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).
David Leonhardt has a good piece pointing out the simple fact that more rapid economic growth will substantially reduce the budget deficit. However he overlooks an important part of the story.
More rapid growth makes the country richer. In his hypothesized growth speed-up, the country grows 0.5 percentage points more rapidly on average over the next two decades. If this happened, then people would be roughly 10 percent better off on average in 2030 than under current projections.
If people are wealthier, then the cost of sustaining the government would be less of a burden. For example, in this fast growth scenario if we had a tax increase equal to 1 percentage point of GDP in 2030 (a large tax increase), it would still leave people with roughly 9.0 percent more after-tax income than in the baseline scenario even without a tax increase.
In other words, if before tax income grows more rapidly, then after-tax income can increase rapidly even if a somewhat greater portion is diverted to the government in tax revenue. Since the deficit is often put as a generational issue, if workers 20 years from now enjoy much higher after-tax incomes than workers today (which they will in every plausible scenario), it is difficult to understand why anyone today should be troubled if workers in future decades will pay a higher tax rate.Add a comment
The NYT referred to the trade pacts with South Korea, Panama and Colombia as "free-trade" agreements. Of course this is inaccurate. They do not free all trade, most notable trade in highly paid professional services like physicians and lawyers' services. These areas are highly protected by conscious policy. The deals also increase protection in some areas, most notably for patents and copyrights.
Trade pacts have been unpopular with much of the country because they have been designed to place manufacturing workers in direct competition with low-paid workers in the developing working, thereby driving down their wages. By contrast, they have largely left in place the protection from such competition enjoyed by the highest paid workers. As a result, they have contributed to the growth of income inequality in the last three decades.Add a comment
Warren Buffet has a thank you note in the NYT. He certainly owes a big thanks to the taxpayers, after all he put a $10 billion bet on Goldman Sachs at the peak of the crisis. Without our help, he would have lost his whole bet.
Of course the issue is not as he presents it here. The question was not whether or not the government did something to keep the financial system functioning. The question was whether the rescue would save investors like Buffet, who were knowingly taken big risks with their money, the highly paid executives of the major banks, and preserve the speculative culture of Wall Street.
That's what TARP was about. Mr. Buffet has very good grounds to be thankful that the rescue was structured to make preserving the wealth of the wealthy the top priority. The 25 million unemployed and underemployed people may feel differently.Add a comment
That's the question that listeners to All Things Considered must be asking after hearing Mara Liasson tell them:
"If you sit down with the numbers and look at what the government actually does and how it pays for it, it's obvious that there is no simple solution."
Actually, anyone who bothered to sit down and look at the numbers would see that there was not a big deficit problem by any realistic measure until the housing bubble collapsed. If NPR could find a reporter who could read a simple chart (to paraphrase Senator Simpson in one of his famous e-mails) they would quickly recognize that the debt to GDP ratio rose only modestly over the last business cycle, even with the huge increase in defense spending associated with the wars in Iraq and Afghanistan.
The real run-up in the deficits and the debt began in 2008. That's right folks, it was the collapse of the housing bubble (which NPR never talked about) that led to the big deficits. While NPR is telling its listeners that the deficits are a problem, the deficits are giving people jobs. If we either cut spending or raised taxes we would be pulling money out of the economy and throwing people out of work.
In this sense, people who want lower deficits in the current slump want more people to lose their jobs. This is the same as people who want fish to live out of water effectively want them to die. It is possible that people who push for lower deficits do not know that this would mean throwing people out of work, just like it is possible that some people don't know that fish cannot live out of water, but neither group of people should be working as a reporter for a serious news outlet.
The longer term deficit is also very simple. It is a problem of exploding health care costs. We currently spend more than twice as much per person for health care as the average for the countries that enjoy longer life expectancies than the United States. The long-term budget projections assume that this ratio will rise to three or four to one. If the United States spends four times as much per person on its health care as Germany, Canada and everyone else, then it will face enormous economic problems. One of these problems is a serious budget deficit, since more than half of health care in the United States is paid by the government.
However, honest people would talk about the problem of health care costs, since nothing about the situation is helped if the government saves money by just cutting back its spending without fixing the system. In that case we would just be left with a situation in which tens or perhaps hundreds of millions of people could not afford decent health care.
So contrary to what NPR told its listeners, there is a very simple solution: fix health care.Add a comment
David Brooks complains that liberals used rigorous economic models.
"The economic approach embraced by the most prominent liberals over the past few years is mostly mechanical. The economy is treated like a big machine; the people in it like rational, utility maximizing cogs. The performance of the economic machine can be predicted with quantitative macroeconomic models.
These models can be used to make highly specific projections. If the government borrows $1 and then spends it, it will produce $1.50 worth of economic activity. If the government spends $800 billion on a stimulus package, that will produce 3.5 million in new jobs.
Everything is rigorous. Everything is science."
Brooks contrasts this approach with the moralizing and whining of conservatives:
"Conservatives, who are usually stereotyped as narrow-eyed business-school types, have gone all Oprah-esque in trying to argue against these liberals. If the government borrows trillions of dollars, this will increase public anxiety and uncertainty, the conservatives worry."
He then concludes that because the economy is still weak, we should listen to the conservatives and cut spending and taxes.
Actually, the liberal models have performed quite well if Brooks actually bothered to look. The stimulus was projected to create 3.7 million jobs in its original form. The bill actually approved by Congress contained roughly one-third less stimulus, so we should have expected it to create roughly 2.5 million jobs. No one who looked at the models that Brooks is condemning would have thought that this would have been sufficient to restore the economy to normal levels of output and employment in an economy that had lost over 6 million jobs by the time the stimulus kicked in.
Brooks also misrepresents the attitude of liberal economists to the moralistic conservatives who just want to give all our money to rich people. All of their whining has specific implications. For example, when Brooks or some other conservative complains that businesses aren't hiring because of all the uncertainty about taxes and regulation, then the implication is that businesses are finding ways to meet their demand for labor in ways that don't involve permanent hires.
The obvious mechanisms would be to increase average hours per worker or increase the hiring of temps. Liberal and progressive economists insist on examining the evidence to see whether it supports the whining of the conservatives. In this case (and all others) it doesn't. The increase in hours per worker since the trough last fall has been very modest and average hours are still well below their pre-recession level. Temp employment has rebounded very weakly and is also far below its pre-recession level.
In short, Brooks is not just complaining about the economic models of liberals. He is also complaining that liberals try to examine the logical implications of their whining and look for evidence of these whinings being accurate. Brooks' view is apparently that we just give in to conservatives since this is the only way to get them to stop whining.
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Listeners might have thought that 9.6 percent unemployment, with 25 million people unemployed, underemployed, or who have given up looking for work altogether was the biggest problem facing the country today. But, NPR knows better.
It concluded a fawning interview with New Hampshire Senator Judd Gregg by referring the deficit as a "great problem." It would have been interesting if they explained to listeners how they arrived at this conclusion.
People who know economics know that current deficits are due to the collapse of the housing bubble. NPR had virtually no time for analysts who warned of this entirely predictable disaster (unlike the endless hours that it devotes to deficits). If deficits were smaller today we would have fewer jobs and higher unemployment. It is not clear why anyone would advocate this outcome.
In the longer term, the large projected deficits are attributable to a projected explosion of health care costs in the United States. Per person costs are projected to rise from a bit more than twice the average of other wealthy countries to 3 or 4 times the average per person cost. If health care costs increase as projected, it will have a devastating impact on the economy. It will also lead to a large budget deficit. If U.S. health care costs were comparable to those in Canada, Germany or other wealthy countries, the United States would be looking at long-term surpluses, not deficits.
A competent interviewer would have asked Senator Gregg why he persists in misrepresenting a health care problem as a budget problem.Add a comment
Robert Samuelson is beating up on Japan in his column today. While its economy has certainly had troubles in the last two decades, the picture is not quite as bleak as he seems to believe. Its rate of productivity growth (the most important measure of economic dynamism) since 1995 has been almost identical to the average for the OECD and within 0.2 percentage points of the rate in the United States. Furthermore, since depreciation is a large and growing share of U.S. output (primarily because computers become obsolete quickly) it is likely that a net measure of output would show Japan and the United States having virtually the same productivity growth over this period. Net productivity is the measure that is relevant for living standards, since you can't eat depreciation.
It is also worth noting that Japan's unemployment rate is just 5.0 percent. It never rose above 6.0 percent over the last two decades.
However Samuelson's biggest error is that he fails to understand the problem that deflation, or more correctly low inflation, poses for Japan's economy. While he rightly ridicules the idea that consumers would delay purchases to buy items of like cars to buy them at a price that is 0.5 percent lower the following year, this is not the main way that low inflation harms the economy.
In an economy operating below capacity, it would be desirably to have very low real interest rates to boost investment. This means that the cost of borrowing is low relative to the return on investment. Because interest rates can't go negative, it is impossible for real interest rates to fall as much as would be desired given the weakness of Japan's economy. It would be ideal if it could keep its nominal rates at their current near zero level, while inflation rose to 3.0 or 4.0 percent.
The other reason why inflation would be desirable is that it would allow homeowners to get out from under their debt burdens. If wages rose 3.0-4.0 percent annually in step with inflation, the burden of a fixed mortgage debt would be eroded through time. Also, if house prices rose in step with inflation, consumers would gain equity in their homes.
However, the problem in both of these cases is that the rate of inflation is too low. The fact that it crosses zero and is negative is of no special importance. The problem is low inflation, not deflation.Add a comment
Ross Douthat denounced progressives who attacked the Bowles-Simpson proposals for cutting Social Security and Medicare to help finance lower taxes on the hard-pressed wealthy. He got a few things wrong in the process.
First, Douthat complains that businesses in the United States have to "labor under one of the higher corporate tax rates in the developed West." While the marginal tax rate in the United States is somewhat higher than the average, because of the extensive loopholes in the corporate tax, the effective tax rate in the United States is lower than the average for the OECD. There certainly is no general opposition among liberals to reform that would reduce the tax rate while offsetting the lower rates with fewer deductions.
He complains that in the liberal/progressive's world, "the Social Security retirement age never budges, no matter how high average life expectancy climbs." Mr. Douthat apparently has not heard that the Social Security retirement age is rising already. The age at which workers collect full benefits has already risen from 65 to 66. It will rise to 67 for workers who reach age 62 after 2022. Also, although life expectancy has been rising, this is mostly due to increases for workers in the top half of the income distribution. The increase in the retirement age already in law will eat up most of the increase in life expectancy over the last 40 years for workers in the bottom half of the wage distribution.
He also appears to believe that Social Security is a subsidy for middle class workers. This is not the case. Because of its progressive benefit structure, most middle income workers will get a real return of less than 2.0 percent on the money they paid in payroll taxes.
Douthat also complains about the government warping the health care marketplace. While this is true, the main distortions are not being primarily protected by liberals. Patent protection for prescription drugs cause them to be sold at prices that are several hundred percent above their competitive market price, however conservatives tend to be the biggest proponents of stronger patent protection. Increased international competition would also go far toward bringing our health care costs more in line with the rest of the world.
Douthat also compares the views of liberals in the United States unfavorably with Europe, noting that many European countries are cutting back on the generosity of their welfare states. Apparently Mr. Douthat didn't know that their welfare states are currently far more generous than the welfare states in the United States. This means that the cutbacks will still in most cases leave the welfare states in these countries considerably more generous than in the United States. For example, the recent hotly contested law in France raised its early retirement age to 62 and its age for full benefits to 67, the levels already in law in the United States. And, French workers have seen a much more rapid increase in life expectancy than workers in the United States over the last four decades.
Finally, Douthat apparently is a Neanderthal protectionist who fears international competition. He argues that the United States could have higher tax rates and a more generous welfare state in the early post-war period because its competitors had been destroyed by the war. Actually, in economic theory, the United States benefits from having wealthy countries from whom it can buy goods and services more cheaply than they can be produced domestically. It is not clear why Douthat thinks that this is a problem.
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That is the only thing that readers can conclude from its heroic efforts to balance the budget in 2030. This exercise is utterly mind-boggling. We have more than 25 million people unemployed, underemployed, or who have given up work altogether. This is a real crisis. Furthermore, it is worth noting that these people are largely suffering as a result of the incompetence of the budget balancers. (The budget balancers were the same people who dominated economic debate in the years before the crash and could did not see the $8 trillion housing bubble that wrecked the economy and gave us the huge deficits that now have them so obsessed.)
Obviously it is politically popular in Washington to be obsessed by the deficit, but we are supposed to have an independent press in this country. It is utterly loony to be focused on the projected deficit in 2030, when we have tens of millions of people who are seeing their lives ruined today by the downturn. This is like debating the colors to paint the classrooms when the school is on fire with the students still inside. Given economic reality, it would make far more sense to use the effort devoted to construct an elaborate game like this to designing a route toward restoring full employment.
It would also be worth pointing out to readers and participants in the NYT game that the long-term deficit is 100 percent a health care story. If the United States paid the same amount per person for health care as any of the 35 countries with longer life expectancies, we would be looking at huge budget surpluses for the indefinite future. Pointing out this simple fact would at least get people to focus on the real long-term problem facing the country: a broken health care system.
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The NYT and other major media outlets have continually referred to public pensions as being "unsustainable" or out of control. The implication is that public sector workers get exorbitant pensions.
In fact the main reason that the public pensions are underfunded at present is not the generosity of the benefits, but rather the plunge in financial markets that followed the collapse of the housing bubble. If public pensions had earned just a modest 5.0 nominal annual rate of return since 2007 their assets would stand at $3.6 trillion today, 41.3 percent above current levels. This would eliminate most, if not all, of the their reported shortfall.
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For years the Post has used both its editorial and news pages to push the idea that Social Security and Medicare are unaffordable burdens for the U.S. economy. The paper almost never lets readers hear from any of the expert voices who question this assessment or shows any of the evidence that exposes it as being wrong.
Today, Ruth Marcus suggested that President Obama have a lecture series to explain to the American people that these entitlements are unaffordable. She also suggested that he offer his podium to dissenters, like Republican Congressman Paul Ryan who wants to privatize both Medicare and Social Security.
The question that millions are asking is does Marcus envision that President Obama would allow dissenters who oppose its austerity vision, or does she want him to be as one-sided as the Post? For example, should President Obama give his podium to someone who would show that there would be no budget problem if per person health care costs were the same in the United States as in any other wealthy country? Should podium users be allowed to point out that Medicare could save trillions over its 75-year planning period by just giving people the option to get care from countries with more efficient health care systems? Will the public be exposed to the idea that we could save trillions of dollars over the next decade by adopting a more efficient mechanism for developing prescription drugs.
It would be great if President Obama used his platform to educate the public about major economic issues. Unfortunately, I think that Ms. Marcus's intention was that this platform only be used to highlight Post approved views.Add a comment
In the United States economic growth numbers are almost always presented as annual rates. In Europe and much of the rest of the world they are typically presented as quarterly rates. This means that if a reporter simply presents the official rate from a government agency, as the Post did in an article on the debt crises in Ireland and Portugal, they will be giving readers a quarterly growth rate. This will likely leave a large portion of the paper's readers confused as to actual growth rate.
It is a very simple matter to convert a quarterly growth rate into an annual rate. The proper way is to take the 1 plus the growth rate to the fourth power, an operation that could be done in far less than a second by almost any calculator produced in the last 15 years. However, for small numbers, like the 0.4 percent growth figure reported for the euro zone last quarter, it is just fine to multiply the quarterly rate by 4 to get a 1.6 percent annual rate.Add a comment
The Post told us about the prospect that the Bush tax cuts would expire in January:
"The stakes are enormous. Millions of taxpayers could see hundreds of dollars sliced from their paychecks in January unless Congress acts. Economists say expiration of the tax cuts would deal a devastating blow to the fragile U.S. economy, and has the potential to push it back into recession."
There can be little doubt that the impact of pulling money out of the economy at this point will be negative, and given that the economy is scraping against zero growth already, it would not take much to throw it into another recession. But it might be a bit much to describe this as a "devastating blow." The expiration of the Make Work Pay tax credit and other parts of the stimulus will also pull money out of people's pockets and slow growth. The Post has never issued similar warnings about this prospect.
It would have been appropriate to refer to actual statements of specific economists rather than present overblown adjectives as being the considered judgment of the economics profession. In the same vein the article later describes the $4 trillion cost of continuing all the credits for a decade as a "budget buster." This assessment should come from a participant in the debate, not the newspaper.Add a comment
I have a general policy at BTP of not mentioning articles that directly refer to me or CEPR. I am making an exception here because I think there is a very important point that deserves attention.
In an NYT blogpost ("A Deficit of Respect") Tobin Harshaw discusses the response of liberals and progressives who attacked Erskine Bowles and Alan Simpson, the co-chairs of President Obama's deficit commission. He concludes by criticizing those who:
"have begun the battle with ad hominem attacks on the commission’s chairmen as unserious, ill-intentioned, mentally unbalanced, avatars of the “money party.”
I would certainly fit as one of those who described at least one of the co-chairs (Erskine Bowles) as an avatar of the money party, even if I did not use exactly these words. The fact is that Mr. Bowles is a director of Morgan Stanley, one of the bailed out Wall Street banks. He gets $335,000 a year for his work with Morgan Stanley. This may be one of the reasons that the co-chairs report did not mention a financial speculation tax as a possible source of revenue, even though financial sector taxes have been widely advocated by policy analysts around the world, including even the I.M.F.
The exclusion of any new taxes on the financial sector is especially striking since Senator Simpson boasted at their joint press conference about having "harpooned every whale." The financial industry is a pretty big whale to overlook.
When I first came to Washington I worked at the Economic Policy Institute, a think tank that gets 20-25 percent of its funding from labor unions. Media outlets, including the New York Times, routinely felt the need to notify readers of this source of funding with the idea that it could have bearing on my work and that of my colleagues. Given this practice, it certainly would seem reasonable to note that Mr. Bowles is currently getting huge amounts of money directly from a major Wall Street bank. Readers can decide for themselves whether this money affects his views on the best way to deal with the budget deficit.
Since we are on the topic, given his behavior, it hardly seems out of line to describe the other co-chair, Alan Simpson, as "as unserious, ill-intentioned, mentally unbalanced." Mr. Simpson has sent several late night e-mails to his critics (I was one recipient), which displayed extraordinary ignorance of the finances of the Social Security program, contempt for its beneficiaries, as well as a serious misunderstanding of bovine anatomy. One e-mail was also openly sexist, implying that the head of a major national women's organization was too dumb to read a simple graph.
People can make their own judgment as to whether or not these e-mails and Mr. Simpson's other erratic actions (he once cursed out a reporter for asking him his views on Social Security) are evidence of being unserious, ill-intentioned or mentally unbalanced. However, it hardly seems inappropriate to raise the question.
Mr. Harshaw obviously approves of the thrust of the recommendations of the co-directors. That is fine and it would be good to have an open debate on the need for and merits of these recommendations. Wall Street investment banker Peter Peterson and other wealthy supporters of the co-directors agenda are doing their best to stack the deck, spending hundreds of millions of dollars to push their agenda, to ensure that nothing resembling a fair debate occurs.
However, the questions raised by the critics of the co-directors, including issues about conflict of interest and erratic conduct, are typical of the sort of questions that the NYT and other media outlets routinely raise in their news reporting. Insofar as Harshaw objects to such questions being raised about Bowles and Simpson he is asking that they be granted special protection. That is a request that does not deserve to be treated seriously.Add a comment
Everyone knows that the Washington Post abandons any pretext of objectivity when it comes to trade. It once even famously claimed that Mexico's GDP had quadrupled from 1988 to 2007 in order to tout the benefits of NAFTA. (The actual increase was 82 percent.) So, it is hardly surprising that it resorted to name-calling in denouncing the opponents of the trade pact with South Korea.
It referred to these opponents as "protectionist voices" within the Democratic Party. Of course everyone involved in trade debates is protectionist, the only issue is who is being protected. This trade agreement would actually increase protections for items like copyrights and patents, increasing the cost to consumers of items like prescription drugs and recorded music and videos. This will slow growth and reduce jobs. The deal also does little or nothing to reduce the barriers that protect highly paid professionals like doctors and lawyers from international competition.
This is why it inappropriate to refer to the Korean pact as a "free-trade" deal. Does the Post require that reporters refer to every trade deal that it likes as a "free-trade" pact, instead of increasing accuracy and saving space by referring to it simply as a "trade" deal?
The Post also repeats the silly old trick of telling readers that the pact will help the economy creating 70,000 jobs in firms exporting goods to South Korea. Of course, the real story on job creation depends on both exports and imports. (Come on, does the Post really think it can fool readers with this one?) The country's trade deficit has increased with most of the countries with whom it has signed trade pacts in the last two decades, implying that by this crude measure the deals have been job losers.
So, the main information that readers get from this front page article is that the Washington Post really likes the proposed trade pact with South Korea. But regular Post readers already knew this.Add a comment
It will come with amazing swiftness. The bond markets are with you until the second they are against you. When the psychology shifts and the fiscal crisis happens, the shock will be grievous: national humiliation, diminished power in the world, drastic cuts and spreading pain"
I still like the biblical version with the four horseman and the rivers flowing upstream, but hey, it's the oped page of the NYT. No one expects that people will be reading this stuff 1500 years from now.
Anyhow, let's take a closer look at Mr. Brook's apocalypse. The U.S. will be spending $1 trillion a year just to the pay the interest on the national debt." Pretty scary, huh?
Well, first it is probably worth noting that Brooks is somewhat more pessimistic on this score that the Congressional Budget Office (CBO) which puts interest in 2020 at $916 billion. How scary is that?
Let's get out the GDP projections. CBO tells us that GDP will be $22.5 trillion in 2020 [thanks Jeff]. This means that Mr. Brooks scary interest burden will be equal to about 4.1 percent of GDP. Will that be the end of the world or least national humiliation, as Brooks promises? The interest burden peaked at 3.3 percent of GDP in 1991, so we would not be in hugely different territory than we were during the Bush I presidency.
But, there is a further complication. The Fed currently holds much of the federal debt and it is actually increasing its share. This is what QE2 is all about. Given the massive amount of excess capacity and unemployment, coupled with the trend towards disinflation, there is no reason that the Fed should not continue to hold this debt. (It can take other steps, such as increasing reserve requirements, to ensure that an increase in reserves in the banking system does not lead to inflation in future years.)
If the Fed holds the debt, then it poses no burden to the government. The Treasury pays interest on the debt to the Fed and then the Fed refunds the interest to the Treasury. Last year the Fed refunded $77 billion in interest to the Treasury, nearly 40 percent of the net interest paid out by the Treasury.
If the share of interest going to the Fed is the same in 2020 as it is today, then the interest burden on taxpayers in 2020 will be equal to about 2.6 percent of GDP, well below the levels of the late 80s and 90s. If the Fed increases the share of the debt it holds, as it is doing now with QE2, then the interest burden on future taxpayers will be even less.
This doesn't leave much for Mr. Brook's apocalypse story. Of course, if Brooks really wants to tell a story of national humiliation he just has to look around beyond the streets and restaurants that he and his friends frequent. The country has more than 25 million people who are unemployed, underemployed or who have given up work altogether. Tens of millions of people are underwater in their mortgages and millions face the imminent prospect of losing their home through foreclosure.
This might not be the apocalypse, but it should be humiliating to the nation, especially since this suffering is entirely due to incompetent economic policy and therefore was and is entirely avoidable. And, Brooks doesn't even have to wait for 2020 to talk about this picture.
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The discussion of the trade imbalances continues to be muddled even beyond the failure to realize that changes in relative currency prices are the main mechanism for adjustment in a system of floating exchange rates. Many news articles and columns have lumped together Germany and China as troublemakers due to their large trade surpluses. This is wrong.
The principle here is very simple. China is an extremely fast growing country where the return on capital is very high. Germany is a relatively slow growing country, where the return on capital is much lower. In standard trade models, capital is supposed to flow from countries where the return is low to countries where the return is high.
The implication of this simple point is that we should expect relatively wealthy slow growing countries like Germany to have trade surpluses. Their capital could in principle be better used in fast-growing developing countries. This would imply a trade surplus.
By contrast, it would be expected that a fast-growing country like China would be an importer of capital. This is due to the fact that capital gets a much higher return in China than in wealthy countries. This would correspond to a trade deficit, not a trade surplus.
The fact that China and many other developing countries are running trade surpluses does not mean that they have done something wrong. The real problem in this story has been the system of international finance designed primarily by the I.M.F. and therefore the United States. This system has not allowed developing countries to feel comfortable in accumulating foreign debt, forcing them to build up reserves to avoid being subjected to dictates from the I.M.F.. But, reporters should recognize what economic theory says about the current world trade imbalances.
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The New York Times seems to be following in the footsteps of the Washington Post in terms of making up nutty numbers to promote trade deals. The NYT told readers that if Japan did not join in a pan-Asian trade agreement it would "eliminate eight million jobs."
According to the OECD, employment in Japan is just over 62 million. This means that the estimates in the NYT imply that not taking part in this trade agreement would cost Japan a number of jobs approximately equal to 13 percent of its current employment the equivalent of roughly 18 million jobs in the United States. Given that Japan already trades with these countries and this deal would simply expand trade, it is implausible that the agreement would increase its employment by even one-tenth this amount.
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The Washington Post notes that the Fed's new round of quantitative easing will:
"harm exports from developing countries. That's because steps to lower U.S. interest rates and put money into the economy have the effect of making other countries' currencies more expensive."
If world imbalances are going to be addressed, then developing country exports must be hurt. In economic theory, rich countries like the United States are supposed to have trade surpluses. This means that they export capital developing countries. The logic of this pattern of trade is that capital commands a higher rate of return in fast growing developing countries in which it is relatively scarce.
There were in fact substantial flows of capital from rich countries to poor countries prior to the East Asian financial crisis in 1997. However, the harsh treatment of countries in the region by the I.M.F. led developing countries throughout the world to focus on accumulating vast amounts of reserves in order to avoid ever being in the same situation. This meant that developing countries had to run export surpluses with the United States and other wealthy countries.
In effect, the I.M.F, under the guidance of the Rubin-Summers Treasury Department, put in place a dysfunctional system that would inevitably explode. The effort to re-balance trade is about reversing those policies.Add a comment
The deficit report put out by the commission's co-chairs, Alan Simpson and Erskine Bowles, had one striking omission. It does not include plans for a Wall Street speculation tax or any other tax on the financial industry.
This omission is striking because the co-chairs made a big point of saying that they looked everywhere to save money and/or raise revenue. As Senator Simpson said: "We have harpooned every whale in the ocean - and some minnows." Wall Street is one whale that appears to have dodged the harpoon.
This omission is made more striking by the fact that at least one member of the commission, Andy Stern, has long been an advocate of such taxes. Presumably he raised this issue in the commission meetings and the co-chairs chose to ignore him.
The co-chairs apparently also chose to ignore the I.M.F. Noting the waste and extraordinary economic rents in the sector, the I.M.F. has explicitly recommended a substantial increase in taxes on the financial industry. It is even more striking that the co-chairs apparently never considered a speculation tax since Wall Street's reckless greed is at the center of the current economic crisis.
In this context, it is worth noting that one of the co-chairs, Erskine Bowles, is literally on Wall Street's payroll. He earned $335,000 last year for his role as a member of Morgan Stanley's (one of the bailed out banks) board of directors. Morgan Stanley would likely see a large hit to its profits from a financial speculation tax.
It would have been appropriate for the reporters covering the report to ask about a financial speculation tax. It would also be appropriate to explore the connection between Mr. Bowles role as a Morgan Stanley director and the absence of any financial taxes in this far-reaching report.Add a comment
One would hope that reporters who cover economic issues for the Washington Post know a little economics. Unfortunately, this does not seem to be the case. Therefore, BTP will provide a free economics tutorial for the Post's economic reporters.
The Post told readers today that:
"world leaders share the overall aims of bringing trade flows into better balance and curtailing recent clashes over currency values."
The whole piece in fact shows the opposite. In a system of floating exchange rates the mechanism for correcting trade imbalances is a change in currency values. Countries with trade surpluses are supposed to see the value of their currency rise. Countries with trade deficits are supposed to see the value of their currency fall.
When a country's currency falls in value, imports become more expensive meaning that they will import less. Its exports become cheaper for people in other countries, causing foreigners to buy more of their exports. This will reduce its trade deficit. The opposite holds for a country's whose currency rises in value.
This is really simple. If you want to see trade imbalances corrected, then you want to see the value of the currency fall for countries with large deficits like the United States. This is just like if you want the school fire put out, you want the firefighters to spray water on it.
On the other hand, if you don't want the firefighters to use water, then you really don't want the fire extinguished. In the same vein, all the officials cited in this article who complain about the decline in the value of the dollar obviously do not want the trade imbalances corrected. It is that simple, at least for folks who learned intro econ.
There is another interesting sidebar for the economically literate. The article tells us:
"Some developing countries took aim at the Fed move in part because it could weaken the dollar, making their own currencies relatively more expensive, hurting their exports and fueling inflation."
This is a non sequitur. If the dollar falls in value, then imports from the United States will be cheaper for developing countries. This will lower inflation, other things equal. In addition, reduced exports from these countries will also reduce domestic demand and employment, which will also put downward pressure on inflation. If developing countries actually make the claims attributed to them in this article then the news is that their officials have no better grasp of economics than a Washington Post reporter.Add a comment