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Article Artículo

The End of China Bashing: Toward a Serious Discussion of the Trade Deficit

Paul Krugman and Ezra Klein both say, following Joe Gagnon, that the time for criticizing China for "currency manipulation" has passed. This is partly true in the sense that China's currency has risen substantially in real terms against the dollar over the last few years. However this does not mean either that the relative value of the dollar and the yuan is now at a sustainable level or that China is not continuing as a matter of policy to prop up the dollar against its currency.

To see the former point, it is important to remember that China is a fast growing developing country. Ordinarily such countries are expected to run large trade deficits. The idea is that capital can be better used in fast growing countries like China than in slow growing wealthy countries. Since capital will get a higher return in developing countries, we expect capital to flow from rich countries to poor countries. The flow of capital would imply a trade deficit for developing countries. Effectively this trade deficit would allow developing countries to sustain consumption levels even as they build up their capital stock. 

China, along with many other fast developing countries, is running a large trade surplus. This is not sustainable. To see this point imagine we have a developing country that is growing at the rate of 7 percent annually, the slower rate of growth that China is now seeing. Suppose it sustains a trade surplus of 3.5 percent of GDP, roughly the amount projected by the IMF for the next five years. For simplicity we'll make the United States the only other country in the world and have it grow at a 2.5 percent annual rate.

If China and the U.S. start at the same size, after 20 years China's annual trade surplus will be equal to 8.3 percent of U.S. GDP. To have sustained this surplus it will have bought an amount of assets that exceeds 100 percent of U.S. GDP in 2032. If we carry this out another twenty years then the annual deficit in the U.S. will be 19.5 percent of GDP and China's holdings of U.S. assets will exceed 300 percent of 2052 GDP. Clearly this does not make sense and we will not see these sorts of deficits running in the wrong direction indefinitely.

As far as the second part, China is still accumulating U.S. assets as part of an official policy of pegging its exchange rate. In other words it is deliberately propping up the dollar against its currency.

The point that Gagnon makes is that China is not alone in this exercise and it is not even the biggest culprit, relative to the size of its economy. In this sense the China-bashing that Governor Romney and other politicians have practiced is inappropriate.

Dean Baker / October 22, 2012

Article Artículo

The Washington Post Tries to Scare You on Public Sector Pensions

The Washington Post rarely tries to conceal its contempt for unions or middle class workers. In keeping with this spirit it ran a column today that was intended to scare readers about the extent to which public sector pensions will impose a burden on taxpayers in the years ahead. The column projects that the unfunded liabilities of public sector pensions will require:

"on average, a tax increase of $1,385 per U.S. household per year would be required, starting immediately and growing with the size of the public sector."

Now that's pretty scary, right? It sure looks like we better go after those public sector workers and their generous pensions.

The column, by two finance professors, Robert Novy-Marx of Rochester University and Joshua Rauh from Stanford, uses two simple tricks to generate its scary projections of household liabilities. First is assumes that pensions will receive impossibly low returns on their assets. The piece notes:

"These finding were calculated assuming that states invest somewhat cautiously and achieve annual returns of 2 percent above the rate of inflation. But even if states continue to make massive bets that the stock market will bail them out, and if the market were to perform as well over the next 30 years as it did over the past half-century (an unprecedented bull market), the required per-U.S. household tax increase would still amount to $756 per year."

Actually, all the stock market has to do to get us to this $756 per year figure is to grow at the same pace as the economy. Using the standard growth projections from the Congressional Budget Office and other official forecasters, if the price to earnings ratio in the stock market remains constant over the next 30 years then we will see the lower liability figure than the pension funds themselves project.

This is hardly a heroic assumption. In fact, unless Novy-Marx and Rauh want to dispute the official growth projections, it is almost impossible to construct scenarios in which stock returns will come in much below the levels assumed by the pension funds.The point is simple, it was absurd to project high returns in the stock market in the late 90s, when the ratio of stock prices to trend earnings was over 30 to 1 or even in the last decade when it was still over 20 to 1. However with a current ratio that is close to the historic average of 15 to 1, real returns of 7 percent are very reasonable. People who understand the stock market and saw the stock bubble could have explained this fact to Post readers, but such views are excluded from the pages of the Post in order to avoid embarrassing its writers, editors, and columnists, all of whom completely missed both the stock and housing bubbles.

Dean Baker / October 21, 2012

Article Artículo

What Krugman Said, With a Not So Small Addendum

In his latest blogpost Paul Krugman makes the point that the recoveries from financial crises have in general been slow and difficult, but that they need not be. The point is that this downturn is not like the severe downturns in the 74-75 or 81-82, because they were both driven by the Fed raising interest rates to combat inflation. That left the obvious corrective step of lowering interest rates, which in both cases prompted a swift recovery.

That option does not exist today because this downturn was brought about a collapsed housing bubble, not the Fed raising interest rates. Okay, I just gave my addendum to the Krugman story. Yes, we did have a financial crisis in the fall of 2008. This crisis did hasten the pace of the downturn, but it was and is not the story of the recession. We would be in pretty much the same place today even if the financial crisis had not happened.

It is difficult to see any obvious way in which the current state of the financial system is seriously impeding recovery at this point. Unlike Japan, mid and large size firms in the United States have direct access to capital markets and are now able to borrow at record low interest rates. While some potential homebuyers are finding it more difficult to get mortgages than in the mid-90s (that's the relevant comparison, not the nuttiness of the bubble years), the impact of restoring 90s era credit conditions for homeowners on the housing market would be trivial, especially if it went with mid-90s interest rates. In short, the problems of the economy are not directly related to the financial crisis.

Nor are they directly related to indebtedness. The ratio of current consumption to disposable income is still high by historical standards, not low. While the consumption share of disposable income is not at the peak of the stock bubble of the housing bubble, when the saving rate was near zero, it remains far above the average for the 60s, 70s, the 80s or even the 90s. There is simply no reason to expect consumption to return to bubble levels when the bubble wealth that drove it has disappeared.

consump-disp-09-2012

Source: Bureau of Economic Analysis.

This gets to the more fundamental story of a recession driven by a collapsed housing bubble. We were able to reach near full employment at the peak of the bubble as a result of demand created by an extraordinary construction boom and consumption boom. The overbuilding of the bubble years led housing construction to fall well below trend levels. With the excess supply now being eroded by a growing population, housing construction will return to trend levels, but not the levels of the bubble years. This leaves a gap in demand of roughly 2 percentage points of GDP or $300 billion. 

Consumption has already returned to a reasonable, if not excessive, share of disposable income. Are most households saving enough for retirement? The answer is almost certainly not, especially given the stated desire of the leadership of both parties to cut Social Security and Medicare benefits. This means that we have zero reason for expecting the consumption share of disposable income to go still higher, absent the return of another bubble.

Dean Baker / October 20, 2012

Article Artículo

Honduras

Latin America and the Caribbean

World

Honduras’ Violent “Hot Spots” Help Propel Homicides to a New Record High

Several new op-eds and articles highlight problems with the U.S. government’s support for the post-coup government of Pepe Lobo in Honduras. New U.N. data reveals that the homicide rate in Honduras – already infamous as the “murder capital of the world” -- has gone up even further, to 92 murders per 100,000 people, over 82 a year ago. This makes Honduras far and away the most murderous country in Latin America (despite what some journalists have contended), and well above that of violent neighbors such as El Salvador (69 per 100,000) and Guatemala (38.5 per 100,000).

As scholars such as Dana Frank, in numerous articles in The Nation, The New York Times, and now Foreign Affairs, have pointed out, the increase in killings has resulted from the climate of instability in the wake of the 2009 coup, which was supported by the Obama administration. While coup opponents, journalists, the LGBT community, and women have been targets of post-coup violence across the country, Honduras is also now home to more than one “hot spot” of bloodshed since the coup.

The 2009 coup against democratically elected president Manuel Zelaya cut short a land reform process that sought to resolve conflict in the Aguán Valley region where a few rich landholders have been able to acquire huge swaths of land at the expense of impoverished peasants. “Armed commandos pass[ed] menacingly through defenceless villages during the days after the coup,” as “The government has converted the area of these agrarian conflicts in Bajo Aguán into a war zone” with “low-flying military helicopters and planes" and “the peasants of the region’s organized movement suffer from kidnappings, torture and murders,” a September 2011 report [PDF] by the International Federation for Human Rights noted. The most notorious of these land owners is Miguel Facussé, uncle of former president Carlos Flores Facussé. Miguel Facussé is considered by the U.S. government to be involved in drug trafficking, and is frequently described as the “most powerful man in Honduras.” Facussé also has tourism interests in the Gulf of Fonseca area, on the other side of the country on the Pacific Coast, where forced evictions are also occurring and community radio stations and journalists covering them have been targeted with death threats, shut downs, and arrests.

CEPR / October 19, 2012

Article Artículo

Hot Air from David Brooks on Clean Energy and Global Warming

David Brooks is trying to do his best to help the Romney campaign, but apparently he hasn't been getting the memos. Brooks' column today is a diatribe against measures to promote clean energy. (That would be socialist items like tax credits for retrofitting buildings, solar panels, or fuel efficient cars. The same sorts of policies that were promoted under President Bush, albeit on a smaller scale.)

There are a number of things that are not quite right in Brooks' piece, but my favorite is Brooks' assertion:

"The biggest blow to green tech has come from the marketplace itself. Fossil fuel technology has advanced more quickly than renewables technology. People used to worry that the world would soon run out of oil, but few worry about that now. Shale gas, meanwhile, has become the current hot, revolutionary fuel of the future.

... the oil and gas sector is investing a whopping $490 billion a year in exploration."

Oh no, Governor Romney has been running around the country trying to tell people how President Obama's horrible energy policy has blocked drilling for fossil fuels and sent gas prices soaring and now David Brooks is telling us that the great breakthroughs in fossil fuels and massive amounts of drilling has caused energy prices to plummet. Brooks' story is that the progress in drilling for fossil fuels in the Obama years has made clean energy uncompetitive.

This is horrible, Brooks is 180 degrees at odds with the Romney message. Someone better get Brooks with the program, even ardent Republicans might find it difficult to accept that energy prices are both too high and too low.

Okay, but there's much more fun in this Brooks column. His big gotcha indictment of Obama's clean energy program as a failure is:

Dean Baker / October 19, 2012