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).
Mark Landler used his "White House Letter" column to tell readers that President Obama will "need his oratory powers to sell globalization." This assertion is wrong. Landler is referring to the Trans-Pacific Partnership (TPP) which can more accurately be described as a protectionist agenda than globalization.
The reality is that the trade barriers between the United States and the other countries in the TPP are already very low. The U.S. already has trade deals with six of the other eleven countries in the TPP and even in the case of the other five most of the barriers are already at or near zero. This is why the International Trade Commission (ITC) projected that in 2032, when the gains from the deal will be mostly realized, it will have increased national income by just 0.23 percent, a bit more than one month's growth.
While the deal does little to reduce traditional trade barriers, the TPP increases protectionism in the form of stronger and longer copyright and patent protection. The provisions in the TPP will cause people to pay more for everything from prescription drugs and computer software to recorded music and old books. The impact of the protectionist measures in the TPP are likely to be much more important in slowing growth than the tariff reducing measures are in enhancing growth. (The ITC did not include the impact of stronger protections in its analysis.)
New Zealand's government estimated that the copyright extension required by the TPP, from 50 years to 70 years, would cost the country 0.023 percent of its GDP annually. This assessment implies that this one narrow provision, in a country that already has strong copyright protection, will cost the country one-tenth as much as what the ITC projected the United States will gain from the deal. The impact of the stronger protections for drugs and other products will almost certainly be many times larger than the impact of this copyright provision.
It is also worth noting that stronger patent and copyright protection shifts income upward. Not many low-income people own patents and copyrights. By making these protections stronger, under standard economic assumptions, the United States trade deficit in manufactured goods and other items will increase. (It is worth noting that the TPP does nothing to weaken the protections for highly paid professionals like doctors and dentists. These protections add over $100 billion a year to the country's health care bill.)
The TPP would also make the far-right legal doctrine of compensation for regulatory takings part of U.S. law. Under current law, if Congress or a state legislature determine that a company's pollution imposes a health or environmental hazard, they can simply prohibit the company from polluting. However, under the TPP governments would have to compensate foreign investors for the profits they would lose if they are not able to pollute.
NAFTA already has a similar provision, but TPP would greatly expand the number of companies in a position to sue for regulatory takings. It could also create a situation in which U.S. companies pressure Congress to grant them the same treatment as foreign companies in getting compensation for regulatory takings. (U.S. companies could also transfer divisions to a foreign based subsidiary or sell them to a foreign company if they thought it was likely that they could face a reduction in profits due to regulatory measures.)
It is very generous of Mr. Landler to call the push for greater protectionism and the advancement of a right-wing legal doctrine "globalization," however these actions do not fit the normal meaning of the term.
Note: this was altered slightly from an earlier version to clarify the issue on regulatory takings. Thanks to Robert Salzberg.Add a comment
Paul Krugman has again waded into trade and employment turf in his latest blog post. I agree completely with the post-Great Recession story where Krugman acknowledges that the trade deficit creates a demand gap that we have not been able to fill.
The problem is that fiscal policy is limited by a bizarre austerity cult that works to prevent larger budget deficits even though the economy clearly needs them to reach full employment levels of output. Monetary policy has been helpful, but with the Fed up against the zero lower bound there is not much more the Fed can do by way of traditional monetary policy to boost the economy. As a result, the trade deficit really does mean lost jobs.
Where I differ with Krugman is in his assessment that the trade deficit did not cost the economy jobs in the pre-recession period. He argues that we were pretty much at full employment in the period prior to the 2008 recession.
"Up through 2007 we basically had a Fed which raised rates whenever it thought the economy was overheating; in the absence of the China shock it would have raised rates sooner and faster..."
Just to refresh folks' memory, the unemployment rate was 4.0 percent as a year-round average in 2000. In the recovery, we bottomed out at 4.4 percent for several months in 2006 and 2007, although we didn't get back below 5.0 percent until the end of 2005. But the unemployment rate doesn't really tell the whole story.
The employment rate for prime age men (ages 25–54) peaked at 89.5 percent at the start of 2000. In the recovery, it never crossed 88.0 percent. When the recession hit at the end of 2007 it was at 87.2 percent, more than two full percentage points below its 2000 peak. This gap corresponds to a drop in employment among this group of more than 1 million.Add a comment
Neil Irwin raises the question of whether economists have been too single-minded in pushing efficiency, while ignoring issues of distribution. This is way, way too generous to economists. In fact, economists have been totally happy to ignore efficiency considerations when the inefficiencies redistribute income upward. This situation pops up all the time.
As I frequently point out in comments here and elsewhere, we protect doctors, dentists and other highly paid professionals from competition with their lower paid counterparts in the developing world or even other wealthy countries. We have maintained these protections even while our trade negotiators did everything they could to make steel workers and textile workers compete against their low-paid counterparts in Mexico, China, and other developing countries.
This protectionism is obviously inefficient and cost U.S. consumers more than $100 billion a year in higher medical bills and other costs. Yet economists act really dumb when questioned about it. Apparently, it never occurred to them that competent doctors could be trained in Mexico, India, or even Germany. Sorry folks, economists don't give a damn about efficiency in this case. They want to protect the income of highly paid professionals.Add a comment
It is possible to make serious arguments against Donald Trump's views on trade, but apparently the Washington Post can't find anyone with sufficient knowledge and skills. Instead they assigned Fareed Zakaria the task and he failed badly.
Zakaria tells readers:
"The appeal of both Trump and Sanders has many politicians mouthing cliches about the deep problems with globalization. It is true that two gifted populists have been able to give voice to people’s fears about a fast-changing world. But this does not alter the truth. Their central charge is false. Free trade has not caused the hollowing out of U.S. manufacturing.
"Manufacturing as a share of all U.S. jobs has been declining for 70 years, as part of a transition experienced by every advanced industrial economy."
If Zakaria had access to data from the Bureau of Labor Statistics he would have better knowledge of trends in employment in U.S. manufacturing.
Jobs in Manufacturing Industries
Source: Bureau of Labor Statistics.
As can be seen, employment in manufacturing hovered near 17.5 million from the late 1960s until 2000. At that point, the explosion in the size of the U.S. trade deficit sent employment in manufacturing plummeting. We lost roughly over 3 million manufacturing jobs in this period, almost 20 percent of total employment, before the onset of the recession. It is difficult to believe that a Washington Post columnist could be so ignorant of these data and still be writing a column on the topic.
It is also important to note that Zakaria insists on saying the United States has been pursuing a policy of free trade even though this is clearly not the case. Under U.S. law, it is necessary to go through a residency program in the United States to practice as a doctor. It is necessary to go to a U.S dental school (or recently a Canadian school) to be a dentist. Does anyone seriously believe that the only way to be a competent doctor is to go through a U.S. residency program or to be a competent dentist is to go to a U.S. dental school?
These protectionist barriers inflate the pay of both doctors and dentists and add over $100 billion a year to our health care bill. Are we supposed to believe columnists at the Post are too stupid (to use Trump's word) to notice this fact?
What about patent and copyright protection? We will spend over $430 billion this year for prescription drugs that would likely cost around one-tenth this price in a free market. This is massive protectionism that imposes enormous costs on people's health. Did this also escape Zakaria's attention? (There are more efficient ways to finance drug research.)
Trump is obviously a blowhard without a coherent trade or economic policy, but in this battle he beats Zakaria hands down.Add a comment
A new study from the European Central Bank (not official bank policy) estimated the size of the output gap in the euro area at 6.0 percent of GDP. Most analyses put the cost to the UK's from its exit from the European Union at around 2.0 percent of GDP. If the ECB's estimate of the output gap is correct, then austerity is imposing three times as much harm on the euro zone countries as Brexit is projected to impose on the UK.Add a comment
David Brooks apparently thinks he has things down. The major divide isn't between supporters of big government and small government, it's a debate between supporters of an open economy that looks to increase trade and a closed economy that looks to protectionism. This is the theme of his column that tells us about "the coming political realignment."
To make his case, he gets a lot of things wrong. For example, he seriously misrepresents research on the impact of trade liberalization. Brooks refers to a study by the Peterson Institute that "found that past trade liberalization laws added between $7,100 to 12,900 in additional income to the average household." The vast majority of the gains estimated from liberalization by this study occurred before 1980, a point at which trade was largely non-controversial. The gains estimated from the trade deals of the last quarter century (post-NAFTA) have been far more limited.
Brooks then notes a study from the Peterson Institute for International Economics which projects that the Trans-Pacific Partnership (TPP) would increase national income by $131 billion. It would have been useful to point out that this gain is projected for 2030, a point at which it would be equal to 0.5 percent of GDP. This means that if the study projections are correct, we will as wealthy on January 1, 2030 with the TPP as we would be in mid-March of 2030 without the TPP.
It is also worth noting the Peterson Institute's projection of gains from the TPP assumes the economy is at full employment. It also does not calculate any costs associated with the increased protections in the TPP as a result of stronger and longer patent and copyright protections. This increased protectionism could easily offset the projected gains from the modest tariff reductions in the TPP. It is also worth noting that the non-partisan International Trade Commission projected gains that were less than half as large (roughly one month's growth) also while assuming full employment and not counting any negative impact from the increased protections in the TPP.Add a comment
Paul Krugman has an excellent blog post ridiculing the doomsayers on Brexit. I agree with just about everything he says. His basic point is that, while the UK will pay a substantial economic price if it leaves the European Union (especially if the EU imposes punitive tariffs), there is not a plausible story that Brexit will lead to a near-term recession.
Krugman furthermore makes the point that many economists feel the need to exaggerate their case when arguing on trade. The point is that they believe their "free trade" policies to be good and therefore are willing to sort of make stuff up to advance their case. (Can you say "TPP?")
This is all very well-taken and I agree with Krugman 100 percent on these issues. Where I would differ is on the assumption that Brexit won't lead to a recession in the near-term. The argument is not that the reduction in trade resulting from the withdrawal would be so large as to lead to a recession. Rather, the reason stems from the fallout of collapsing bubbles.
There is a very credible case that the UK was experiencing a serious housing bubble, especially in the London market. Brexit may be bringing this to an end for two reasons.
First, UK real estate was seen as a safe haven for rich people across the globe. Therefore, they were willing to sink large chunks of money to purchase condos and houses in the UK. This perception of safety may no longer hold in the post-Brexit world. Instead of money flowing into London real estate it may start to flow out.
The other reason has to do with the strength of the London economy. It is virtually certain that the financial industry will take a big hit from the Brexit vote; the only question is how large a hit. The London finance boys were big buyers of London real estate. If they have to relocate to Paris, Frankfurt, or elsewhere, it could send London prices plummeting.
The net effect of a plunge in real estate prices could very well be a recession. The construction sector will see a sharp fall in demand, leading a major contraction and large-scale layoffs. Similarly, as millions of homeowners see their house prices plummet they will cut back spending in response to the loss of wealth. (Have we ever seen anything like this?)Add a comment
Sure, it's tough to get a job in reporting that pays a decent wage. But now you can get on the fast track to a successful career in journalism by writing pieces that make fun of opponents of U.S. trade policy.
No knowledge of the economic theory of trade or actual trade practices is required. You just have to be able to trivialize any argument against a current or future trade deal by saying that opponents want to end trade and close borders. Apply at the Atlantic or other major news outlets.Add a comment
Media coverage of U.S. trade policy with China and other countries has been remarkably one-dimensional. The coverage almost exclusively treats the issue as being one of relative toughness. While this is certainly the way some politicians, notably Donald Trump, speak about trade, it conceals the real issues involved.
The United States pursues a variety of agendas in its trade negotiations. Naturally, it does not get everything it wants, it prioritizes some items over others. In some areas it clearly has been very "tough" as measured by outcomes. For example, Pfizer and Microsoft and other drug, software, and entertainment companies are collecting tens of billions of dollars a year from foreign countries because U.S. trade negotiators have been very tough in demanding that these countries adopt U.S.-type rules on patents and copyrights.
The United States has also demanded that other countries allow U.S. corporations to take their complaints to special tribunals outside of their domestic legal system. This is a central feature of the newly negotiated Trans-Pacific Partnership. Undoubtedly our negotiators had to be very tough to get these countries to surrender this aspect of their national sovereignty. (We even had to make a reciprocal sacrifice of sovereignty, allowing foreign investors a route around the U.S. legal system.)
Negotiators have not been tough in pressing demands on currency values, which would have meant a lower U.S. trade deficit with countries like China. While the trade deficit matters hugely to workers, some of whom directly lose jobs to imports and others who suffer indirectly from a weak labor market (in the era of secular stagnation we have no mechanism for making up the demand lost due to a trade deficit), it actually benefits many major corporations.
Companies like GE benefit from being able to produce at low cost in countries like China. Retailers like Walmart also benefit from having low-cost supply chains in the developing world. And highly-paid professionals like doctors, who are largely protected by regulations from foreign competition, benefit from a weak labor market by being able to hire cheap help.
In this context, a call to address currency values and thereby bring down the trade deficit, is not necessarily an issue about being tough with China and other trading partners. It is an issue about what will be prioritized in trade negotiations. Presumably if these countries met U.S. demands on currency, they would be less likely to meet demands on patents and copyrights or special courts for foreign investors.Add a comment
The NYT ran an article on how France's far-right sees the vote in the UK for leaving the European Union as a boost to its own efforts. After outlining the state of anti-EU sentiment in France, the piece tells readers:
"Given the array of other issues facing France, including a near-stagnant economy and high unemployment, it remains to be seen how central an issue membership in the bloc might be in the presidential race."
Actually, since France is in the euro (unlike the UK), its stagnant economy is very directly linked to its membership in the EU. The rules imposed on it by the EU leadership have prevented it from adopting the sort of stimulus that would be needed to boost its growth and reduce unemployment. It would be very surprising if this issue were not front and center in France's presidential race since it is so important in people's lives. The EU is forcing both a deterioration in the quality of France's public services and higher unemployment with its pointless austerity policies.Add a comment
This is a serious question. BBC told readers that Fitch and Moody's both lowered their outlooks for debt issued by the British government following the Brexit vote. The question is, what do these bond-rating agencies mean when they lower the rating of a country that issues debt denominated in a currency it prints.
This issue came up back in 2011 when S&P downgraded the debt of the United States following a long standoff on a budget agreement between President Obama and the Republican Congress. While U.S. debt is also denominated in a currency we print, there was at least a not 100 percent absurd story where another standoff could lead to the government not paying its debt. (It's only 99.99999999 percent absurd.)
But in the UK there is no possible issue of a division of power blocking normal debt payments since the country has a parliamentary government. So what are the bond rating agencies telling us when they lower its debt rating? For private companies or governments that issue debt in a currency they do not issue, the meaning is clear. There is a possibility they won't have enough money to pay their debts. In the case of companies, this means a risk of bankruptcy. In the case of governments that can't go bankrupt, there is still a risk of a write-down in which creditors will have to accept less than full payment on their bonds.
But the UK will always be able to print the pounds needed to pay the bonds it has issued. So what are the credit rating agencies saying when they downgrade them. This could be seen as an inflation risk projection, except the rating agencies don't have special expertise in inflation projections and furthermore have not historically tied their ratings to inflation. For example, they did not downgrade the debt of the United States and other countries in the seventies even as inflation increased to double-digit rates. (FWIW, inflation in the UK has been close to zero in the last year.)
So what do the bond-rating agencies think they are telling us about the UK? Inquiring minds want to know.Add a comment
Phillippe Legrain began his NYT column denouncing the supporters of Brexit by noting their contempt for economic expertise. He then went on to give good reasons for such contempt.
Legrain tells readers:
"Experts are, of course, known to make mistakes. But in this case, the people who voted for Brexit will pay a big price for ignoring economic expertise. The harmful effects of this vote are both immediate and lasting.
"Britons are already worse off. The pound has — so far — plunged by nearly 9 percent against the dollar, slashing the value of British assets, with higher import prices likely to follow. The stock market has also taken a hit. The prices of property, most British people’s main asset, are almost certain to fall, too."
Actually the pound's fall was a necessary and good development in the long-run, even if it would have been better had it occurred over a longer period of time. The UK was running a trade deficit in the neighborhood of 5.0 percent of GDP (@ $900 billion in the U.S.), this was unsustainable. And, contrary to what Legrain claims in this piece, the best way to get the trade deficit down is to lower the value of the pound.
Legrain incorrectly asserts that the drop in the pound in 2008 did not lead to a reduction in the trade deficit. In fact it led to a substantial reduction, although with a 1–2 year lag as would be expected. (The pound fell from a peak of more than 1.5 euros in 2007 to just over 1.0 euro at its trough in 2008. It remained low until it began to rise sharply in 2013, reaching values of more than 1.4 euros last year, hence the large rise in the trade deficit.)
The inflow of money from abroad was fueling a housing bubble in the UK. This has priced many people out of the real estate market. Bubbles do burst, often with very bad outcomes.
The problem with bubbles is not the factor that causes them to burst, the problem is allowing them to grow in the first place. Apparently the "experts" in the UK had no idea that real estate markets could develop bubbles or that their bursting could lead to harm. The problem Legrain describes here is entirely on the shoulders of the experts, not the Brexiters.
It is also worth noting that a high stock market is not an economic good. It is a distributional measure. It means that the owners of stock have more claim on society's income. There is very little direct relationship between the stock market's value and investment. (In the U.S. the investment share of GDP peaked in the late 1970s when the stock market was in the doldrums.)
The piece also implies that the UK will face punitive tariffs from the EU after it leaves. This is possible, but the fault will then be with the EU leadership. They will be deliberately making the EU poorer so that they can extract revenge on the UK for leaving.Add a comment
That's only a small exaggeration. He touted a study by Steve Rose showing substantial income gains for upper middle class households over the last four decades. The study did not take account of the extent to which incomes rose because households had two earners, as opposed to a situation where people in the household got more pay for each hour worked.
Most people probably expect that a household would have more income if two people are working than one. Economic progress is when people get more money for each hour of work — but hey, if you have a case to sell, you make it up as you go along.Add a comment
Back in 2011 the Bank of International Settlements (BIS) began warning of the risks of run away inflation associated with the expansionary monetary policy being pursued by the Fed, the European Central Bank and other central banks. It is still making these warnings. Unfortunately, the NYT presented the warnings as being somehow new information that should interest them, rather than old predictions that had been proven wrong repeatedly.
Even better, the piece tells us that one of the main credentials of Jaime Caruana, the managing director of the BIS, is that he missed the massive housing bubble in Spain:
"It is worth noting that Mr. Caruana is familiar with asset bubbles: He was the head of Spain’s central bank a decade ago when reckless lending among the country’s financial institutions resulted in a boom and eventual bust of Spanish property prices."
Incredibly the piece only presents the views of people who are opposed to expansionary monetary policy. The views of Stephen Jen, a former official at the International Monetary Fund who now manages a hedge fund in London, figure prominently. Jen insists that we have lots of inflation, it's just in asset markets. Actually, most economists would make a clear distinction between inflation in the markets for goods and services and asset markets. The former tend to feed into inflation and can lead to a wage price spiral. The latter cannot unless Mr. Jen has developed a new theory on inflation dynamics.
The piece also misleadingly implies that rising asset prices are an important factor in wage stagnation in the UK telling readers:
"Thanks to aggressive central bank policies, house prices in London are among the most expensive in the world, yet the inflation-adjusted weekly average wage of 470 pounds, or about $632, is still £20 lower than it was before the financial crisis, according to the Resolution Foundation, a British research organization."
Actually, house sale prices don't factor into the inflation index, even if people like Mr. Jen and the reporter writing this piece want them to. The housing component that is used to measure inflation and therefore provides the basis for the real wage calculation cited here is a rental index. This will not be directly affected by house prices. In fact, the low interest rate policies of central banks are likely to go the other direction by making it easier to build more housing and thereby driving down prices.
Also, while there is a strong case that the UK again has a housing bubble (which may now burst in response to Brexit — a good thing), asset prices in most of the world are not out of line with fundamentals. The U.S. stock market has risen roughly in line with GDP from its 2007 peaks, which almost no one considered to be a bubble at the time. Most real estate prices in the U.S. are still far below bubble peaks and only modestly above trends, with the exception of some California cities.
In short, this piece is effectively an opinion piece calling for higher interest rates and an end to expansionary monetary policy. It's just a lot more confused than the typical NYT column.Add a comment
Just kidding, AP wouldn't waste readers time on anything so frivolous as the future of the planet. No, it's calling politicians irresponsible because they won't run out and cut Social Security and Medicare.
The piece is headlined, "Medicare, Social Security finance woes." The first sentence tells readers:
"The nation's framework for economic security and health care in retirement is financially unsustainable, but you wouldn't know it from listening to the presidential candidates."
Yep, the programs are unsustainable in the same way that driving west in New Jersey is unsustainable. If you keep going west, you'll end up in the Pacific Ocean. Yes, the programs face a projected shortfall, but if we waited a decade to do anything, and then put in place fixes comparable to what we did in the 1980s, the program would be fine for the rest of the century.
But hey, AP wants us to cut benefits now! You hear that, now! The piece only includes comments from advocates of cuts to emphasize that point.
Also, somehow AP failed to notice the enormous progress that has been made in reducing the projected shortfall for these two programs under President Obama. The combined shortfall has fallen by more than one-third over the eight years of the Obama administration. This is primarily due to slower growth in health care costs.
On this issue, the piece wrongly asserts that further savings in this area are unlikely. This is not true, our doctors get paid more than twice as much in doctors in other wealthy countries. There are enormous potential savings from bringing their pay in line with their counterparts in the rest of the world. There is also enormous room for savings on prescription drugs, medical equipment, and other areas.
Finally, it is striking how much ink AP and other news outlets devote to warning of the prospect of higher taxes for these programs when workers face far greater risks from the continuing upward redistribution of income. If most workers get their share of projected wage growth over the next three decades, any tax increases associated with sustaining Social Security and Medicare will be a drop in the bucket.Add a comment
An NYT article on the upcoming elections in Iceland told readers that, "gross national income per capita is down by a quarter since 2007." The I.M.F. doesn't agree. According to the I.M.F. data, per capital GDP in Iceland is around 2.0 percent higher now than its pre-recession peak. That is a very different story.
In fairness, the NYT piece refers to gross national income (GNI), not gross domestic product. Generally these are very close, but in a small country like Iceland they may differ by large amounts. GDP is usually the preferred measure, but it can be inflated by things like foreign companies claiming profits in the country for tax purposes, as happens in Ireland.
If the NYT's GNI numbers are correct, it is most likely due to foreign profits of Iceland's major banks in the bubble years before the crisis. It's not clear that the loss of these profits, which were based on speculation and fraud, is a negative for Iceland's economy.Add a comment
Jim Tankersley had an interesting piece arguing that the Brexit vote ended "globalization as we know it." I am less optimistic on that front. The folks who profit from the current path of globalization are incredibly powerful and very effective at working around democracy and things like that. But that aside, the article had an interesting graph that caught my attention.
The graph shows the ratio of international trade in goods and services to GDP over the last two decades. After rising sharply from 1995 to 2007, it has been largely flat and still has not recovered to its 2007 peak. This change in trends is of course striking.
However, there is another aspect to this story worth considering. In the debate over the productivity slowdown, there is a camp which argues that it is largely illusory. The story goes that we are undercounting GDP, and therefore productivity, because we are missing the value of things like video downloads on the web, undercounting the value of the camera in our iPhones, and other such things.
While there is obviously some non-zero amount here (we are missing some things in our GDP accounting), I have never been convinced that it could be enough to change the basic story. (Remember it has to be cumulative. If we are undercounting by 0.5 percentage points annually, after 20 years we are undercounting GDP by 10 percent.)
But this connects to the trade story in an interesting way. The items that are likely to be missed in GDP accounts are also items that are heavily involved in trade. For example, people everywhere get information, music, and videos off the web. This means that if we are even undercounting GDP by a small amount, like 0.2 percentage points, we may be undercounting trade by a large amount.
In the 0.2 percentage point case, suppose that half of this is in items that cross national borders. This means that we are understating the growth of trade by 0.1 percentage points annually. Over the stretch of time covered by the graph, this would translate into 2.0 additional percentage points of world GDP involved in trade. In this story, it is very plausible that much of the drop in the trade to GDP ratio is a result of mis-measurement, even if the measurement problem is not a big deal from the standpoint of the world as a whole.
There is one other thing worth noting in this story. Suppose the protectionists get defeated and we find a way to finance innovation and creative work other than patent and copyright protection. In that case, drugs are all cheap and books, recorded music and video material all cross borders at zero cost. This explosion in globalization would be associated with a plunge in the trade to GDP ratios. This indicates that it may not be a very good measure of what we are interested in.Add a comment
The Washington Post once again got in over its head as it tried to sort out the consequences of the UK's exit from the EU. In article on the implications for the rest of the European Union it told readers:
"A strain of fear is already running through the German government as it contemplates the loss of Britain — whose conservative prime minister, David Cameron, largely backed Chancellor Angela Merkel’s austerity crusade. Berlin now fears a “ganging up” by nations including France, Spain and Italy, which may seek to overthrow Merkel’s austerity-first policy.
"Yet, if the Germans do not lead, who will? France is too distracted, a nation mired in economic stagnation and a war on terror. The Italians and the Spanish, meanwhile, are still struggling with financial hardship, political volatility and large-scale unemployment."
See the problem here? The article tells us that France, Italy, and Spain can't lead because they are all suffering from serious internal problems. But almost all the problems cited, except for terrorism in France, are a direct result of their economic situation. And, that's right folks, the bad economic situation is the result of the austerity imposed on them by Germany with the backing of David Cameron.
So, if Germany is no longer in a position to impose its absurd austerity policies on the rest of the EU, then France, Italy, and Spain can again have normal growth and lower unemployment. Stronger economies would then make these countries much better situated to play a leading role in the European Union: problem solved.
Wasn't that easy?Add a comment
Neil Irwin had an Upshot piece trying to work through some of the fallout from the vote to leave the European Union. It is worth elaborating on a couple of the points in this piece.
First, Irwin seems to give financial markets undue credit in having a clue. He argues that the effects of the vote will be transmitted to the economy through financial markets. While this is largely true, financial markets are notoriously fickle. They often over-respond to events or even non-events, the most obvious being the 25 percent plunge in October of 1987 that wasn't linked to anything in the world. This plunge also had only a very limited impact on the economy. For this reason, it doesn't make much sense to project economic affects based on one day's market movements.
Second, Irwin highlights the 8.0 percent plunge in the value of the pound against the dollar as something that is likely to have a substantial impact on the UK economy. This is true, but a little more background here is important.
The UK was running a trade deficit in the neighborhood of 5 percent of GDP (@ $900 billion in the U.S.). This deficit was being in large part fueled by an inflow of foreign money to buy UK real estate, leading to an enormous run-up in housing prices, especially in London. This was unsustainable. (Some folks may have heard about housing bubbles but apparently it was difficult in the UK in the pre-Brexit era to get information on such things.)
Anyhow, the correction for a large trade deficit is a drop in the value of the currency. If the UK had competent economic managers, they would have tried to engineer a drop in the value of their currency. They also would have tried to prevent the bubble from growing so large. The plunge in the pound may now bring about the necessary correction in the trade deficit. It may also stop and even reverse the inflow of foreign capital to buy real estate, thereby crashing the bubble.
If that happens, then the Brexit vote will have merely brought forward events that were inevitable. While Washington Post types will inevitably engage in a round of intense finger-wagging at the Brexit voters, the real problem here was the incompetent management of the UK economy by Prime Minister Cameron and the English Central Bank.Add a comment
"Britain's exit from E.U. sends global economy into a tailspin." That was the headline of a Washington Post article on the vote in the U.K.. If you missed the tailspinning economies that's because this is just Washington Post hysteria. Obviously the Washington Post is referring to financial markets. They apparently don't realize the difference between financial markets and the real economy.
And if you don't realize they are very different then you must believe in the horrible recession of 1987. Of course there was no recession in 1987 (or 1988 or 1989), but that was when the stock market plunged more than 20 percent in a single day. This drop, which happened in every major world market, did not correspond to any identifiable event in the economy. Nor did it have any massive fallout on the world economy. But in Washington Post land it was undoubtedly a serious recession.
Unfortunately the headline did not misrepresent the nature of the piece. The first sentence tells readers:
"The global economy faces months — if not years — of slower growth as Britain’s stunning decision to abandon the European Union threw financial markets into a tailspin and darkened the outlook for corporate and consumer spending."
While the UK's departure from the EU will almost certainly have a negative impact on world growth, most of the impact will be on the UK, with a lesser effect on the EU (both will be worse if the EU imposes harsh protectionist measures as punishment — which should be the big story in the media), the impact on the U.S. economy and the rest of the world will likely be minimal.
In terms of hits to the world economy, the 2011 budget agreement that turned the U.S. sharply toward austerity was almost certainly far worse than Brexit. Of course, the Washington Post basically liked that deal so it is unlikely that it would ever make this sort of comparison.Add a comment
Back in my teaching days I would use the seriously wrong answers on student exams as valuable information telling me what concepts I need to explain better. Charles Lane's Washington Post column on a universal basic income can be used the same way. Lane clearly does not like the idea of a universal basic income (UBI), but his confused rationale ties together many common misunderstandings.
First, the whole idea of job-killing robots is more than a bit bizarre for a couple of reasons. Robots kills jobs in the same way that technology has always killed jobs. They displace human labor. We used to need far more workers to make a car than we do today, or a ton of steel, or to harvest a ton of wheat. In all of these cases we were able to use technology to accomplish more work with fewer people.
Robots are part of the same story. What possible difference can it make if a job is displaced by a robot or a more efficient assembly line? We have seen whole industries, like photographic film, wiped out by digital technology. Would the former workers at Kodak somehow be worse off if they had lost their jobs to robots than to digital cameras?
The point is that robots are productivity growth. Say that a few thousands times until it sinks in. The impact of robots on the economy is nothing more or less than any other innovation that produces the same amount of productivity growth.
And on this account the story is not terribly impressive. Lane cites an analysis by Carl Frey and Michael Osborne that claims that 47 percent of U.S. jobs are at risk due to technology over the next two decades. Now they just said these jobs were at risk, but lets assume we lose them all. That would translate into 3.1 percent annual productivity growth. That is roughly the same rate as we saw in the 1947-1973 golden age, a period of rapid wage growth and low unemployment. Are you scared yet?Add a comment