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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All Things Considered got things badly wrong in talking about the government debt last night. As most folks know, Donald Trump seemed to imply that he would threaten to default on the debt in order to force creditors to take write-downs on their bonds. He then clarified what he meant, saying that if interest rates rise, he would look to buy back government bonds at a discount.

For some reason, this left NPR befuddled:

"It's not clear how that would work, though, since the cash-strapped government would have to borrow more money at rising interest rates to buy back its old debt. Holtz-Eakin was left scratching his head."

It's actually very clear how this would work. The government would borrow money at higher interest rates (it doesn't matter if interest rates are rising), to buy back bonds whose market value is less than their nominal value. This is a very simple story, when interest rates rise, the market rise of bonds already issued falls. This would allow the government to reduce the nominal value of its outstanding debt, even if it doesn't reduce its interest burden.

If it seems strange to people that the government would care about reducing the nominal value of its debt, then they haven't been paying attention to policy debates in Washington over the last decade. There has been a huge amount of energy devoted to keeping down the debt-to-GDP ratio. In fact, there was a widely held view in policy circles that if the debt-to-GDP ratio exceeded 90 percent, then the economy would face a prolonged period of slow growth. This view was first espoused by Carmen Reinhart and Ken Rogoff, two prominent Harvard professors. It was frequently referenced in publications like the New York Times, Washington Post, and undoubtedly mentioned on NPR. It was also a main justification for the budget cuts put in place in 2011.

The numerator in this debt-to-GDP ratio is the nominal debt, the number that could be reduced by exactly the sort of financial engineering that Donald Trump proposed. For this reason it is difficult to understand why Trump's proposal would have left Douglas Holtz-Eakin (a former head of the Congressional Budget Office and chief economist for George W. Bush) scratching his head.

Of course it is silly to be worried about the ratio of nominal debt to GDP, but that can't erase the fact that this ratio has been a central concern in policy circles for some time. It doesn't speak well of our media that they only recognize that the debt-to-GDP ratio doesn't matter when the point is raised by Donald Trump, but not when it is raised by elite economists and top policy makers. (Erskine Bowles and Alan Simpson frequently made reference to the 90 percent figure when they chaired President Obama's deficit commission.)

What matters much more than the ratio of debt to GDP is the ratio of interest payments to GDP. If we net out the interest refunded by the Federal Reserve Board, this ratio now stands at 0.8 percent of GDP. By comparison, it was more than 3.0 percent of GDP in the early 1990s. These numbers don't fit the deficit crisis story widely preached in the media, but if we want to get serious, that would be the number to focus on.

Addendum:

In case you were wondering how anyone could be concerned about the ratio of nominal debt to GDP, here is NPR on the topic back in 2011. 

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It really is amazing what you can find in the Washington Post's opinion pages. The latest is Robert Samuelson complaining that the problem with the weak recovery is that people are saving too much. This is amazing for two reasons: first, it is not true, and second if people saved less they would have even less money to support themselves in retirement.

Starting with the first point, the saving rate is actually quite low by historical standards. It is just over 5.0 percent. The only periods in which it was lower was when the wealth generated by the stock bubble in the 1990s and the housing bubble in the last decade pushed the saving rate somewhat lower. For most of the 1960s and 1970s it was over 10.0 percent. Even in the 1980s it averaged more than 7.0 percent. (No, there should not be a downward trend in saving rates, unless you think that people will eventually have zero money in retirement.)

fred savings
If we want to see the origins of the economy's shortfall of demand, the trade deficit is the obvious place to look. If the trade deficit was 1.0 percent of GDP, as opposed to its current 3.0 percent of GDP, this would have the same impact on demand as a drop in the savings rate of 2.5 percentage points. The standard route for getting a lower trade deficit is a lower valued dollar, but apparently no one is supposed to make this point in the Washington Post's opinion pages. (The savings rate is likely overstated at present. There is a large gap between the income side measure of GDP and the output side. This likely reflects some amount of capital gains wrongly being recorded as ordinary income. If income is overstated, it would cause the reported savings rate to be higher than the true saving rate.)

The other reason why the complaint about excessive savings is bizarre is that Samuelson, like most of the rest of his colleagues in the opinion section, regularly calls for cutting Social Security and Medicare. So apparently Samuelson both wants retirees to have less personal savings to support themselves at the same time they have less support from public social insurance programs: only in the Washington Post.

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I guess we can get a pretty good sense of the priorities of the folks at ABC News from the headline of a piece on the costs of replacing the country's lead water pipes. The headline noted the price for Flint and then warned of the "colossal price tag for a US-wide remedy."

The piece gives two estimates of the cost. One puts the costs at between a few billion dollars and fifty billion dollars. The other puts it at $30 billion. If we take the latter figure and assume that the pipes will be replaced over the next decade, the cost would come to roughly 0.025 percent of GDP. (GDP will average roughly $20 trillion, in 2016 dollars, over the next decade.) 

To give some points of comparison, we spend roughly 3.5 percent of GDP on the military. Patent protection for prescription drugs raise their cost by close to 2.0 percent of GDP. And, protected our doctors from international competition raises our annual health care bill by 0.5 percent of GDP.

Note: An earlier version wrongly put average GDP over the next decade at $20 billion.

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I see Greg Mankiw used his NYT column to tell folks that politicians are spinning tales when they say the economy is rigged. I would say that economists spin tales when they tell you it is not. (Mankiw and I just ran through this argument on a panel in Boston last week.) Let's quickly run through the main points.

First, the overall level of employment is a political decision. We would have many more people employed today if the deficit hawks had not seized control of fiscal policy back in 2011 and turned the dial toward austerity. The beneficiaries of higher employment are disproportionately those at the middle and bottom of the income distribution: people with less education and African Americans and Hispanics. So the politicians pushing austerity decided that millions of people at the middle and bottom would not have jobs.

Furthermore, in a weaker labor market, it is harder for those at the middle and bottom to get pay increases. So the shift to austerity also meant that tens of millions of workers would have to work for lower pay. Read all about it in my book with Jared Bernstein (free, and worth it).  

The second way in which it is rigged is our trade policy. First there is the size of the trade deficit. This is the result of policy choices. Instead of forcing our trading partners to respect Bill Gates copyrights and Pfizer's patents, we could have insisted they raise the value of their currency to move towards more balanced trade. But Bill Gates and Pfizer have more power in setting trade policy than ordinary workers.

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As the media erupt in fury over Donald Trump's comments on the debt, it is worth taking the opportunity to remind people that the interest burden on the national debt is near a post-World War II low. While the debt-to-GDP ratio rose sharply in the Great Recession, because interest rates are extremely low, we face an unusually low interest burden. 

This fact has largely been missing from reporting on the issue. For example a Washington Post piece warning of the end of the world if Trump tried to negotiate on the debt, told readers that the government would pay roughly $255 billion this year in interest on the debt. This includes the $113 billion that the Federal Reserve Board will receive and refund back to the Treasury. That leaves a net interest burden of $142 billion, a bit less than 0.8 percent of GDP. By comparison, the interest burden was over 3.0 percent of GDP in the early 1990s.

It is also worth noting that we actually could buy back debt at a discount if interest rates rose. When interest rates rise, the market value of long-term debt falls. This means that the government could issue new debt, which would pay a higher interest rate, to buy back debt with a higher face value, thereby reducing its debt, but leaving its interest burden unchanged. 

There is no economic reason to do this sort of financial engineering, but there are people who worry about debt to GDP ratios apart from the interest burden, like Harvard economics professors, the Washington Post editorial page writers, and Washington budget wonks. As a result, this sort of financial engineering may be a useful way to alleviate concerns on the debt and free up public money for productive uses.

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Paul Krugman complains that the media have not exposed the inconsistencies in Paul Ryan's budgets. While there is some truth to that (Ryan never identifies any of the loopholes he would close to cover the cost of lower tax rates), it is more serious that it never reports what Ryan actually proposes.

Ryan's budgets, as analyzed by the Congressional Budget Office under his direction, call for eliminating the whole of the federal government by 2050, except for Social Security, Medicare and Medicaid, and the military. This is implied by his reducing everything except Social Security, Medicare, and Medicaid to 3.5 percent of GDP, roughly the current size of the military budget. That leaves zero for the Justice Department, the State Department, the Food and Drug Administration, the National Institutes of Health, the Education Department, the National Park Service and everything else we think of as the federal government.

While Krugman is right in calling attention to proposals to pay for large tax cuts with the elimination of unnamed deductions, it seems more serious that Speaker Ryan is a person who wants to phase out the federal government. That is about as radical a position as you can find in D.C. and Ryan has repeated it many times. (He boasts how CBO scored his plan as eliminating the federal debt.)

Next to no one seems to know that Ryan is an abolitionist. It is difficult to see how someone espousing this view can be seen as a moderate conservative.

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The Washington Post had a piece noting that it is unlikely that the economy will produce the 1 million new jobs in manufacturing by 2016, as promised by President Obama in 2012. The piece is implies that this was an unrealistic promise that Obama should not have made. In fact, the economy had lost more than 2 million manufacturing jobs in the recession, so it was very reasonable to expect that it would get at least half of these jobs back, as it had in prior recoveries.

Jobs in Manufacturing

manu jobs2

                                                 Source: Bureau of Labor Statistics.

The main reason why we did not recover more manufacturing jobs is that the non-oil trade deficit increased by more than 1 percent of GDP since 2012. If the deficit had remained constant as a share of GDP, then we would have easily exceeded the one million jobs target.

The piece also mentioned that President Obama had increased spending on community colleges by $2 billion over the last four years. This is a bit more than 0.01 percent of federal spending over this period.

Note:

As Ryan Denniston rightly points out in his comment, expressing the spending on community colleges as a share of the total budget is not very helpful. As a better point of reference, the American Association of Community Colleges put the number of people taking courses at community colleges at 12.8 million in the fall of 2012. This means that the $500 million in addition annual spending secured by President Obama would come to a bit less than $40 per student per year.

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David Brooks used his column today to complain about Hillary Clinton's lack of imagination. (She will face a candidate in the general election with considerable imagination.) One of his highlights is that she has no plan to deal with the problem faced by coal miners and their communities as a result of the loss of coal mining jobs. He tells readers:

"A few decades ago there were 175,000 coal jobs in the U.S. Now there are 57,000. That economic dislocation has hit local economies in the form of shuttered storefronts and abandoned bank buildings."

While the numbers are accurate, readers may have been misled about timing. The vast majority of the job loss took place more than two decades ago and had nothing to do with recent measures to reduce greenhouse gas emissions.

Jobs in the Coal Mining Industry

coal mining jobs

Source: Bureau of Labor Statistics.

Of course this doesn't change the seriousness of the problem for the workers and communities affected, but it is important that readers be clear on its cause. The effect of measures to reduce greenhouse gas emissions are a relatively minor part of this story.

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Trying to make sense of Donald Trump's comments can be a risky business, but it is actually possible that he got it right and the NYT's Neil Irwin got it wrong on dealing with the national debt. Irwin had a NYT Upshot piece in which he discussed Trump's comments on monetary policy. Trump essentially endorsed the low interest rate policy being pursued by Janet Yellen and indicated that he would seek to appoint a Fed chair who would continue to follow this policy. (FWIW, we have yet to hear anything from Secretary Clinton on what sort of people she might appoint to the Fed.)

Irwin goes through Trump's logic on low interest rates and agrees that it is essentially right. But then he turns to Trump's comments on buying back debt at a discount:

"But Mr. Trump also suggested something that would represent a radical shift in United States policy if we take him seriously. 'I’ve borrowed knowing that you can pay back with discounts,' he said. He added, 'Now we’re in a different situation with the country, but I would borrow knowing that if the economy crashed, you could make a deal.'"

If Trump is suggesting that we will get bondholders to take a haircut on debt because the government would otherwise go bankrupt (something Trump has repeatedly done with businesses he owns) then Irwin is right. This would be a radical departure and is frankly almost inconceivable (we could just print the money).

But there is a way this can make sense. If interest rates rise, the situation Trump described, the market value of long-term debt falls. For example, a 30-year bond issued in 2015 at an interest rate of less than 3.0 percent, might sell for less than 70 percent of its nominal value if the long-term interest rate crosses 6 or 7 percent, which it certainly could.

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It is bizarre how many people feel the need to claim that a large trade deficit in manufactured goods does not cost manufacturing jobs. You can argue all sorts of things about the merits of trade, and even make a story about how a trade deficit is good (pretty hard, when we're below full employment), but it is almost impossible to tell a story that the explosion of the trade deficit between 1997 and 2006 did not cost manufacturing jobs.

Nonetheless that is the story the NYT gave its readers when discussing Indiana's economy just before the primaries this week. It presents the views of Michael J. Hicks, director of the Center for Business and Economic Research at Ball State University in Muncie, Indiana:

"Factory jobs have declined, he added, but not because of trade deals with other countries as Mr. Trump and Mr. Sanders assert, but because Indiana factories are increasingly efficient and fewer workers are needed.

"'Manufacturing employment peaked in 1973,' he said, adding that since then the productivity of Indiana factory workers has climbed 250 percent. 'We need far fewer workers, and a very different type of worker, too.'"

In the country as whole manufacturing employment peaked in the early 1970s, but then remained more or less constant, while falling as a share of total employment since the labor force grew. However employment fell sharply in the years from 2000 to 2006. While there was productivity growth in manufacturing over the years 2000 to 2006, that was also true for the years 1973 to 2000. The difference in the years 2000 to 2006 was the sharp rise in the trade deficit.

This was also the story in manufacturing employment in Indiana, as can be seen in the graph below.

Manufacturing Employment in Indiana

Indiana man

                                                                    Source: Bureau of Labor Statistics.

As can be seen, manufacturing employment had been rising through the 1990s recovery. It peaked in December of 1999 at 672,200 and then fell to 556,700 by December of 2006, a drop of almost 20 percent. Employment fell further during the 2008-2009 recession, although it has recovered the ground lost. Anyhow, the data certainly seems to support the case that Indiana lost a large number of jobs due to trade in the years 1999-2006, it's not clear why the NYT would want to deny this fact.

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Thomas Friedman really is a gift to the world. As a long established New York Times columnist and author of many widely touted books, he is a great source of insight into establishment thinking. He comes through brilliantly in his column today.

Friedman's basic story is that the two parties need to work out compromises, like the "Grand Bargain" on the budget, that President Obama tried to negotiate in 2011 with then Speaker John Boehner. Friedman blames the intransigence of the Republicans for failing to come to an agreement on this and other important issues. He argues that Trump is where this extremism gets them. His hope is that now the Republicans will move to the center and work out the deals that Friedman would like to see.

It's good to see that Friedman is looking forward to working with Republican centrists again, but let's look at the nature of his argument. Basically his story is that the truth lies in the center and these know nothing types need to be chased out of the political debate:

"In this vortex [the 2008 economic collapse and the political polarization that followed] a lot of the public got unmoored and disoriented, opening the way for populists with simple answers. Get rid of immigrants, end trade with China or eliminate big banks and all will be fine. It’s nonsense."

Friedman is right that it is nonsense, but it is also not what anyone is saying. Even Donald Trump doesn't propose getting rid of all immigrants, which is not to say that his plan for departing 11 million unauthorized immigrants is not absurd and inhumane. And neither Trump nor Sanders proposed ending trade with China. And, while Sanders agrees with many leading economists that breaking up the big banks is important, he has certainly never implied that this would somehow make everything fine.

In short, Friedman is making up absurd positions, attributing them to the people he doesn't like, and using this as an excuse to throw them out of the discussion. He wants to leave it to the real experts.

Okay, let's see how the experts have done, starting with some of the details of the "Grand Bargain." As Friedman reminds us, a big part of the Grand Bargain was cutting Social Security and Medicare. Is it really true, that in a world where few workers now have traditional pensions and most are not able to accumulate substantial sums in 401(k)s or other savings, Social Security is too generous? The vast majority of the public does not hold this view. On what basis has Thomas Friedman decided it is true?

With Medicare the problem is a wasteful health care system, not the coddling of the over 65 population. One of the ironies, that has apparently escaped Friedman's attention, is that the slowdown in health care cost growth over the last six years has actually led to more savings in Medicare than had been sought by Bowles and Simpson in their deficit cutting plan that was the basis for the Grand Bargain.

Of course the whole idea that we needed to reduce the deficit in an economy that was and is still well below its full employment level of output is wrong. Had the Grand Bargainers gotten their way in 2011, the recovery would have been even slower and weaker.

But this is the real story of the establishment. After all, the 2008 crash was not a rare weather event that struck the country and the world unexpectedly. It was the result of the incompetence of our country's leading economists in both parties. They could not see the dangers in an $8 trillion housing bubble.

A similar story applies in foreign policy circles, where many foreign policy experts were prepared to believe the Bush administration's transparent lies about Saddam Hussein's weapons of mass destruction. And, they actually thought that the United States could go into Iraq and put in place a stable government that enjoyed popular support.

The amazing part of the story is that the establishment types pay no price for being wrong in really big ways in their areas of expertise. This is best exemplified by Friedman himself. He can be wrong on every single thing he writes, every day of his life, and it will not in any way jeopardize his standing as one of the country's most respected commentators on policy and politics.

And he wonders why the public is angry.

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Eduardo Porter used his weekly column to chronicle Brazil's economic course over the last two decades. He argues that many of its current problems are due to excessive government involvement in the economy in imposing price controls and trade barriers.

While there is likely some truth to this argument, it is worth extending Porter's warning to patent and copyright protection. These forms of protection are equivalent to tariffs of many thousand percent, they typically raise the price of protected items by ten or even a hundred times the free market price.

The rationale for this protection is to promote innovation and creative work, but the market doesn't care about the rationale, raising prices by 2000 percent above the free market price has the same impact whether we call the cause a "tariff" or a "patent." And, patents and copyrights do affect a very large segment of the economy. In the case of prescription drugs alone, patents and related protection likely add close to $380 billion (@ 2.1 percent of GDP) to the what the country pays for drugs each year.

If anyone wants to give advice to developing countries, avoiding the protectionism that the United States is trying to impose in deals like the Trans-Pacific Partnership would be a good place to start. These deals would both create enormous economic distortions through their impact on the prices of protected products and also be a substantial drain on these countries economies, since the income from the patents and copyrights will mostly go to foreign corporations.

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That's what a Reuters article in the NYT inadvertently told readers. The piece begins by telling readers:

"Some of the richest, smartest and most powerful humans have an important message for the rest of us as they convened this week to discuss pressing global issues: the robots are coming.

"At the Milken Institute's Global Conference in Beverly Hills, California, at least four panels so far have focused on technology taking over markets to mining - and most importantly, jobs."

The piece goes to blame technology for destroying large numbers of middle class jobs, which it argues is a main cause of wage stagnation. The problem is that if these smart and powerful people had access to the Bureau of Labor Statistics website (BLS) they would know that productivity growth (the rate at which robots and other technologies are taking our jobs), has been extremely slow over the last decade, as in the opposite of fast.

This means that we have to look to other causes of inequality, like boneheaded macro policy that leaves millions unemployed, trade policy that displaced millions of manufacturing workers, and longer and stronger patent and copyright protection that make the rest of us pay larger rents for drugs, software, and other protected items.

But the rich and powerful prefer the robot story, and apparently, because they are rich and powerful, they can get the media to take it seriously.

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President Obama continued the administration’s boasting about how the Trans-Pacific Partnership (TPP) will eliminate Vietnam’s tariff on exports of U.S. whale meat. You may have missed it, but this tariff, along with Malaysia’s tariff on U.S. exports of shark fins, and Japan’s tariff on our ivory exports, are among the 18,000 tariffs that President Obama said would be eliminated by the TPP in a Washington Post column today.

This 18,000 tariff figure was intended to sound very impressive, but according to Public Citizen the United States doesn’t export at all in more than half of the categories and in almost all the ones in which it does export the tariffs are already low. One important exception is tobacco. Several of the countries in the TPP have high tariffs on U.S. tobacco exports, so the TPP will be making cigarettes cheaper for kids in Vietnam, Malaysia, and elsewhere.

President Obama framed the TPP as an anti-China measure, warning readers:

“As we speak, China is negotiating a trade deal that would carve up some of the fastest-growing markets in the world at our expense, putting American jobs, businesses and goods at risk.”

Actually, this is not the way the economy works. If China reduces trade barriers with other countries in Asia, allowing the region to grow more rapidly, then it should also make the United States more prosperous. The region would be a bigger source of demand for U.S. exports and a more efficient provider of goods and services to the United States. That was exactly the logic of the Marshall Plan that helped to rebuild West Europe after World War II. Greater economic integration in the region, even if engineered in part by China, is something that the United States should applaud, not fear.

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A NYT article on Donald Trump's threats to impose high tariffs on Chinese imports discussed the possibility that Trump might seek rules that addressed policies aimed at currency management. The piece included the strange assertion that:

"A central problem is defining currency manipulation in a way that excludes the United States — in particular, the Federal Reserve’s post-recession stimulus campaign, which had the effect of weakening the dollar much in the same way that other countries do to their currency."

Actually it is difficult to see the problem here. Currency management ("manipulation" is a peculiar term, since it is generally done in the open) involves buying another country's bonds, the Fed's quantitative easing program involved buying U.S. bonds. It's not clear what the basis for confusion is.

 

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Washington Post editorial writer Charles Lane appeared to be throwing in the towel on the Post's dream of cutting Social Security and Medicare in a column headlined, "Entitlement Reform, RIP." The piece recounts a sad story whereby the bulk of currently scheduled federal spending is already committed to entitlement programs like Social Security, Medicare, and Medicaid:

"Seventy-five percent of planned federal spending between now and the end of the next two presidential terms is mandatory: Social Security, Medicare and other entitlement programs, plus interest on the national debt, according to Congressional Budget Office forecasts. That money is going out the door no matter who’s president."

The piece complains that this indicates a lack of democracy, since it means that spending will have been committed by past decisions. Of course a problem with this story is that voters seem to overwhelmingly support this spending, as Lane complains:

"Moreover, if the primary results demonstrate anything so far, it is that voters of both parties oppose trimming entitlements, especially the two giants, Social Security and Medicare, that benefit the elderly."

So, we are suffering from a lack of democracy because voters are getting what they want? Only in the Washington Post.

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My guess is that many people reading this NYT article on Europe's GDP growth will think that its 0.6 percent rate was only slighly better than the anemic 0.5 percent rate the U.S. had just reported for the first quarter. Actually, it is a lot better, because the the European Union (EU) rate is a quarterly growth rate, while the U.S. rate is an annualized growth rate. If the EU growth rate were also annualized, it would be approximately 2.4 percent.

In Europe and many other parts of the world it is standard to report growth figures at quarterly rates. In the United States they are always reported at annualized rates. This is no big deal as long as everyone is clear which rates they are using, but it is likely that many NYT readers will see the 0.6 percent figure and assume it is an annualized number. (The piece does indicate it is quarterly growth.)

The simplest solution would seem to be to just report all numbers as annual rates. It's a pretty simply conversion that NYT economics reporters should be able to do in a second.

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Neil Irwin noted the incredibly weak productivity growth of the last six years and then considered three possible explanations. Unfortunately, he left out what may be the plausible one: labor is cheap.

The high unemployment of the last seven years has left many people desperate for work. As a result, they are willing to work for very low wages. If businesses can get people at very low wages, they don't mind having them do relatively low productivity tasks. For example, Walmart will have large numbers of workers standing around waiting to help customers. Convenience stores will remain open all night even though only a few people an hour may come in between midnight and 5:00AM.

If these stores had to pay workers higher wages, then many of these jobs would disappear. This would raise average productivity by eliminating many of the least productive jobs. If the Fed doesn't raise rates to reduce the pace of job creation, we may get a chance to test this theory.

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Andrew Ross Sorkin presented a confused account of the state of the economy and economic policy under President Obama. The account repeats many self-serving comments from Obama without comment and offers little useful context to readers.

The confusion starts early when he reports Obama's complaint that he doesn't get sufficient credit for the economy's strength, pointing out:

"His economy has certainly come further than most people recognize. The private sector has added jobs for 73 consecutive months — some 14.4 million new jobs in all — the longest period of sustained job growth on record. Unemployment, which peaked at 10 percent the year Obama took office, the highest it had been since 1983, under Ronald Reagan, is now 5 percent, lower than when Reagan left office."

The economy has also seen close to 3 million prime age workers (ages 25-54) drop out of the labor force. No one had predicted this back in 2009 when President Obama took office. The number of people who are working part-time involuntarily is still close to 1.7 million above their pre-recession level. No one had expected this back in 2009 either.

The 73 consecutive months of private sector job growth, "the longest period of sustained job growth on record," is kind of a joke. This is sort of like a weak scoring basketball player telling a reporter about the number of consecutive games in which he scored points, it is an utterly meaningless statistic. It is the average job growth, GDP growth, and improvement in living standards that matter, not the monthly job creation streak. (And President Obama wonders why people don't feel better.)

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Sorry couldn't resist, but the lecture on why we should not care about manufacturing jobs from Eduardo Porter brought it out in me. Porter makes many valid points. Manufacturing has been declining as a share of total employment in the United States for half a century. The same is happening almost everywhere else in the world. And, he's right that the main cause has been productivity growth.

But that doesn't change the fact that the huge explosion in the trade deficit in the decade following 1997 led to a collapse of manufacturing unemployment. This drop in employment had a huge impact on large segments of the workforce.

Manufacturing Employment

manufacturing jobs

Source: Bureau of Labor Statistics.

The surge in the trade deficit, which did not have to happen (i.e. it was the result of policy) and could be reversed, cost 20 percent of manufacturing employment in a very short period of time. It is reasonable for politicians to talk about this policy even if the pundits don't like it.

The other point is that opponents of "walls" should pay attention to patents. These are not god-given or natural features of the market. U.S. policy has been focused on making patent and copyright protection longer and stronger for the last four decades. To engage in this sort of policy and then wonder why income is being redistributed upward is a bit like filling a body with bullets and then wondering why the person is dead.

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Why are none of the "free trade" members of Congress pushing to change the regulations that require doctors go through a U.S. residency program to be able to practice medicine in the United States? Obviously they are all protectionist Neanderthals.

Will the media ever stop the ridiculous charade of pretending that the path of globalization that we are on is somehow and natural and that it is the outcome of a "free" market? Are longer and stronger patent and copyright monopolies the results of a free market?

The NYT should up its game in this respect. It had a good piece on the devastation to millions of working class people and their communities from the flood of imports of manufactured goods in the last decade, but then it turns to hand-wringing nonsense about how it was all a necessary part of globalization. Actually, none of it was a necessary part of a free trade.

First, the huge trade deficits were the direct result of the decision of China and other developing countries to buy massive amounts of U.S. dollars to hold as reserves in this period. This raised the value of the dollar and made our goods and services less competitive internationally. This problem of a seriously over-valued dollar stems from the bungling of the East Asian bailout by the Clinton Treasury Department and the I.M.F.

If we had a more competent team in place, that didn't botch the workings of the international financial system, then we would have expected the dollar to drop as more imports entered the U.S. market. This would have moved the U.S. trade deficit toward balance and prevented the massive loss of manufacturing jobs we saw in the last decade.

The second point is political leaders are constantly working to make patents and copyrights stronger and longer. This raises the price that ordinary workers have to pay for everything from drugs to computer games. The result is lower real wages for ordinary workers and higher incomes for the beneficiaries of these rents. It also slows economic growth since markets are not smart enough to distinguish between a 10,000 percent price increase due to a tariff and a 10,000 percent price increase due to a patent monopoly. (In other words, all the bad things that "free trade" economists say about tariffs also apply to patents and copyrights, except the impact is far larger in the later case.)

Finally, the fact that trade has exposed manufacturing workers to international competition, but not doctors and lawyers, was a policy choice, not a natural development. There are enormous potential gains from allowing smart and ambitious young people in the developing world to come to the United States to work in the highly paid professions. We have not opened these doors because doctors and lawyers are far more powerful than autoworkers and textile workers. And, we rarely even hear the idea mentioned because doctors and lawyers have brothers and sisters who are reporters and economists.

 

Addendum:

Since some folks asked about the botched bailout from  the East Asian financial crisis, the point is actually quite simple. Prior to 1997 developing countries were largely following the textbook model, borrowing capital from the West to finance development. This meant running large trade deficits. This reversed following the crisis as the conventional view in the developing world was that you needed massive amounts of reserves to avoid being in the situation of the East Asian countries and being forced to beg for help from the I.M.F. This led to the situation where developing countries, especially those in the region, began running very large trade surpluses, exporting capital to the United States. (I am quite sure China noticed how its fellow East Asian countries were being treated in 1997.)

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