Beat the Press is Dean Baker's commentary on economic reporting. Dean Baker is co-director of the Center for Economic and Policy Research (CEPR).

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We are seeing the usual hysteria over the sharp drop in the markets in Asia, Europe, and perhaps the U.S. (Wall Street seems to be rallying as I write.) There are a few items worth noting as we enjoy the panic.

First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy. The most famous was the 1987 crash which did not correspond to any real world bad event that anyone could identify.

Even over longer periods there is no direct correlation between the stock market and GDP. In the decade of the 1970s the stock market lost more than 40 percent of its value in real terms, in the decade of the 1980s it more than doubled. GDP growth averaged 3.3 percent from 1980 to 1990 compared to 3.2 percent from 1970 to 1980.

Apart from its erratic movements, the stock market is not even in principle supposed to be a measure of economic activity. It is supposed to represent the present value of future profits. This means that if people are expecting the economy to slowdown, but also expect a big shift in income from wages to profits, then we should expect to see the market rise. So there is no sense in treating the stock market as a gauge of economic activity, it isn't.

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If folks can take a break from worrying about how robots are going to take all the jobs, they may want to look at a NYT piece on Japan's excess supply of housing. The basic story is that because of Japan's declining population there are now hundreds of thousands of homes across the country that are sitting empty because no one wants them.

While this is an interesting and important story, the piece also includes the standard nonsense about the demographics of an aging population devastating Japan's economy. It tells readers:

"The demographic pressure has weighed on the Japanese economy, as a smaller work force struggles to support a growing proportion of the old."

Let's see, if the smaller workforce is struggling to support a growing population of elderly they must be working weekends and overtime to make up for the shortage of workers. It seems the OECD hasn't gotten word of these struggles. According to its data, the average work year has fallen from 2,121 hours in 1980 to 1,734 hours in 2013. If Japanese workers put in as many hours today as their counterparts did three decades ago, it would give them the equivalent of 22.3 percent more workers. It's hard to see the evidence of the struggle in these numbers.

The piece also comments that Japan is:

"still building more than 800,000 new homes and condominiums a year, despite the glut of vacancies."

Maybe if the country is having such a hard time meeting the needs of its retirees, it should spent fewer resources building homes that may not be needed.

Seriously, the effects of productivity growth swamp the demographic changes that the elites keep yapping about. If Japan could lift its rate of annual productivity growth by 0.5 percentage points over the next thirty years, it would swamp the impact of its aging population. If we believe anything remotely like the robot taking our jobs story, then aging is nothing to worry about. In fact, it is a good thing since it means there are fewer people for whom we have to find work. 

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Joe Nocera rightly takes Jeff Bezos to task for making Amazon an undesirable place to work. (Sorry, I have more sympathy for the warehouse staff in overheated warehouses than the overachievers who are treated poorly at headquarters.) However he gets one part of the story wrong.

He tells readers:

"Practically from the moment Amazon went public in 1997, Wall Street has pleaded with Bezos to generate more profits. He has ignored those pleas, and has plowed potential profits back into the company. Bezos believes that if Amazon puts the needs of its customers first — and no company is more maniacally focused on customers — the stock will take care of itself. That’s exactly what has happened. That is the good side of Bezos’s indifference to the opinion of others."

While it is clear that the stock market has rewarded Amazon, just as it rewarded AOL.com in the 1990s bubble, it is not clear that Amazon had "potential profits" to plow back. Profits are independent of investment decisions, at least if a company is not engaged in accounting fraud. Amazon may have kept prices low to expand market share, thereby depriving itself of profits, but then it doesn't have money to plow back either. It is very hard to make sense of the assertion that Amazon somehow doesn't have profits because it is re-investing, although if it gets not very bright market actors to believe it, Amazon's share price can continue to rise.

It is also important to note the big handout that Amazon has relied upon from taxpayers. Amazon has not had to collect sales tax in most states for most of its existence, giving the company an enormous subsidy in its competition with brick and mortar competitors. The cumulative size of this subsidy almost certainly exceeds its cumulative profits in the years that it has been in existence. Any discussion of Bezos success should mention this huge subsidy from the government.

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In his two months as a candidate for the Republican presidential nomination, Donald Trump has said many things that are racist, sexist, or otherwise offensive, but that doesn't mean that everything he says is off the mark. The Wall Street Journal took Trump to task yesterday for dismissing the relatively low official unemployment rate and instead focusing on the large number of people who are not working. 

While the WSJ is right that the vast majority of people who are not working are people who chose not to work. These are older people who are retired, young people who are still in school, or people who are taking time out of the labor force to care for children or other family members.

Nonetheless, even if we control for changes in demographics there has been a sharp decline in the employment rate of prime-age workers (ages 25-54) from the pre-recession level. The employment rate of prime age workers is still down by almost three percentage points from its pre-recession level and almost four percentage points from its peak in 2000.

While many analysts try to explain this falloff with vigorous hand waving, it is almost certainly due primarily to the weakness of the labor market. It is implausible that millions of prime-age workers suddenly decided that they don't feel like working. Trump is right to call attention to the drop off in employment, even if he is wrong to be worried that our grandparents or teenage children aren't working. 

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In a blogpost Paul Krugman picked up on a discussion by Rex Nutting of the Carter presidency. Nutting points to many of the positive accomplishments of the Carter years, including the fact that, by many measures, the economy actually performed quite well.

Krugman picks up on this theme and uses a chart of median family income to show that the typical family was actually better off in 1981 when Carter left the White House than they had been in 1977 when he took office. Krugman argues that the problem for Carter's re-election prospects was that income was declining in the last years of his presidency, which is what people had in their minds when they went to vote.

While this point is undoubtedly accurate, there is another complication when we try to get a sense of people's perceptions when they went to vote in November of 1980. The measure of inflation that is used to derive real median income in Krugman's chart is the CPI-U-RS. This applies the methodology that we use today to construct what the CPI should have been in prior years. This gives a very different and much lower measure of inflation than the CPI that the Bureau of Labor Statistics was using at the time.

Here is how the two compare for 1978-1981.

                       CPI         CPI-U-RS

1978             9.0%               7.8%

1979            13.3%             10.7%

1980            12.5%             10.7%

The cumulative difference for these three years is 5.6 percentage points. (Yes, this is just adding and I should be compounding, but let's keep this simple.) This means that folks going to vote in 1980 would have been seeing in the data a 5.6 percent greater drop in real income by 1980 than what Krugman has in his chart. The question is whether this error in the data would have affected people's perceptions of their well-being or whether we should only care about what we might think of now as the "true" rate of inflation.

I would argue for the importance of the errors in the data. First, none of us really have a clear idea of the true rate of inflation. It's based on a basket of goods and services that none of us literally buy. There is a big weight for large purchases, like cars, that we may buy at five year intervals, or even longer. Also, the prices are quality adjusted. Is the typical person's assessment of the rate of the quality improvement in a cell phone or computer the same as the BLS's assessment? It's very likely that if she pays more for a car or computer than for her last purchase, she sees that as a price increase, even if BLS has determined that the quality adjusted price has fallen.

On the other side, back in the late 1970s many contracts were legally tied to the CPI. This meant that workers had reason to know the inflation rate shown by the CPI since it would determine their pay increase that year. This was often true of rents as well. As a result, if the BLS said the rate of inflation was 13.3 percent in 1979, it is likely that many people thought the inflation rate was 13.3 percent, even though our methodology now tells us that the rate of inflation was actually just 10.7 percent.

There is more to this story of mis-perceived inflation—could mis-measured inflation lead to actual inflation? I'd argue yes, but we'll leave that one for another day. For today, I'll just say that it was not only Paul Volcker's Fed that doomed Jimmy Carter's re-election prospects, but also the mistakes made by the folks at BLS.

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Mitch Daniels did a big pitch for making student loans more complex and more profitable for the financial industry in a Washington Post column today. The basic story is that he is pushing "income-share agreements" where students contract with lenders to pay them a fixed share of their income for a number of years after they graduate college in exchange for a student loan.

My bet is that good students will be able to figure out ways to get much of their income after the end date on the ISAs, but that is the lender's problem. The more obvious problem is that Daniels is making a pitch for special government assistance for his friends in the ISA business.

He wants Congress to pass a law that will make the ISA loans exempt from bankruptcy. This means that if a student has a serious illness that makes him or her unable to work or falls on really bad economic times, he can be harassed for the full term of his contract by ISA lenders. This can be 25 or 30 years after graduation (or possibly not graduating).

That may not sound like such a great way to help our young people deal with college costs, especially since there are much simpler alternatives, like the income-based loan repayment plans initiated by the Obama administration or other proposals to reduce the cost of college. Daniels rejects such plans by telling readers:

"It is fallacious to term such an approach “debt-free”; borrowed by an already bankrupt federal government, the money will be all debt, merely shifted to taxpayers, including these very same students as they enter their working years. Already facing $57,000 per person in federal debt, incurred not for their future but almost entirely for the current consumption of their elders, the last thing today’s young people need is another massive federal entitlement program."

Sorry folks, but anyone who thinks the federal government is "bankrupt" should be treated like a ranting nut, because this is utter nonsense. If Daniels had access to the business pages, he could see that the United States government can now borrow long-term for an interest rate of less than 2.1 percent. Private sector lenders do not lend money to "bankrupt" borrowers at less than 2.1 percent interest.

If Daniels could take off his tin hat, he might notice that the $57,000 in debt per person corresponds to hundreds of thousands of dollars in assets in the form on infrastructure, technology, natural resources, and the education of its population. In Daniel's calculation, our children would be better off if we stopped paying for their education altogether to get down the $57,000 debt that he thinks is burdening them.

If anyone wants a serious assessment of the debt burden on the federal government, at present interest payments, net of refunds from the Federal Reserve Board, are less than 0.7 percent of GDP. By contrast they were over 3.0 percent of GDP in the early 1990s.

 

 

 

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That's what millions of people are asking after reading a NYT article contrasting the "bombastic" Donald Trump to Jeb Bush who is described as "the wonky son of a president." Bush has repeatedly said that he can generate 4.0 percent GDP growth during a Bush presidency.

The baseline projection for the years 2017 though 2025 from the Congressional Budget Office is 2.1 percent. Raising this to 3.0 percent would be a remarkable accomplishment. There is no remotely plausible story that would raise growth to 4.0 percent. It would be sort of like predicting a baseball team going undefeated through 162 game season. It would be difficult to take seriously a team manager who confidently made such predictions. The same should apply to a presidential candidate boasting of 4.0 percent GDP growth.

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The Post has an interesting piece on a St. Louis Federal Reserve Bank study which shows that African American and Hispanics with college degrees have far less wealth than their white counterparts. (Stay tuned for CEPR study showing this story with wages.) The study also shows a large decline in wealth for African Americans and Hispanics with college degrees over the last two decades.

It attributes much of this decline to subprime mortgages pushed by lenders during the bubble years:

"But African American and Hispanics were often steered into high-cost home loans that many could not afford once the housing market crashed. Those who managed to stave off a foreclosure still watched the value of their properties took a nosedive, especially if they lived in minority neighborhoods."

While a subprime loan made it more difficult for homeowners to keep their homes in the crash, the loss of wealth was due to plunging house prices. Even if an African American or Hispanic family bought a house with a traditional fixed rate 30-year mortgage they still would have seen a huge hit to their wealth when the housing bubble collapsed.

This point is important because the warning signs were everywhere for economists and policy analysts to see. However, they chose to ignore them and encouraged minorities to buy homes at bubble-inflated prices where they were virtually guaranteed to see large losses. Unfortunately, most of the people who were involved in setting housing policy during the bubble years are still in the same business today. Most do not appear to have learned much from the experience.

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It might have been worth a few sentences calling attention to the seeming irony in the industry's objections to proposed regulations that would limit emissions of methane gas. The NYT article noted that a large share of greenhouse gas comes from such methane emissions. At the same time, the industry has promoted fracking as a way of developing a bridge fuel, that emits less greenhouse gas than the coal it replaces, until renewable energy becomes cheaper.

If the net effect of fracking is to reduce emissions, then regulations that ensure this outcome should not pose a problem for the industry. The regulations should only be a major issue for the industry if it turns out that methane gas emissions largely or completely offset any reductions in carbon dioxide emissions.

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In an interesting piece on the decline of the political center, E.J. Dionne wrongly lists globalization as a villain. He tells readers:

"Globalization weakens the ability of moderate governments of both varieties to deliver on their promises. Capital can flee easily to more congenial climes, undercutting a nation’s tax base and its regulatory efforts."

Globalization should also have the effect of reducing inequality by making it easier to take advantage of lower cost professional services (e.g. physicians services, lawyers' services, dentists' services) except that the United States has acted to maintain or even increase barriers to trade in these areas. It should also make it easier to circumvent patent and copyright monopolies that redistribute income upward, except we have consciously pursued policies to strengthen these forms of monopolies to limit the extent to which developing countries might provide vehicles for avoidance (in contrast to tax policy).

Also, governments with their own currency (e.g. the United States, the U.K., and the euro zone collectively) need not be restricted by their tax take in terms of spending, as long as they are below full employment. The decision not to use fiscal policy to bring economies to full employment is due to superstitions, not actual limits imposed by globalization.

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Yes, it can be hard getting access to information in the barren heart of the nation's capital. Therefore it is not surprising that the Washington Post seems completely unaware of the economic situation in Japan at present.

In an account of the economic problems facing the world the Washington Post told readers:

"Japan, meanwhile, has recorded years of slow growth, has alarming public debt levels and is perpetually on the brink of deflation."

Actually in terms of employment growth, which is probably what matters most to the Japanese people (as opposed to GDP growth), the country has been doing pretty well as of late. According to the OECD, Japan's employment to population ratio (EPOP) has risen by 2.4 percentage points from 70.8 percent to 73.2 percent since the new Prime Minister Shinzo Abe took power in the fourth quarter of 2012 and embarked on a policy of aggressive fiscal and monetary stimulus. By comparison, the EPOP in the United States rose by 1.4 percentage points to 68.7 percent in this period. If the EPOP in the United States had risen by the same amount as in Japan it would correspond to another 2.5 million jobs. 

It's not clear who the current levels of Japanese debt are supposed to be alarming to, but clearly financial markets do not fall into this group. The interest rate on long-term Japanese government bonds is 0.38 percent. In terms of being on the brink of deflation, fans of economics everywhere would say, "so what?" The United States, Europe, and Japan all have inflation rates that are lower than is desirable. If the inflation rate ends up being a small negative number rather than a small positive number it doesn't matter. Any fall in the inflation rate, regardless of whether it means crossing zero makes debt burdens worse and raises real interest rates.

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Steve Rattner had a column in the NYT in which he derided Donald Trump's economics by minimizing the impact of trade on the labor market. While much of Trump's economics undoubtedly deserve derision, Rattner is wrong in minimizing the impact that trade has had on the plight of workers.

Rattner tells readers:

"In Mr. Trump’s mind (although not in the minds of serious economists), that’s why [the trade deficit] we’ve lost five million manufacturing jobs since 2000.

"The Chinese are certainly protectionists, but a shift in manufacturing jobs was inevitable. For centuries, as countries have developed, the locus of jobs has shifted based on comparative advantage.

"Moreover, many of those manufacturing jobs weren’t lost to other countries but to growing efficiency, just as employment in agriculture in the United States has fallen even as output has risen."

"No policies could reverse tectonic forces of this magnitude, and in suggesting that there are remedies, Mr. Trump is cynically misleading the American public."

There are several points here that are worth correcting. First, productivity in manufacturing is not new, but the large-scale loss of manufacturing jobs is. According to the Bureau of Labor Statistics, in 1971 we had 17,200,000 jobs in manufacturing. In 1997, we 17,400,000 jobs. This is in spite of the fact that there was enormous productivity growth in manufacturing over this quarter century. Manufacturing employment then fell to 13,900,000 in 2007, the last year before the crash. The big difference between this decade and the prior twenty-six years was the explosion of the trade deficit as jobs were lost to China and other developing countries.

The fact that we would have more manufacturing jobs without the trade deficit is almost definitional. We currently are running a trade deficit of more than $500 billion a year, a bit less than 3.0 percent of GDP. Total manufacturing output is roughly $1.8 trillion, which means that if we filled the deficit entirely with increased output of manufactured goods, we would expect to see manufacturing employment rise by more than a quarter ($500 billion divided by $1,800 billion), creating more than 3 million new manufacturing jobs.

There is also a fundamental difference between the shift out of manufacturing jobs and the shift out of agricultural jobs to which Rattner refers. Workers left agricultural jobs for higher paying higher productivity jobs in manufacturing. The jobs didn't actually disappear, the workers did not want them.

This is the exact opposite of what we are seeing with manufacturing jobs. Workers are losing relatively good paying jobs in sectors like autos and steel, and are then forced to take lower pay and lower productivity jobs in the retail or restaurant sectors.

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Paul Krugman had a nice blogpost outlining some of the key issues in the literature on optimal currency unions. The question is what happens in a currency union like the euro zone, which is not optimal for many reasons, if there is free mobility of labor.

Krugman points to the experience of Portugal and argues that mobility of labor actually makes the situation worse, not better. The story is that much of Portugal's prime age labor force is emigrating to other countries in the European Union, leaving behind a population of retirees, without a working age population to pay their benefits. This is similar to the story with Puerto Rico, although as Krugman points out, due to the fiscal union with the rest of the United States, retirees in Puerto Rico can still count on their Social Security and Medicare, as well as other payments that flow from Washington.

It is worth taking another step with this one to think about Detroit. There we have a situation where the the downturn in the auto industry is a big hit to the city and the region. However, white workers were able to escape many of the bad effects by stepping over the city lines and move to the suburbs. Due to discrimination in housing and lending, African Americans find the move to the suburbs much more difficult, therefore leaving many of them stuck dealing with the effects of the loss of much of the city's employment base.

This picture is clearly somewhat exaggerated. People can move to other cities and many African Americans have moved to Detroit's suburbs, but the reality of discrimination, certainly in the very recent past and which undoubtedly continues to some extent into the present, has made it considerably more difficult for African Americans in Detroit to escape the fallout from the collapse of the auto industry than for its white population.  

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Economists and people who write about the economy are not known for being especially astute when it comes to economic issues. After all, there were almost no people in this group who were able to see the $8 trillion housing bubble whose collapse sank the economy. More recently, we have a substantial clique running around yelling that the robots will take all the jobs. This is at the same time that we continue to have most of the Washington elite types fretting that the retirement of the baby boomers will leave us without any workers. These concerns are 180 degrees opposite, sort of like complaining that the soup is too hot and too cold, but that's the sort of conceptual absurdities folks have come to expect from people who write about the economy.

The usually astute Catherine Rampell is one of the guilty parties today, telling readers that the recent drop in the value of the Chinese yuan is a response to the market, not the result of currency management by China's government. The problem in this story is that it ignores that China's central bank is holding more than $4 trillion of reserves, about $3 trillion more than would be expected for an economy of China's size. This stock of reserves has the effect of raising the value of the dollar and other reserve currencies against the yuan.

If that is not obvious, consider the analogous situation with the Federal Reserve Board and its holding of more than $3 trillion in assets as a result of it quantitative easing (QE) policy. Under this policy, the Fed bought up large amounts of government bonds and mortgage backed securities. The idea was that the Fed's purchases would drive up the price of these bonds and thereby directly lower long-term interest rates.

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The NYT went a couple of miles over the top with Peter Eavis' analysis of China's currency devaluation. It begins by telling readers;

"For years, China looked like the principled noncombatant. As other countries, seeking to secure an economic advantage, let the value of their currencies slide on international markets, China held firm on the value of its money."

"The principled noncombatant?" What are they smoking over there? China accumulated more than $4 trillion in reserves to keep its currency from rising against the dollar. China looked to the world outside of the NYT like the principal combatant. This massive intervention led China to run massive trade surpluses, peaking at more than 10 percent of GDP in 2007.

Fans of economics everywhere know that fast growing developing countries like China are supposed to run large trade deficits, as capital is supposed to flow from slow growing rich countries to fast growing developing countries. Given China's 10 percent plus annual GDP growth a trade deficit of 10 percent of GDP would have been reasonable, instead China had that reversed.

This also explains the massive housing bubble in the United States and other wealthy countries. With trade deficits creating enormous gaps in demand, the only way they could be easily filled was with demand driven by asset bubbles. (We could have filled the demand gap with large budget deficits, but people in positions of power in Washington are superstituous, so we can't run large budget deficits to fill demand gaps.)

The rest of the article is no more in touch with reality. It tells readers:

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Yes, I know oil is priced in dollars, not euros, but it doesn't make one iota of difference. In an article on the meaning of the drop in the value of the yuan on people in the United States, USA Today told readers:

"China, the world's second largest economy, consumes a lot of oil, second only to the U.S. However, oil prices are denominated in dollars, so a gutted yuan means China's purchasing power is reduced, which could prompt the Chinese to spend less on oil-based products. That reduction in demand could lower prices, an upside for American drivers."

Everything in this paragraph would be equally true if oil was priced in euros. The Chinese currency is now worth less measured in dollars, euros, yen, or oil. The loss of purchasing power will lead China to buy less of everything that is produced abroad, including oil. The fact that oil is priced in dollars matters not at all.

As a practical matter, anyone hoping to get super cheap gas due to less demand from China is likely to be disappointed. If we assume that the 2 percent drop in the value of the yuan leads to 2 percent higher gas prices in China, and we assume an elasticity of demand of 0.3, then China's gas consumption will fall by roughly 0.6 percent as a result of the devaluation. This almost certainly has less impact on the demand for gas than even a one-year reduction in China's growth rate by 2 percentage points. If the devaluation and other stimulatory policies speed growth in China, then we may see increased rather than decreased demand for oil from China.

The piece also gets the story of U.S. companies manufacturing in China somewhat confused. It tells readers:

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We here at CEPR were glad to see that new research confirms what we had shown earlier, the Affordable Care Act (ACA) did not create a "part-time" nation as many of its opponents warned. In contrast to these studies, our work actually looked at the period when employers would have expected the sanctions to have been in effect, the first six months of 2013.

We did find a small increase in the percentage of workers employed between 25 and 29 hours a week, just under the 30 hours a week cutoff for the sanctions, as the opponents of the bill predicted. However this increase in the share of people working 25-29 hours was due to a reduction in the percentage of people working less than 25 hours a work, not a reduction in the number working more than 30 hours a week. In other words, there was no evidence that employers were shortening workweeks to escape the sanctions in the ACA.

This meant the bad story, that people who needed full-time jobs would only be able to find part-time work, was not true. But there is also a good story, that because people can now get insurance through the exchanges, many people will opt to work fewer hours at jobs that don't provide health insurance. This is likely to be the case with many parents with young children and possibly among older pre-Medicare age workers who might find it difficult to work full time jobs.

We used the Current Population Survey (CPS) to examine the change in voluntary part-time employment between 2013 and 2014, the first year the exchanges were operating. We found a large increase in the number of young parents (the CPS only gives ages of the parents, not the children) who were choosing to work part-time. We also found an increase in the number of older workers, especially women, who were voluntarily working part-time.

In short, our takeaway is that the ACA is not taking away full-time jobs from people who need them, but it is giving many people an option to work part-time that they did not previously have. That looks like a pretty good deal.

 

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Several of the articles discussing the decision of China's central bank to lower the value of the yuan have referred to the assessment of the I.M.F. that the Chinese currency now reflects its market value. Many have pointed out that China's central bank has stopped buying large amounts of foreign exchange to keep the yuan from rising, implying that the current value now reflects the market rate.

The problem with this story is that China's central bank is still sitting on more than $4 trillion in foreign exchange reserves. If we apply the rule of thumb that it should keep around 6 months worth of imports on hand as a buffer, this implies $3 trillion of excess reserves. This large holding of excess reserves, helps keep up the price of the dollar and other reserve currencies relative to the yuan.

This is the same situation as the Fed is in with its holding of $3 trillion in assets as a result of its quantitative easing programs. There are few people who would argue that the Fed's holding of these assets doesn't have the effect of keeping interest rates down. It would be very difficult to come up with a story whereby the Fed's holding of assets keeps interest rates down, but China's central bank's holdings of foreign exchange doesn't keep the value of the yuan down.

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The NYT ran an article on the goal for greenhouse gas emission reduction set by the Australian government. The article noted criticism of the goal as being inadequate. In particular, it refers to criticism from the Marshall Islands' government that this sort of action will not be sufficient to keep the islands from being destroyed by rising sea levels.

While it would be a tragedy if the Marshall Islands were destroyed and its 53,000 people had to be relocated, this would be a relatively minor consequence of the failure to address global warming. By comparison, Bangladesh has a population of almost 160 million, most of whom live in relatively low-lying areas that are subject to frequent flooding. With rising oceans, these floods would be much more severe.

No one has a plausible plan to locate the hundreds of millions of people in Bangladesh and other low-income countries whose lives will be put at risk from rising oceans. Similarly, hundreds of millions of people live in areas of Sub-Saharan Africa that will be faced with severe drought if world temperatures continue to rise. 

If the point was to call attention to the consequences of the failure to address global warming, these situations probably deserve more attention than the fate of the Marshall Islands.

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Those of you who were wondering about the best way to finance drug research need look no further, the Washington Post has the answer: It's government-granted patent monopolies. They told us in an editorial today:

"The profit-driven system in this country has its inefficiencies, including high marketing costs and the like; but on balance it has served the United States, and the world, well, by promoting more innovation than a state-dominated system of research probably would have."

It would have been useful if the Post had given some hint as to what evidence it might be relying on to make this assertion. The claim doesn't start well with the phrase "profit-driven," since there is no reason that alternative funding mechanisms might not also be profit-driven. For example, military contractors are profit-driven, last time I checked. These alternative systems also would not create the same sort of perverse incentives that are likely to lead to enormous waste and bad medicine.

But hey, since we got the word from the Post, there is no reason to look further. (I suppose it is rude to mention that the Post gets lots of advertising revenue from drug companies.)

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One of the most bizarre debates in national politics is over whether China "manipulates" its currency. It is bizarre both because of the term used and also because the fact that China manages its currency is really not a debatable point.

The use of the term "manipulation" is bizarre because it implies that China is doing something sneaky in the middle of the night when no one is looking. There actually is nothing sneaky about it. China openly targets the value of its currency at a level that is well below the market clearing rate. The question is not whether we can somehow catch them in the act, the question is what do we think about the policy.

Anyhow, China just gave deniers another degree worth of global warming to explain away when the bank lowered the target rate for its currency against the dollar in order to boost its economy. There are three points worth making here.

First, China is quite obviously acting in currency markets to keep down the value of its currency. Do we have to pretend we didn't see this? The $4 trillion in reserves that China's central bank was sitting on should also have been a big hint on this issue. (For those who confuse the importance of stocks, rather than just flows, almost everyone believes that the Fed's holding of $3 trillion in assets puts downward pressure on U.S. interest rates. It's the same story with China's central bank's reserves and China's currency.)

The second point is that China's government obviously believes that the relative value of its currency affects its trade balance. That also should not really be arguable, but there were some policy experts who believed that imports and exports from China are not affected by relative prices. Of course they may still be right, but this move demonstrates that China's government does not agree with them.

The third point is that several other currencies moved in step with China's currency against the dollar. This contradicts a common assertion that if China raised the valued of its currency against the dollar then we would just import more from other countries. In fact, since many countries' currencies follow the Chinese yuan, the improvement in the U.S. trade balance with China that would result from a higher yuan is likely to be amplified by an improvement in our trade balance with other countries as well.

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