stores pay to the government in taxes instead goes into the pockets of the owners of the duty-free stores.
This is the same story with Internet retailers. Amazon has effectively been subsidized by the amount of the sales tax that it would have been required to collect had it been subject to the same rules as its brick and mortar competitors. Instead of putting the extra profits into its pockets, it appears that Amazon has largely followed the strategy of passing on the savings to win market share at the expense of its competitors. This has proven to be an effective strategy, as its sales volume has made it the world’s most valuable retailer by market capitalization.
It is worth knowing how much taxpayers have given through the tax subsidy route to Jeff Bezos, now one of the world richest people. We calculated the amount that Amazon saved on sales tax through its existence. While many states no longer exempt Internet retailers from collecting taxes, 20 states still do. We added up the amount of tax that Amazon would have been required to collect in each state had it been subject to the same rules as it competitors for each year that it was able to avoid this requirement. The total amount through 2014 comes to $20.4 billion. Bezos has gradually reduced his stake in the company over this period, but he still own close to 20 percent. If we apportion the subsidy accordingly, taxpayers have effectively handed $4.1 billion to Jeff Bezos over the last two decades.
In order to put this in perspective, the average monthly TANF payment to a family with one child is roughly $400. This means that taxpayers have given Jeff Bezos the equivalent of 10 million monthly TANF checks. The average food stamp payment is $127 per person per month. Jeff Bezo’s $4.1 billion in tax subsidies would amount to 31.5 million person months of food stamps.
Source: authors' calculations, see text.
So, as we prepare to celebrate this holiday season, we should keep in mind one person, Jeff Bezos, to whom the rest of us have been very generous.
 For simplicity, the calculation assumes that Amazon’s sales in each state were proportional to the state’s share in 2014 GDP. It applies a 5 percent real discount rate to past savings.Add a comment
Adam Davidson has an interesting piece in the NYT Magazine on the effectiveness, or lack thereof, of U.S. foreign aid. He discusses various models of aid, noting that none of them has been a clear success.
In commenting on the issue, the article says in passing that the United States spends $30 billlion a year to help the world's poor. This figure could be misleading. Most readers are probably unaware of the size of the overall budget, therefore they may think that $30 billion involves a major committment of federal dollars. In fact, since we are spending $3.5 trillion a year in total, this sum comes to less than 0.9 percent of the total federal budget.
In discussing foreign aid, it is probably also worth mentioning the risk of corruption in the aid granting agencies. Foreign aid is a substantial source of money. For this reason it attracts not only people interesting in helping the world's poor, it also attracts contractors looking to line their pockets. As a result, much of the spending may not end up being very helpful for its intended targets. This has likely been an especially serious problem in Haiti, which is the focus of the piece.
Note: Typos corrected, thank Joe E. and Robert Salzberg.Add a comment
I’ve been asked why I focus so much on restructuring the market as a way to address problems of inequality and poverty as opposed to tax and transfer programs. There are ideological, economic, and political reasons for this focus, which I will take in order.
On the ideological side, there is a commonly held view that the winners in the economy got there through a combination of luck, skill, and hard work. The losers scored less well in these categories. The central question from the standpoint of public policy then ends up being whether we should feel sorry for the losers, or at least sorry enough to take something away from the winners. Conservatives are mostly comfortable leaving distribution where it is, while liberals have guilty consciences so they feel we should help out the people at the bottom.
Rejecting loser liberalism means not accepting this framing. The winners did not win just by luck, skill, and hard work, but also by rigging the deck. For example, they construct trade deals to make U.S. manufacturing workers compete with low-paid workers in the developing world. The predicted and actual consequence is to reduce the employment and wages of U.S. manufacturing workers. Meanwhile, they maintain or increase the protections that make it difficult for people from developing (or developed) countries to train to U.S. standards and work as doctors, lawyers, and other highly paid professions in the United States.
The winners also made patent and copyright protection stronger and longer, with the predicted and actual effect of shifting more money to the small segment of the population that benefits from these forms of protection. And the winners have conducted a monetary policy, through their control of the Federal Reserve Board, which sustains higher than necessary rates of unemployment. The effect of excessive unemployment falls disproportionately on those at the middle and bottom of the wage distribution, not only increasing their risk of unemployment, but lowering the wages of those who do have jobs.
The point is that we did not just end up with a situation where some people are extremely wealthy and many people have little or nothing, we have policies that were designed to bring about this result. We don’t have to ask the wealthy to feel compassion for the poor or have guilty consciences over their good fortune. We need to stop the wealthy from rigging the game so they continue to end up with all the money.Add a comment
In today's Washington Post, columnist Ruth Marcus contrasted the policies that Bernie Sanders advocates, which she characterizes as being about redistribution, with the policies advocated by the Wall Street funded policy group Third Way, which she describes as being about "expanding opportunity for participation." While it is true that Third Way would like its policies to be described as being about expanding opportunity, it does not follow that this is true.
Third Way has promoted the macroeconomic, trade, and regulatory policies that gave us the Great Recession. While some of us were warning about the dangers of the housing bubble, Third Way was taking up space in the Washington Post and elsewhere warning about the dangers of retiring baby boomers. When the bubble burst, it left millions unemployed and tens of millions losing much or all of the equity in their homes. Low- and moderate-income families were especially hard hit. This did not expand opportunities for participation.
More generally Third Way has supported trade policies that have been designed to redistribute income upward and cost the country millions of good-paying middle income jobs. They also have refused to support measures that would address the ongoing trade deficit by adopting serious policies on currency management. It is understandable that Third Way would justify policies designed to redistribute income upward by saying they care about opportunity ("more money for Wall Street" is not a good political slogan), but that hardly makes the claim true.
On the other hand, policies advocated by Sanders, like a financial transactions tax and universal Medicare system, could provide a solid boost to growth by eliminating hundreds of billions of dollars of waste in the financial and health care sectors. These resources could be freed up to support productive investment, leading to an enormous boost to growth.Add a comment
In policy circles, "free trade' is always supposed to be good. Only ignorant Neanderthal types like protectionism. Therefore the NYT was talking up the Trans-Pacific Partnership (TPP) when it presented the pact as being part of a "free trade" tradition:
"Surrounding himself with cabinet secretaries and generals who had served presidents of both parties, Mr. Obama presented what has long been the establishment Washington consensus in favor of free trade against the surging tide of populist outrage from the political left and right against an agreement that critics call a bad deal for American workers."
Since the United States already has trade deals with most of the countries in the TPP, and these countries account for the vast majority of U.S. trade with TPP countries, it does relatively little to reduce trade barriers. On the other hand, it makes patent and copyright and related protections stronger and longer. It is entirely possible that the impact of these protections in raising barriers will be larger than the reductions in tariffs and other barriers.
It is also worth noting that the more money that foreigners have to pay for drugs and other protected products, the less money they will have to buy U.S. manufactured goods. For this reason, higher drug prices might be good news for people who own lots of Pfizer stock, but they are bad news for just about everyone else.Add a comment
Josh Barro had a good discussion of the impact of longer life expectancy on the finances of Social Security. The basic point is the program will cost more money. There are a couple of points that are worth a bit more discussion and one mistake that should be corrected.
Starting with the mistake, Barro ends his piece by saying that the last major overhaul to Social Security was carried through by a bipartisan commission in 1985. Actually, the recommendations of the Greenspan commission were approved by Congress in 1983.
The first point worth some additional comment is Barro's reference to the chained Consumer Price Index (CCPI), which he says most economists view as a more accurate measure of the rate of inflation. President Obama and others have proposed using the CCPI to index post-retirement benefits. This would reduce average benefits by around 3 percent, since the CCPI shows a rate of inflation that is 0.2–0.3 percentage points lower than the CPI currently being used. This reduction would be cumulative, so that after ten years a retiree would receive a benefit that is between 2–3 percentage points lower than under the current system. After 20 years the benefit reduction would be between 4-6 percent.
While the CCPI is arguably more accurate as a measure of the rate of inflation seen by the population as a whole, economists do not have evidence of whether this is true for retirees. Older people have different consumption patterns than the rest of the population. They may also change their consumption less in response to changes in price than the rest of the population. (The difference between the CCPI and the currently used CPI is that the CCPI picks up the effect of changes in consumption patterns due to price changes.)Add a comment
Robert Samuelson devoted his column this morning to discussing the fate of Fannie Mae and Freddie Mac (F&F). He notes that both are still effectively owned by the government even though almost everyone agreed years ago that they should be wound down and eliminated.
The complaint against leaving F&F public is that it leaves the government exposed to the sort of liabilities that led us to spend more than $180 billion bailing out F&F in 2008–2009. This badly misunderstands the dynamics of housing finance.
First, on the money used to bail out F&F, we ended up making a profit using the standard accounting that the media employs for bank bailouts. The government collected more money from F&F than it loaned it. This is of course a silly criterion, since the government is among the world's lowest cost borrowers, so it can generally make money by lending at interest rates between its cost of borrowing and the cost of borrowing for the businesses to which it is lending money. (This is the story of how the Export-Import Bank is profitable.)
The issue here is that the government is allocating capital by making subsidized loans available to favored companies in the case of the Export-Import Bank or the housing sector in the case of F&F. This has a cost in the form of higher priced capital to other borrowers, even if this does not appear as a budget item. Anyhow, the issue should be less the bailout money than whether F&F helped fuel the housing bubble, and if there is an alternative structure that would make such irrational exuberance less likely.
On the first question, there can be no doubt that F&F contributed to the bubble (they did finance 40 percent of new loans), but they were followers rather than leaders. The worst loans were financed by the investment banks that bundled them into their own mortgage backed securities. The business press derided F&F at the time for losing market share to more nimble private sector competitors. When F&F did start to move more aggressively into the subprime market it was for pursuit of profit (they were privately-held profit-making companies at the time), not because they were trying to serve the public good.Add a comment
The NYT devoted an article to a report put out by the British Bankers' Association that claimed that new regulations were making the British industry less competitive internationally. This is presented as being a serious problem that should concern people.
In fact, people who believe in free trade should not care any more about the possibility that the U.K. will lose jobs in finance to foreign competition than if it loses jobs in textile manufacturing to foreign competition. The standard free trade argument — that all right-minded people are supposed to accept — is that the economy operates at full employment. This means that if bankers lose their jobs to international competition they will simply shift over to the sectors in which the U.K. has a comparative advantage. Only a knuckle-dragging Neanderthal protectionist would worry about losing jobs in textile manufacturing or banking to international competition.
It also would have been helpful if the NYT included the views of a critic of the banking industry in this article.Add a comment
The Planet Money team had a nice segment pointing on the Trans-Pacific Partnership (TPP). The piece pointed out that the TPP has no enforceable language on currency management.
While the deal is ostensibly about eliminating tariffs and other trade barriers, controlling currency values can be an effective way to impose barriers to trade. If a country intervenes in currency markets to lower the value of its currency by 10 percent it has an impact that is comparable to imposing a 10 percent tariff on all imports and giving out a 10 percent subsidy on all exports. There is nothing in the TPP that will prevent the parties in the agreement from protecting their industry through this mechanism.Add a comment
Josh Barro had a very nice discussion of the issues involved in simplifying the income tax code, as proposed by most of the Republican presidential candidates. He concludes with a discussion of what would probably the greatest simplification for most taxpayers: have the I.R.S. prepare returns that could be corrected by taxpayers if they thought there was an error.
This is now done in some European countries, such as Denmark and Spain. As Barro explains, it could also be done here, for people who file the standard deduction, which is most taxpayers. Barro points out that the number using the standard deduction could be increased by eliminating some deductions. This is true, but it would also be possible to increase the number of people taking the standard deduction by increasing its size.
Unfortunately, because of the power of H&R Block, few politicians are likely to propose this simplification that would be an enormous benefit to tens of millions of taxpayers. As Barro points out, none of the Republican simplifiers have it on their agenda.Add a comment
When a columnist uses your blog name in his title, he has to expect a response, right? Egan is unhappy about attacks on reporters and reporting from both the left and right. I am not going to particularly defend the targets of Egan’s criticism, but I will say that people have very good reason to be angry at the media. And here I am referring to elite outlets like the NYT, Washington Post, National Public Radio, not the small town journalists working at “poverty-level wages” who Egan grabs as a cover. (This reminds me of Walmart and McDonald’s touting the small businesses that will be hurt by a higher minimum wage. It’s not the story and everyone knows it.) I will stick to economic reporting, since that is my turf.
First, these news outlets cover economic issues almost entirely from an insider perspective. This means that the news is what people at the White House, the Fed, or the leadership in Congress want to be the news. And, it is overwhelmingly told from their perspective.
This means, for example, that trade deals like the Trans-Pacific Partnership (TPP) are often wrongly described as “free trade” deals. And it is often assumed, sometimes explicitly, that the point of these deals is to increase growth. Of course the deals are not at all “free trade,” since a main purpose of all recent U.S. trade agreements has been to increase patent and copyright protection. These are forms of protectionism. They serve a purpose in providing incentives for innovation and creative work, but they are nonetheless forms of protectionism.
It is simply wrong to describe patents and copyrights as “free trade.” Calling them free trade distracts from a serious discussion of their impact on the economy, inequality, and public health, after all, we are all supposed to support free trade.
Interestingly, the costs of these forms of protectionism are left out of almost every economic model that attempts to estimate the TPP’s impact on economic growth? This cost would almost certainly be a large negative. If patent protection raises the price of a drug fifty-fold (not uncommon) it has the same impact on the market as a 5000 percent tariff. Why do reporters never point this out?
The assumption that these deals are about increasing growth is also unwarranted. The negotiating parties are industry groups like the pharmaceutical industry, the financial industry, and the entertainment industry. These groups are interested in promoting profits for their industries not economic growth. Why is this so hard for reporters to acknowledge?Add a comment
I mention this because some of the reporting on this topic might have misled some people. For example, the NYT recently told readers:
"All three candidates [Clinton, O'Malley, and Sanders] support a financial transaction tax to limit high-frequency trading." [emphasis in original]
While Clinton has proposed a tax on high frequency trading, which is almost certainly unworkable, the other two candidates have actually proposed financial transactions taxes. The taxes they have proposed would raise between $600 billion and $2 trillion over the next decade. Virtually all of this money would come out of the pockets of the financial industry, since its primary impact would be to reduce trading volume. For the vast majority of investors, the savings from reduced trading would be equal or greater than the taxes paid on their trades.
The taxes proposed by Sanders and O'Malley would be a huge hit to Wall Street, bringing it back to the size, relative to the economy, that it was at two or three decades ago. Secretary Clinton has explicitly chosen not to go in this direction.
It is important for the public to recognize this difference. While the other two candidates are proposing measures that would be a major hit to the financial industry, Secretary Clinton is not. Voters should recognize this distinction in their positions; the reporting almost seems designed to hide it. [The Wall Street Journal committed a similar sin, although the error was not quite as egregious.]Add a comment
Thomas Friedman, who once said that Germany would demand Greeks work like Germans as a condition of bailout funds (Greeks now work many more hours on average), allowed his column to stray into economics again today. Not surprisingly, he gets some of the big things wrong.
He starts by going after Donald Trump. While Trump has said many things on economic issues that bear little relationship to reality, Friedman attacks him on one that does. Friedman recounts an interview in which Trump said that he would provide universal health care insurance. Trump is then asked how he will pay for it. Friedman presents Trump's answer along with his own comment:
"'The government’s gonna pay for it. But we’re going to save so much money on the other side. But for the most [part] it’s going to be a private plan and people are going to be able to go out and negotiate great plans with lots of different competition with lots of competitors, with great companies — and they can have their doctors, they can have plans, they can have everything.'
"I just love that last line: 'They can have their doctors, they can have plans, they can have everything!'"
The irony of Friedman's comment is that Trump's claim is not far from being true, if the United States were to adopt a more efficient health care system. The United States pays more than twice as much per person for its health care as other wealthy countries, with little obvious benefit in terms of outcomes.
The World Bank put U.S. annual per person spending at $9,150 in the years 2006–2010. By comparison, Canada spends $5,700, Germany spends $5,000, and the United Kingdom spends $3,600. This enormous gap suggests that the United States could cover the uninsured and pay for it by eliminating the waste in its system.Add a comment
The NYT decided to take on Donald Trump's assertion that the Trans-Pacific Partnership (TPP) is a bad deal for the United States because it doesn't have any provisions on currency manipulation, henceforth referred to as "management." ("Manipulation" implies something that is hidden. Most of the countries who have been candidate "manipulators" have an explicit policy of targeting the exchange rate of their currency against the dollar and buy large amounts of U.S. government bonds to keep the value of their currency down. We don't have to catch them in the middle of the night doing something inappropriate in currency markets. They do in broad daylight where everyone can see it.)
The fact check begins:
"While it is true that the trade deal includes no binding mechanism for dealing with countries that engage in currency manipulation — something that could precipitate sanctions, for example — it does include commitments by signatories to avoid aggressively weakening their currencies to gain market share for their exports."
Actually, the TPP signatories already have similar commitments as members of the I.M.F. It is not clear how the new commitments are qualitatively different and with no enforcement mechanism, it is difficult to believe anyone will take them seriously. We have clear enforcement mechanisms for the rights of investors, obviously they did not feel that vague "commitments" were sufficient. Why should anyone who cares about the trade deficit caused by currency management be obligated to accept a much weaker and likely meaningless provision?
Next we get:
"While many economists agree with Mr. Trump that currency manipulation by our trading partners costs American jobs, they often frown upon the inclusion of strict anticurrency manipulation provisions in the text of trade agreements, arguing that it can be more fruitful to address the problem in bilateral negotiations with the offending country."
Yes, we have been doing bilateral negotiations for decades. We still have a trade deficit of close to 3 percent of GDP (@$500 billion a year). If economists like Paul Krugman, Larry Summers, and Olivier Blanchard are correct, and we face an ongoing problem of secular stagnation, then the trade deficit is creating a major shortfall in demand that can not be easily filled by other components of GDP.
As far as the view of "many economists," economists tend not to take seriously the unemployment and wage declines caused by large trade deficits. It is rarely their friends and families that are affected.
And for the concluding shot:
"Finally, as Senator Rand Paul pointed out, China is not a party to the Trans-Pacific Partnership agreement. In fact, one of the administration’s arguments for passing the agreement is that it would help check China’s influence in the region, and its ability to 'write the rules of the global economy.'"
The NYT strikes out big time here. The plan is to expand the TPP to eventually include China. The idea is to have them play by our rules. If there are not rules on currency management at the time China enters the TPP it is very unlikely it will agree to have them added.
Note: link added, thanks Ltr.Add a comment
Eduardo Porter had a good piece in the NYT today about how India's development needs are likely to lead to a massive increase in its greenhouse gas emissions over the next two decades. This is an interesting issue to think about in the context of secular stagnation.
The problem of secular stagnation is that the United States and other wealthy countries are not creating enough demand to fully employ their labor forces. A great way to increase demand in the U.S. economy would be to pay India to develop using clean energy instead of coal. In effect, the U.S. and other wealthy countries would be covering the difference between the cost of using wind and solar energy. This would both curb emissions and also address the problem of secular stagnation by creating more demand.
Yes folks, I know that India may not buy the wind turbines and solar panels from the United States. But, if we put more dollars out into the world economy, it should drive down the value of the dollar, which will make our goods and services more competitive internationally. This will improve our trade deficit. (Of course, that assumes that other countries' central banks may choose to hold these dollars to prop up the dollar against their currency. If the United States were not such a weak country, we might be able to use our influence and power to deter this sort of currency management, but the artificially propping up of the dollar would be a real risk, which would limit the extent to which the U.S. would see additional demand.)Add a comment
News reports continue to obsess over the idea that China and other countries might run out of people if they don't increase their birth rates. The implication is that countries won't have enough people to do the necessary work to support a larger population of retirees. (It's worth noting that many of these same people worry about robots taking all the jobs. If it's not obvious that these concerns are 180 degrees opposite then think about it until it is.) Anyhow, the NYT had an article that referred to the expected population gains from China ending its one-child policy which gives an idea of the economic importance of this measure.
The piece told readers:
"Mr. Wang [a vice minister of the National Health and Planning Commission] said that the relaxation of rules governing family size would bring more than 30 million new entrants into the labor force by 2050, and that the proportion of older people in China’s total population would be reduced by about 2 percentage points."
To get some rough idea of the impact of this increase in the size of the working age population, if the ratio of workers to retirees would have been 2.0 to 1 in the baseline, it would be roughly 2.2 to 1 as a result of the increased birthrate. If a retiree's living standard is equal to 80 percent of a worker's living standard, this would imply an increase in the living standard of workers just over 3 percent by 2050 as a result of higher ratio of workers to retirees. This is equivalent to less than six months of growth at China's current pace.
Furthermore, the actual improvement in living standards as a result of the higher birth rate would be considerably less than 3.0 percent, since there will be more dependent children to support in the higher population growth scenario. In addition, the larger population will place greater demands on the infrastructure and the environment. On net, the more rapid population growth could certainly have a negative impact on living standards in 2050, especially if we consider distribution (a greater supply of labor could mean lower wages). However, even before factoring in the negatives, the potential benefits of a larger ratio of workers to retirees are swamped by the impact of economic growth.Add a comment