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In the middle of a useful article on the trade deficit, the Post told readers:
“Last year’s $1.5 trillion Republican cut in corporate and personal income taxes, along with the decision to eliminate congressional limits on government spending, has revved up the economy and created nearly $1 trillion budget deficits for the coming years that require financing from abroad.”
This is not exactly true.
When the government borrows more money, it pushes upward pressure on interest rates, other things equal. At higher interest rates, foreign investors may choose to buy more US government bonds, but it is also possible that domestic investors will opt to buy more US bonds, as opposed to other assets. This is the reason that interest rates on mortgages and corporate debt have risen in the last year. Investors who might have otherwise held these assets are instead choosing to buy government bonds.
If no foreigners opted to buy the newly issued debt, interest rates would rise to the point where enough US investors were willing to hold the debt. The fact that foreigners are willing to buy US bonds means that interest rates would not rise as much as would otherwise be the case (holding the response of the Fed constant), but the US does not need foreigners to buy our debt.
In the middle of a useful article on the trade deficit, the Post told readers:
“Last year’s $1.5 trillion Republican cut in corporate and personal income taxes, along with the decision to eliminate congressional limits on government spending, has revved up the economy and created nearly $1 trillion budget deficits for the coming years that require financing from abroad.”
This is not exactly true.
When the government borrows more money, it pushes upward pressure on interest rates, other things equal. At higher interest rates, foreign investors may choose to buy more US government bonds, but it is also possible that domestic investors will opt to buy more US bonds, as opposed to other assets. This is the reason that interest rates on mortgages and corporate debt have risen in the last year. Investors who might have otherwise held these assets are instead choosing to buy government bonds.
If no foreigners opted to buy the newly issued debt, interest rates would rise to the point where enough US investors were willing to hold the debt. The fact that foreigners are willing to buy US bonds means that interest rates would not rise as much as would otherwise be the case (holding the response of the Fed constant), but the US does not need foreigners to buy our debt.
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The Washington Post told readers that when the deficit figures for 2018 were released last month:
“The announcement unnerved Republicans and investors, helping fuel a big sell-off in the stock market.”
The claimed impact on the market seems implausible. In April, after analyzing the effect of the tax cuts, the Congressional Budget Office (CBO) projected the deficit for the 2018 fiscal year would be $804 billion. The figure for the deficit that was reported last month was $779 billion, $25 billion less than what CBO had projected six months earlier. It is hard to believe that a deficit that was slightly lower than projected could cause a big sell-off in the stock market.
It is also worth noting that this piece makes zero effort to put any numbers in context. Since almost none of the Post’s readers has any idea of the meaning of the deficit and debt numbers used in the piece, it is difficult to see why they would use them. It is not hard to express these numbers as a share of GDP and relative to the size of past deficits, measured as a share of GDP. In fact, CBO actually expressed the deficits and debt as shares of GDP in its report, so it is not even necessary to do the arithmetic.
The Washington Post told readers that when the deficit figures for 2018 were released last month:
“The announcement unnerved Republicans and investors, helping fuel a big sell-off in the stock market.”
The claimed impact on the market seems implausible. In April, after analyzing the effect of the tax cuts, the Congressional Budget Office (CBO) projected the deficit for the 2018 fiscal year would be $804 billion. The figure for the deficit that was reported last month was $779 billion, $25 billion less than what CBO had projected six months earlier. It is hard to believe that a deficit that was slightly lower than projected could cause a big sell-off in the stock market.
It is also worth noting that this piece makes zero effort to put any numbers in context. Since almost none of the Post’s readers has any idea of the meaning of the deficit and debt numbers used in the piece, it is difficult to see why they would use them. It is not hard to express these numbers as a share of GDP and relative to the size of past deficits, measured as a share of GDP. In fact, CBO actually expressed the deficits and debt as shares of GDP in its report, so it is not even necessary to do the arithmetic.
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The media have been touting a new foreign aid initiative by the Trump administration which will create an agency that will provide $60 billion worth of loans, loan guarantees, and insurance for investments in developing countries. This is portrayed as an effort to counter China’s growing influence in the developing world.
It would have been helpful to put this number in some context. First, if this is an effort to counter China, it is likely to come up short. China has already paid out more than $900 billion as part of its “One Belt, One Road” initiative. Presumably, its spending will increase in this area in the decade ahead.
The second point is that news articles should put the number in some context for readers who are concerned that all their tax dollars are going to foreign aid. This money is being dispensed to subsidize loans, guarantees, and insurance. It is not a handout. If we assume that 20 percent of the money is a subsidy (i.e. allowing below market rates), this would amount to $12 billion. That would come to a bit more than 0.2 percent of federal spending, at the point where it reaches the $60 billion mark, presumably in around five years.
Note: This is corrected from an earlier version, which did not treat the $12 billion as an annual subsidy.
The media have been touting a new foreign aid initiative by the Trump administration which will create an agency that will provide $60 billion worth of loans, loan guarantees, and insurance for investments in developing countries. This is portrayed as an effort to counter China’s growing influence in the developing world.
It would have been helpful to put this number in some context. First, if this is an effort to counter China, it is likely to come up short. China has already paid out more than $900 billion as part of its “One Belt, One Road” initiative. Presumably, its spending will increase in this area in the decade ahead.
The second point is that news articles should put the number in some context for readers who are concerned that all their tax dollars are going to foreign aid. This money is being dispensed to subsidize loans, guarantees, and insurance. It is not a handout. If we assume that 20 percent of the money is a subsidy (i.e. allowing below market rates), this would amount to $12 billion. That would come to a bit more than 0.2 percent of federal spending, at the point where it reaches the $60 billion mark, presumably in around five years.
Note: This is corrected from an earlier version, which did not treat the $12 billion as an annual subsidy.
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The NYT reported that the Trump administration is considering replacing the tariffs it imposed on aluminum and steel imports from Mexico and Canada with a system of quotas. There is an important economic dimension to such a shift that was left out of the piece.
If the US imposes a tariff on an import then it is effectively imposing a tax on US consumers. The government gets to keep the revenue. For example, if steel is imported at a price of $700 a ton and we impose a 10 percent tariff, then the price of steel to consumers rises to $770 a ton with the government getting $70 for each ton that is imported. (For simplicity, this assumes that the tariff does not affect the price of the steel. In reality, it will fall somewhat in response to the tariff.)
If we impose a quota that leaves imports at the same volume as with the tariff, then the price of steel will rise to the same level, or $770 a ton. However, in this case, while steel consumers are paying the same higher price, the money is not going to the government. The extra $70 a ton is going to the steel producers.
While restricting the volume of their sales, the US government is allowing foreign producers to get more profit on each ton of steel they expect to sell to the United States. For this reason, quotas are generally much more acceptable to our trading partners than tariffs.
When the United States imposed quotas on Japanese car exports in the 1980s (actually “voluntary export restraints”) Japanese manufacturers used it as an opportunity to move into more upscale cars. Originally, Toyota and Honda made large inroads into the US market by competing in the bottom segment of the market. Since they were limited in the quantities they could sell, they could make more money per car competing in the higher end of the market.
The NYT reported that the Trump administration is considering replacing the tariffs it imposed on aluminum and steel imports from Mexico and Canada with a system of quotas. There is an important economic dimension to such a shift that was left out of the piece.
If the US imposes a tariff on an import then it is effectively imposing a tax on US consumers. The government gets to keep the revenue. For example, if steel is imported at a price of $700 a ton and we impose a 10 percent tariff, then the price of steel to consumers rises to $770 a ton with the government getting $70 for each ton that is imported. (For simplicity, this assumes that the tariff does not affect the price of the steel. In reality, it will fall somewhat in response to the tariff.)
If we impose a quota that leaves imports at the same volume as with the tariff, then the price of steel will rise to the same level, or $770 a ton. However, in this case, while steel consumers are paying the same higher price, the money is not going to the government. The extra $70 a ton is going to the steel producers.
While restricting the volume of their sales, the US government is allowing foreign producers to get more profit on each ton of steel they expect to sell to the United States. For this reason, quotas are generally much more acceptable to our trading partners than tariffs.
When the United States imposed quotas on Japanese car exports in the 1980s (actually “voluntary export restraints”) Japanese manufacturers used it as an opportunity to move into more upscale cars. Originally, Toyota and Honda made large inroads into the US market by competing in the bottom segment of the market. Since they were limited in the quantities they could sell, they could make more money per car competing in the higher end of the market.
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The NYT featured a news analysis by Mark Mazzetta and Ben Hubbard that discussed Trump’s willingness to ignore the Saudi murder of reporter Jamal Khashoggi in their embassy in Turkey. The piece begins by telling readers that this decision:
“…showed the extent to which he believes that raw, mercantilist calculations should guide the United States’ decisions about the Middle East and the wider world.”
It later adds, “American jobs outweigh American values.”
The piece presents no evidence as to why we would believe that the issue of American jobs plays an especially important role in Trump’s decision. He did announce a weapons deal with Saudi Arabia, which is likely to amount to around 10,000 jobs, assuming that these weapons would not be sold elsewhere if the Saudis didn’t buy them.
The number of jobs is equal to a bit more than 0.007 percent of total employment in the economy. Or, to take another measure, it is a bit more than the number of jobs the country would create in three days at its pace of job growth over the last six years.
It doesn’t seem likely that a president would make major foreign policy decisions over such a small number of jobs. An alternative that is at least as plausible is that Trump is rewarding a good customer at his hotels. The Saudis have been major renters of rooms at Trump hotels since he took office. While Trump refuses to disclose information on the money he receives from the Saudis (in violation of past precedent and possibly the constitution), it is likely considerable.
Given Trump’s continuing concern with the state of his financial empire (why else won’t he divest?), it seems very plausible that this would be the basis for his foreign policy decisions. It certainly seems more likely than three days worth of job creation.
The NYT featured a news analysis by Mark Mazzetta and Ben Hubbard that discussed Trump’s willingness to ignore the Saudi murder of reporter Jamal Khashoggi in their embassy in Turkey. The piece begins by telling readers that this decision:
“…showed the extent to which he believes that raw, mercantilist calculations should guide the United States’ decisions about the Middle East and the wider world.”
It later adds, “American jobs outweigh American values.”
The piece presents no evidence as to why we would believe that the issue of American jobs plays an especially important role in Trump’s decision. He did announce a weapons deal with Saudi Arabia, which is likely to amount to around 10,000 jobs, assuming that these weapons would not be sold elsewhere if the Saudis didn’t buy them.
The number of jobs is equal to a bit more than 0.007 percent of total employment in the economy. Or, to take another measure, it is a bit more than the number of jobs the country would create in three days at its pace of job growth over the last six years.
It doesn’t seem likely that a president would make major foreign policy decisions over such a small number of jobs. An alternative that is at least as plausible is that Trump is rewarding a good customer at his hotels. The Saudis have been major renters of rooms at Trump hotels since he took office. While Trump refuses to disclose information on the money he receives from the Saudis (in violation of past precedent and possibly the constitution), it is likely considerable.
Given Trump’s continuing concern with the state of his financial empire (why else won’t he divest?), it seems very plausible that this would be the basis for his foreign policy decisions. It certainly seems more likely than three days worth of job creation.
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In the wake of Amazon’s decision to locate its new headquarters in two prosperous metro areas, an NYT Upshot piece by Neil Irwin raised the question of what can be done to help the regions that have been left behind. He then turns to various policy proposals intended to help workers in the areas that are not doing well in the current economy.
An alternative approach is to stop pursuing policies that transfer money from the left behind regions to the rich ones. The top of this list would be patent and copyright monopolies. These government-granted monopolies are explicitly designed as tools to promote innovation. Over the last four decades, they have been made stronger and longer.
They could alternatively be made shorter and weaker. We could also look to use other, more efficient, mechanisms for financing innovation and creative work. This would mean less money going to the software industry in the Silicon Valley and Seattle, less money going to the entertainment industry in Los Angeles, and less money going to the biotech industry outside of Washington, DC. There could be as much as $1 trillion a year at stake with these monopolies, an amount that is equal to roughly 60 percent of after-tax corporate profits.
Another way to benefit the left behind sectors would be to stop doing so much to benefit the financial industry. There is a long list of ways in which the government helps the financial industry (see Rigged, chapter 4), but the most obvious was when the leadership of both parties raced to save the industry from its own incompetence in the 2008 financial crisis. If the market was allowed to work its magic, Goldman Sachs, Citigroup, Bank of America, and many other financial behemoths would have been sent to the dustbin of history. The result would have been a smaller, more efficient industry, with many fewer great fortunes being made by people living in New York City and other financial centers.
A third route is a cleaned up corporate governance structure that made it more difficult for CEOs and top management to rip off the firms they run. As it is the case now, the pay of top management is primarily determined by boards of directors who owe their jobs to the CEOs. The result is a situation where CEO pay is now often 200 to 300 times the pay of ordinary workers. This most immediately comes at the expense of shareholders who have seen much lower returns in the last two decades than in prior years, but it also means more money flowing into cities like New York and San Francisco that house many corporate headquarters.
These and other policies that restructured the market so as not to redistribute so much income upward would be a good place to start if we are concerned about the left behind regions. While transfer policies that largely accept the before-tax distribution of income seem to be more popular in policy circles, they are less likely to be effective than having so much income go to the top in the first place.
The piece also includes an assertion that may have mislead readers. It quotes Clara Hendrickson, a co-author of one of the papers cited in the article:
“What’s increasingly clear after the 2016 election is that the forces that have been really good for the economy in the aggregate, like globalization and technological change, create local shocks that are extremely powerful.”
Actually, it is not clear that these forces, at least as they have been directed over the last four decades, have been really good for the economy in aggregate. This has been a period of slow overall growth, in addition to rising inequality.
In the wake of Amazon’s decision to locate its new headquarters in two prosperous metro areas, an NYT Upshot piece by Neil Irwin raised the question of what can be done to help the regions that have been left behind. He then turns to various policy proposals intended to help workers in the areas that are not doing well in the current economy.
An alternative approach is to stop pursuing policies that transfer money from the left behind regions to the rich ones. The top of this list would be patent and copyright monopolies. These government-granted monopolies are explicitly designed as tools to promote innovation. Over the last four decades, they have been made stronger and longer.
They could alternatively be made shorter and weaker. We could also look to use other, more efficient, mechanisms for financing innovation and creative work. This would mean less money going to the software industry in the Silicon Valley and Seattle, less money going to the entertainment industry in Los Angeles, and less money going to the biotech industry outside of Washington, DC. There could be as much as $1 trillion a year at stake with these monopolies, an amount that is equal to roughly 60 percent of after-tax corporate profits.
Another way to benefit the left behind sectors would be to stop doing so much to benefit the financial industry. There is a long list of ways in which the government helps the financial industry (see Rigged, chapter 4), but the most obvious was when the leadership of both parties raced to save the industry from its own incompetence in the 2008 financial crisis. If the market was allowed to work its magic, Goldman Sachs, Citigroup, Bank of America, and many other financial behemoths would have been sent to the dustbin of history. The result would have been a smaller, more efficient industry, with many fewer great fortunes being made by people living in New York City and other financial centers.
A third route is a cleaned up corporate governance structure that made it more difficult for CEOs and top management to rip off the firms they run. As it is the case now, the pay of top management is primarily determined by boards of directors who owe their jobs to the CEOs. The result is a situation where CEO pay is now often 200 to 300 times the pay of ordinary workers. This most immediately comes at the expense of shareholders who have seen much lower returns in the last two decades than in prior years, but it also means more money flowing into cities like New York and San Francisco that house many corporate headquarters.
These and other policies that restructured the market so as not to redistribute so much income upward would be a good place to start if we are concerned about the left behind regions. While transfer policies that largely accept the before-tax distribution of income seem to be more popular in policy circles, they are less likely to be effective than having so much income go to the top in the first place.
The piece also includes an assertion that may have mislead readers. It quotes Clara Hendrickson, a co-author of one of the papers cited in the article:
“What’s increasingly clear after the 2016 election is that the forces that have been really good for the economy in the aggregate, like globalization and technological change, create local shocks that are extremely powerful.”
Actually, it is not clear that these forces, at least as they have been directed over the last four decades, have been really good for the economy in aggregate. This has been a period of slow overall growth, in addition to rising inequality.
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In an article pointing out that China has more income mobility than the United States, The New York Times seriously understated China’s per capita income. The article told readers:
“Today, the economic output per capita in China is $12,000, compared with $3,500 a decade ago. The number is far higher in the United States, $53,000.”
Actually, using a purchasing power parity measure of income (which applies a common set of prices to all goods and services, regardless of the country), China has a per capita GDP of $16,100 in 2018, according to the I.M.F. This is still less than a third of $55,500 measure for the US, but getting close to the richest countries in Latin America and the poorest countries in Europe. Mexico’s per capita GDP for 2018 is $18,300 and Bulgaria’s is $20,600. The I.M.F’s projections show per capita GDP in China passing Mexico’s by 2022.
In an article pointing out that China has more income mobility than the United States, The New York Times seriously understated China’s per capita income. The article told readers:
“Today, the economic output per capita in China is $12,000, compared with $3,500 a decade ago. The number is far higher in the United States, $53,000.”
Actually, using a purchasing power parity measure of income (which applies a common set of prices to all goods and services, regardless of the country), China has a per capita GDP of $16,100 in 2018, according to the I.M.F. This is still less than a third of $55,500 measure for the US, but getting close to the richest countries in Latin America and the poorest countries in Europe. Mexico’s per capita GDP for 2018 is $18,300 and Bulgaria’s is $20,600. The I.M.F’s projections show per capita GDP in China passing Mexico’s by 2022.
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