In an otherwise useful and important piece on how the Trump administration has backtracked from the Obama administration in enforcing laws and regulations on corporate conduct, the NYT asserted:
“…political appointees under Mr. Trump have led a philosophical shift in governing that favors big business and prioritizes the interests of individual investors.”
How does the NYT know that this shift is explained by “philosophy?” This sentence could have with equal plausibility have been written:
“…political appointees under Mr. Trump, with close ties to the industries they regulate, have adopted policies that favor big business and prioritizes the interests of individual investors.”
There is no more reason to believe that pro-business regulatory enforcement is explained by philosophical beliefs than good old-fashioned corruption. The NYT should not be asserting the former.
The piece also mischaracterizes the views of Jay Clayton, Trump’s pick to head the Securities and Exchange Commission (SEC):
“But Mr. Clayton’s remarks that day about job creation — something not directly under the purview of the commission — signaled a new emphasis on bolstering the economy rather than policing Wall Street.”
If Wall Street engages in abusive business practices it hurts rather than helps job creation. The financial industry does not directly create wealth. It is an intermediate industry, like trucking, as opposed to an industry like health care or food that directly produces goods and services of value to people.
As an intermediate industry, it best promotes jobs and growth if it does its work at the lowest possible cost. In the same way that we would not be benefited by a trucking industry that is four times as large but delivers the milk no quicker, we are not benefited by a large financial sector that no more effectively allocates capital.
For this reason, cracking down on abusive practices, that may enrich the industry but do nothing to promote the economy, is a job creation strategy. Hopefully, the head of the SEC knows this, even if the NYT doesn’t.
In an otherwise useful and important piece on how the Trump administration has backtracked from the Obama administration in enforcing laws and regulations on corporate conduct, the NYT asserted:
“…political appointees under Mr. Trump have led a philosophical shift in governing that favors big business and prioritizes the interests of individual investors.”
How does the NYT know that this shift is explained by “philosophy?” This sentence could have with equal plausibility have been written:
“…political appointees under Mr. Trump, with close ties to the industries they regulate, have adopted policies that favor big business and prioritizes the interests of individual investors.”
There is no more reason to believe that pro-business regulatory enforcement is explained by philosophical beliefs than good old-fashioned corruption. The NYT should not be asserting the former.
The piece also mischaracterizes the views of Jay Clayton, Trump’s pick to head the Securities and Exchange Commission (SEC):
“But Mr. Clayton’s remarks that day about job creation — something not directly under the purview of the commission — signaled a new emphasis on bolstering the economy rather than policing Wall Street.”
If Wall Street engages in abusive business practices it hurts rather than helps job creation. The financial industry does not directly create wealth. It is an intermediate industry, like trucking, as opposed to an industry like health care or food that directly produces goods and services of value to people.
As an intermediate industry, it best promotes jobs and growth if it does its work at the lowest possible cost. In the same way that we would not be benefited by a trucking industry that is four times as large but delivers the milk no quicker, we are not benefited by a large financial sector that no more effectively allocates capital.
For this reason, cracking down on abusive practices, that may enrich the industry but do nothing to promote the economy, is a job creation strategy. Hopefully, the head of the SEC knows this, even if the NYT doesn’t.
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When it comes to the budget deficit and programs like Social Security and Medicare, the Washington Post has had difficulty keeping its editorial views out of the news section. We see this again today in an article on the October jobs numbers that told readers:
“A growing number of Wall Street analysts and economists say that the tax cuts and additional spending caused a temporary boost that will fade and leave future generations with a substantially larger debt burden.”
The piece actually doesn’t cite a single economist who complains about the debt burden on future generations. The extent the debt imposes a burden is questionable since the interest is overwhelmingly paid to people in the United States. This means there could be a distributional issue within generations (from the group who pays taxes to the group getting interest), but not a generational issue.
There can be an issue that the deficits now being run will crowd out investment by raising interest rates. Less investment will mean the economy is less productive in the future. But this story is offset by the fact that more rapid growth tends to lead to more investment. In fact, the failure to run larger deficits earlier in the recovery slowed growth and investment, thereby imposing a huge burden on future generations in the form of a weaker economy. The Washington Post has literally never run a news story calling attention to the cost of austerity policies (which it supported) on future generations.
If the Post were to seriously discuss burdens on future generations it would also have to talk about government-granted patent and copyright monopolies. These monopolies are ways in which the government pays for research and creative work. In effect, the monopolies allow companies to impose large taxes on consumers. If a patent monopoly allows Pfizer or Merck to sell a drug for $30,000 that would sell for $300 in a free market, it imposes the same burden on future generations as a tax of 10,000 percent on the drug.
Again, the Post literally never mentions the burdens imposed by patent and copyright monopolies, even though these come to close to $1 trillion a year, swamping the size of the interest burden on the debt. It is probably worth noting in this context that pharmaceutical companies are major advertisers for the paper.
When it comes to the budget deficit and programs like Social Security and Medicare, the Washington Post has had difficulty keeping its editorial views out of the news section. We see this again today in an article on the October jobs numbers that told readers:
“A growing number of Wall Street analysts and economists say that the tax cuts and additional spending caused a temporary boost that will fade and leave future generations with a substantially larger debt burden.”
The piece actually doesn’t cite a single economist who complains about the debt burden on future generations. The extent the debt imposes a burden is questionable since the interest is overwhelmingly paid to people in the United States. This means there could be a distributional issue within generations (from the group who pays taxes to the group getting interest), but not a generational issue.
There can be an issue that the deficits now being run will crowd out investment by raising interest rates. Less investment will mean the economy is less productive in the future. But this story is offset by the fact that more rapid growth tends to lead to more investment. In fact, the failure to run larger deficits earlier in the recovery slowed growth and investment, thereby imposing a huge burden on future generations in the form of a weaker economy. The Washington Post has literally never run a news story calling attention to the cost of austerity policies (which it supported) on future generations.
If the Post were to seriously discuss burdens on future generations it would also have to talk about government-granted patent and copyright monopolies. These monopolies are ways in which the government pays for research and creative work. In effect, the monopolies allow companies to impose large taxes on consumers. If a patent monopoly allows Pfizer or Merck to sell a drug for $30,000 that would sell for $300 in a free market, it imposes the same burden on future generations as a tax of 10,000 percent on the drug.
Again, the Post literally never mentions the burdens imposed by patent and copyright monopolies, even though these come to close to $1 trillion a year, swamping the size of the interest burden on the debt. It is probably worth noting in this context that pharmaceutical companies are major advertisers for the paper.
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The NYT published an oped last week by Jochen Bittner, a political editor for a major German newspaper, asking what is wrong with German’s Social Democrats. The focus of the piece is the collapse of popular support for the party as shown by its poor performance in several recent elections.
Bittner attributes this drop in support to its unwillingness to push an agenda that combats Germany’s rising inequality. As one example, he comments:
“Nor did the SPD [the German Social Democratic Party] seem to mind that the chief executive of Deutsche Post earns 239 times the salary of his average employee.”
Deutsche Post is the privatized German postal and delivery company. A state-owned bank still has a 20 percent share of the company.
While Bittner’s piece raises good questions (there is nothing in the rules of a market economy that says a CEO should be allowed to rip off the company they work for), he alludes at one point to the German unemployment rate. He notes that it has fallen by more than 50 percent to “around 5 percent.”
In fact, Germany’s unemployment rate according to the OECD’s harmonized measure, which essentially uses the US methodology, is just 3.4 percent. Bittner’s 5 percent figure refers to the official German measure of unemployment, which includes workers who are employed part-time as being unemployed.
The NYT should have adjusted the unemployment number in Bittner’s piece to the OECD measure to avoid giving readers a misleading picture of Germany’s economy. Unfortunately, this is a common problem in the NYT and elsewhere. If the point is to convey information to readers, then the terms should be adjusted to measures readers would understand.
The NYT published an oped last week by Jochen Bittner, a political editor for a major German newspaper, asking what is wrong with German’s Social Democrats. The focus of the piece is the collapse of popular support for the party as shown by its poor performance in several recent elections.
Bittner attributes this drop in support to its unwillingness to push an agenda that combats Germany’s rising inequality. As one example, he comments:
“Nor did the SPD [the German Social Democratic Party] seem to mind that the chief executive of Deutsche Post earns 239 times the salary of his average employee.”
Deutsche Post is the privatized German postal and delivery company. A state-owned bank still has a 20 percent share of the company.
While Bittner’s piece raises good questions (there is nothing in the rules of a market economy that says a CEO should be allowed to rip off the company they work for), he alludes at one point to the German unemployment rate. He notes that it has fallen by more than 50 percent to “around 5 percent.”
In fact, Germany’s unemployment rate according to the OECD’s harmonized measure, which essentially uses the US methodology, is just 3.4 percent. Bittner’s 5 percent figure refers to the official German measure of unemployment, which includes workers who are employed part-time as being unemployed.
The NYT should have adjusted the unemployment number in Bittner’s piece to the OECD measure to avoid giving readers a misleading picture of Germany’s economy. Unfortunately, this is a common problem in the NYT and elsewhere. If the point is to convey information to readers, then the terms should be adjusted to measures readers would understand.
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CEPR was selected as one of the organizations to get a share of CREDO’s November givings. The size of our share will depend on how many people vote for CEPR here.
I am really proud of all the issues where CEPR has been ahead of everyone else. We were saying that Social Security did not have to be cut at a time when even many Democrats said the program faced a crisis. We were warning that the I.M.F.’s structural adjustment programs were stifling growth and increasing inequality at the high point of the Washington Consensus. We were yelling about the housing bubble and the dangers it posed to the economy when politicians in both parties were celebrating the rise in homeownership rates.
And, we were warning of the dangers of private equity before people saw the wreckage of Toys “R” Us and other retail icons brought down by financial engineering. I should also mention our contribution to getting Fed Up off the ground, a fantastic coalition of community and labor organizations that has had a huge impact on the Federal Reserve Board.
I’ll spare people the full boast list, but as the saying goes in Washington, the only thing worse than being wrong is being right. And, with CEPR’s track record, funding is naturally very difficult.
We welcome the direct contributions from many of our readers, which make a big difference to our finances. The funding from CREDO can also be a big help, and in this case, it is just a question of taking a few seconds to vote here.
Thanks for your support.
CEPR was selected as one of the organizations to get a share of CREDO’s November givings. The size of our share will depend on how many people vote for CEPR here.
I am really proud of all the issues where CEPR has been ahead of everyone else. We were saying that Social Security did not have to be cut at a time when even many Democrats said the program faced a crisis. We were warning that the I.M.F.’s structural adjustment programs were stifling growth and increasing inequality at the high point of the Washington Consensus. We were yelling about the housing bubble and the dangers it posed to the economy when politicians in both parties were celebrating the rise in homeownership rates.
And, we were warning of the dangers of private equity before people saw the wreckage of Toys “R” Us and other retail icons brought down by financial engineering. I should also mention our contribution to getting Fed Up off the ground, a fantastic coalition of community and labor organizations that has had a huge impact on the Federal Reserve Board.
I’ll spare people the full boast list, but as the saying goes in Washington, the only thing worse than being wrong is being right. And, with CEPR’s track record, funding is naturally very difficult.
We welcome the direct contributions from many of our readers, which make a big difference to our finances. The funding from CREDO can also be a big help, and in this case, it is just a question of taking a few seconds to vote here.
Thanks for your support.
Read More Leer más Join the discussion Participa en la discusión
In an article on the decline in the Chinese yuan against the dollar, the NYT gave as one explanation:
“Inflation has begun to tick upward, and rising prices tend to make holding the relevant currency less attractive.”
That one really doesn’t seem plausible to me. In the most recent data, China’s year-over-year inflation rate was 2.5 percent, virtually identical to the US rate. If we look to 2019, the I.M.F. actually projects China’s inflation rate will fall slightly to 2.3 percent, a hair lower than the rate projected for the US.
In assessing whether China is holding down the value of its currency, it is important to note that the country holds more than $4 trillion in foreign reserves through its central bank and sovereign wealth fund. This holds down the value of its currency compared to a more normal level of holdings for a country with an economy the size of China, which would likely be in the range of $1–$2 trillion.
This is the same logic as the belief that the Fed is holding down US interest rates by virtue of the fact that it holds $4 trillion in assets as a result of its quantitative easing policy. A more normal level would be around $1 trillion.
The vast majority of economists believe that the Fed’s asset holdings keep down US interest rates. It is inconsistent to believe that the Fed’s holdings of US assets keep down interest rates here, but China’s holding of foreign assets does not keep down the value of its currency.
In an article on the decline in the Chinese yuan against the dollar, the NYT gave as one explanation:
“Inflation has begun to tick upward, and rising prices tend to make holding the relevant currency less attractive.”
That one really doesn’t seem plausible to me. In the most recent data, China’s year-over-year inflation rate was 2.5 percent, virtually identical to the US rate. If we look to 2019, the I.M.F. actually projects China’s inflation rate will fall slightly to 2.3 percent, a hair lower than the rate projected for the US.
In assessing whether China is holding down the value of its currency, it is important to note that the country holds more than $4 trillion in foreign reserves through its central bank and sovereign wealth fund. This holds down the value of its currency compared to a more normal level of holdings for a country with an economy the size of China, which would likely be in the range of $1–$2 trillion.
This is the same logic as the belief that the Fed is holding down US interest rates by virtue of the fact that it holds $4 trillion in assets as a result of its quantitative easing policy. A more normal level would be around $1 trillion.
The vast majority of economists believe that the Fed’s asset holdings keep down US interest rates. It is inconsistent to believe that the Fed’s holdings of US assets keep down interest rates here, but China’s holding of foreign assets does not keep down the value of its currency.
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New house sales were down 5.5 percent in September from their August level and by 13.2 percent from year-ago levels. This is pretty much the textbook story of crowding out from the tax cut.
The story holds that if the government runs large deficits when the economy is near full employment, it will lead to higher interest rates. Higher rates then discourage home buying and construction, investment, and raise the value of the dollar, thereby increasing the trade deficit. These factors together offset the stimulus from the tax cut and eventually leave GDP pretty much the same as it would be without the tax cut, and possibly lower over the long-run.
Of course, it is important to note the role played by the Federal Reserve Board in this story. It has raised repeatedly, partly in response to the boost to growth caused by the tax cut. It has also indicated that it intends to continue to raise rates unless growth slows substantially.
The Fed would justify its rate hikes by claiming the need to prevent a rise in the inflation rate. While this could be right, there is a huge amount of uncertainty about the risk of inflation. To my view, we would be much better off waiting with the rate hikes, and seeing how low the unemployment rate could go, and only begin to raise rates after there is clear evidence of rising inflation. But, I’m not running the Fed.
Anyhow, we are clearly seeing the impact on housing. Mortgage interest rates were just over 3.9 percent last October. Today they are 4.7 percent. This is the main factor weakening the housing market.
And, while the monthly sales data are erratic, we have developed a large backlog of unsold houses, so that the inventory is now equal to 7.1 months of sales. This is the highest inventory since early 2011. This is virtually certain to lead to further declines in construction in the months ahead.
New house sales were down 5.5 percent in September from their August level and by 13.2 percent from year-ago levels. This is pretty much the textbook story of crowding out from the tax cut.
The story holds that if the government runs large deficits when the economy is near full employment, it will lead to higher interest rates. Higher rates then discourage home buying and construction, investment, and raise the value of the dollar, thereby increasing the trade deficit. These factors together offset the stimulus from the tax cut and eventually leave GDP pretty much the same as it would be without the tax cut, and possibly lower over the long-run.
Of course, it is important to note the role played by the Federal Reserve Board in this story. It has raised repeatedly, partly in response to the boost to growth caused by the tax cut. It has also indicated that it intends to continue to raise rates unless growth slows substantially.
The Fed would justify its rate hikes by claiming the need to prevent a rise in the inflation rate. While this could be right, there is a huge amount of uncertainty about the risk of inflation. To my view, we would be much better off waiting with the rate hikes, and seeing how low the unemployment rate could go, and only begin to raise rates after there is clear evidence of rising inflation. But, I’m not running the Fed.
Anyhow, we are clearly seeing the impact on housing. Mortgage interest rates were just over 3.9 percent last October. Today they are 4.7 percent. This is the main factor weakening the housing market.
And, while the monthly sales data are erratic, we have developed a large backlog of unsold houses, so that the inventory is now equal to 7.1 months of sales. This is the highest inventory since early 2011. This is virtually certain to lead to further declines in construction in the months ahead.
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