April 13, 2016

13 Abril 2016

The Obama administration is starting its full court press to get Congress to approve the Trans-Pacific Partnership. Yesterday, Secretary of State John Kerry gave a speech in support of the pact according to the Washington Post.

According to the Post, in his speech blamed technology rather than trade for eliminating jobs in manufacturing. It is easy to show that this is mistaken. The number of jobs in manufacturing was little changed, apart from cyclical fluctuations from the early 1970s to the late 1990s. From the late 1990s to 2006 we lost more than 3.5 million manufacturing jobs, almost 20 percent of employment in the sector, as the trade deficit exploded.

Manufacturing Employment

manufacturing jobs

Source: Bureau of Labor Statistics.

There had been large gains in productivity due to technology throughout this period. It was only when the trade deficit soared from just over 1.0 percent of GDP in 1996 to almost 6.0 percent of GDP in 2005 that we saw massive job loss in manufacturing. It would have been helpful if the Washington Post had corrected Mr. Kerry’s misstatement, as it might have done for other public figures, like Senator Bernie Sanders.

The Obama administration is starting its full court press to get Congress to approve the Trans-Pacific Partnership. Yesterday, Secretary of State John Kerry gave a speech in support of the pact according to the Washington Post.

According to the Post, in his speech blamed technology rather than trade for eliminating jobs in manufacturing. It is easy to show that this is mistaken. The number of jobs in manufacturing was little changed, apart from cyclical fluctuations from the early 1970s to the late 1990s. From the late 1990s to 2006 we lost more than 3.5 million manufacturing jobs, almost 20 percent of employment in the sector, as the trade deficit exploded.

Manufacturing Employment

manufacturing jobs

Source: Bureau of Labor Statistics.

There had been large gains in productivity due to technology throughout this period. It was only when the trade deficit soared from just over 1.0 percent of GDP in 1996 to almost 6.0 percent of GDP in 2005 that we saw massive job loss in manufacturing. It would have been helpful if the Washington Post had corrected Mr. Kerry’s misstatement, as it might have done for other public figures, like Senator Bernie Sanders.

Olivier Blanchard Is Worried About Inflation In Japan

By Dean BakerDean Baker

April 13, 2016

13 Abril 2016

Olivier Blanchard is one of the world’s leading macroeconomists. In addition to a long and distinguished academic career, in his tenure as the chief economist at the I.M.F. he turned its research department into a major producer of cutting edge research. In particular, the research department was instrumental in producing work that undermined the case for austerity that was being widely pushed across the globe. Unfortunately, politics was able to overcome the research, and austerity won. But that is the past. In an interview with the Telegraph, Blanchard warned that Japan will soon switch from combating deflation to a struggle to contain inflation. The core problem is its debt burden, which now stands at almost 250 percent of GDP. This concern seems more than a bit bizarre, especially coming from an economist as knowledgeable as Blanchard. The first point is that, in spite of the high ratio of debt to GDP, Japan actually has a low interest burden. According to the OECD, Japan’s net interest payments on its debt were 1.0 percent of GDP in 2015. By contrast, U.S. payments were well over 3.0 percent of GDP in the 1990s. This matters, not only because the interest payments represent the actual drain on resources, but also because the value of the debt is largely arbitrary. If that sounds strange, it’s worth thinking about what happens to the value of debt when interest rates rise. The current interest rate on a 10-year Japanese government bond is -0.09 percent. On a 30-year bond it’s 0.41 percent. Suppose that the interest rate on a 10-year bond rose to a still historically low 4.0 percent and the 30-year bond to 5.0 percent. According to my bond calculator, the market price of a newly issued 10-year bond would drop by almost one-third and the price of a newly issued 30-year bond would fall by more than 75 percent. Of course not all Japanese debt is long-term, nor is it all newly issued, but the point is that the market value of its outstanding debt would drop sharply if interest rates rose to even modest levels. If the 30-year rate got as high as 7.0 percent (lower than the U.S. rate in much of the 1990s), then the market price of the newly issued 30-year bond would drop by more than 85 percent from its current level. The way governments typically keep their books, this plunge in the market price would not affect Japan’s debt to GDP ratio. But if the markets were actually troubled by the high ratio of debt to GDP, Japan could simply issue new debt to buy up old debt at a fraction of its face value. This would quickly send its debt to GDP ratio plunging. (This is why the Reinhart-Rogoff 90 percent cliff story never should have passed the laugh test even before the exposure of the famous Excel spreadsheet error.)

Pension Panic: Round XXII

By Dean BakerDean Baker

April 13, 2016

13 Abril 2016

There has been a flurry of recent articles touting recent work by Stanford Business School Professor Joshua Rauh, arguing that state and local pension fund liabilities are far larger than generally reported. Rauh puts the unfunded liabilities of state and local pension funds at $3.4 trillion, more than three times the figures that the pensions themselves calculate. He predicts looming crises with many local governments driven into bankruptcy. The reason for the difference between Rauh’s $3.4 trillion number and the shortfall of roughly $1 trillion using the pension fund’s methodology is the rate of discount used to evaluate pensions’ liability. Pension funds calculate their liability using their expected rate of return as the rate of discount. This currently averages just over 7.0 percent on their assets. In contrast, Rauh uses the risk-free rate of interest for discounting, using the current 2.5 percent yield on 30-year Treasury bonds. The lower interest rate puts a much higher value on projected funding shortfalls 20-30 years in the future. While many would like the public to be scared by Rauh’s calculations, there are a few points worth keeping in mind. First, the return numbers that pension funds use are not pulled out of the air. They reflect projections of investment returns based on actual experience and a range of standard economic projections. They will of course not be exactly right, but they are also unlikely to be hugely wrong. As a recent report from Pew Research Center points out, the main reason that some pension funds are in serious trouble is not that they were overly optimistic about investment returns, the pensions that are into serious trouble were the ones that failed to make their required contributions. In states like New Jersey and Illinois, not making pension contributions became almost a sport among politicians. The same was true for the city of Chicago under Mayor Richard M. Daley. If governments don’t contribute to their pensions, they will be underfunded regardless of what returns are assumed.

Krugman on Falling Oil Prices and Inflation

By Dean BakerDean Baker

April 13, 2016

13 Abril 2016

I’m glad to see that Paul Krugman has the same story about falling oil prices, inflation, and real interest rates as me. He pointed out that to the extent that falling oil prices reduce the overall rate of inflation it should not matter for real interest rates. What matters for the real interest rate is the expected rate of inflation for goods and services in general. Lower oil prices will matter for energy investment, but not for the vast majority of goods and services in the economy.

I made this point a couple of months back, although probably many times before that as well.

I’m glad to see that Paul Krugman has the same story about falling oil prices, inflation, and real interest rates as me. He pointed out that to the extent that falling oil prices reduce the overall rate of inflation it should not matter for real interest rates. What matters for the real interest rate is the expected rate of inflation for goods and services in general. Lower oil prices will matter for energy investment, but not for the vast majority of goods and services in the economy.

I made this point a couple of months back, although probably many times before that as well.

Bernie Sanders: Enemy of the World’s Poor?

By Dean BakerDean Baker

April 12, 2016

12 Abril 2016

A popular theme in the media in recent days is that the world’s poor would face disaster if Bernie Sanders ended up in the White House.[1] The story is that Sanders would try to protect jobs for manufacturing workers in the United States. The loss of these jobs has been a major source of downward pressure on the wages and living standards of a large portion of the working class over the last four decades. While saving manufacturing jobs here may be good for U.S. workers, the media line is that by trying to block imports from the developing world, Sanders would be denying hundreds of millions of people their route out of poverty. This story may be comforting for elites in the U.S. and Senator Sanders’ political opponents, but it defies basic economics and common sense. To see the problem in the logic, note that the essence of the Sanders as an enemy of the world’s poor story is that manufacturing workers in the developing world need people in the United States to buy their stuff. If people in the United States didn’t buy their stuff, these workers would be out on the street and growth in the developing world would grind to a halt. In this story, the problem is that we don’t have enough people in the world to buy stuff — there is a shortage of demand. But is it really true that no one else in the world would buy the stuff produced by people in the developing world if they couldn’t sell it to consumers in the United States? Suppose people in the developing world bought the stuff they produced, you know, raising their living standards by raising their consumption. That is actually the way the economics is supposed to work. In the standard theory, general shortages of demand are not a problem. Economists have traditionally assumed that economies tended toward full employment. The economic constraint was a lack of supply. The problem was that we couldn’t produce enough goods and services, not that we were producing too much and couldn’t find anyone to buy them.

• Affordable Care Act

Paul Ryan Wants to Cut Social Security and Medicare

By Dean BakerDean Baker

April 11, 2016

11 Abril 2016

Some people may have failed to realize this fact when a NYT article profiling Speaker Ryan told readers:

“Mr. Ryan is the architect of his party’s plan to rein in spending on entitlement programs.”

“Entitlement programs” is a popular euphemism used by politicians who want to cut Social Security and Medicare. The phrase is likely to mislead many readers.

The piece also asserts that:

“For example, if the Republican nominee does not provide an alternative to the Affordable Care Act — something Republicans have failed to do since it passed in 2010 — Mr. Ryan intends to do so, just as he will lay out an anti-poverty plan.”

Actually, the reporter who wrote this article has no idea what Mr. Ryan “intends.” Mr. Ryan says that he “intends” to develop an alternative to the Affordable Care Act, whether he actually does, or whether his proposal will actually pass the laugh test remains to be seen. It is important to remember that Mr. Ryan proposed a budget that would eliminate most of the federal government by 2050. This would have been a useful piece of information to provide readers when they are trying to assess his intentions.

Some people may have failed to realize this fact when a NYT article profiling Speaker Ryan told readers:

“Mr. Ryan is the architect of his party’s plan to rein in spending on entitlement programs.”

“Entitlement programs” is a popular euphemism used by politicians who want to cut Social Security and Medicare. The phrase is likely to mislead many readers.

The piece also asserts that:

“For example, if the Republican nominee does not provide an alternative to the Affordable Care Act — something Republicans have failed to do since it passed in 2010 — Mr. Ryan intends to do so, just as he will lay out an anti-poverty plan.”

Actually, the reporter who wrote this article has no idea what Mr. Ryan “intends.” Mr. Ryan says that he “intends” to develop an alternative to the Affordable Care Act, whether he actually does, or whether his proposal will actually pass the laugh test remains to be seen. It is important to remember that Mr. Ryan proposed a budget that would eliminate most of the federal government by 2050. This would have been a useful piece of information to provide readers when they are trying to assess his intentions.

Making the Federal Reserve Board Accountable

By Dean BakerDean Baker

April 11, 2016

11 Abril 2016

Professor Andrew Levin (Dartmouth College), the former special advisor to Fed Chair Ben Bernanke and then-Vice Chair Janet Yellen, released a proposal for reform of the Federal Reserve Board’s governing structure in a press call sponsored by the Fed Up Campaign. The proposal has a number of important features, but the main point is to make the Fed more accountable to democratically elected officials and to reduce the power of the banking industry in monetary policy.

See the fuller story.

Professor Andrew Levin (Dartmouth College), the former special advisor to Fed Chair Ben Bernanke and then-Vice Chair Janet Yellen, released a proposal for reform of the Federal Reserve Board’s governing structure in a press call sponsored by the Fed Up Campaign. The proposal has a number of important features, but the main point is to make the Fed more accountable to democratically elected officials and to reduce the power of the banking industry in monetary policy.

See the fuller story.

Fun and Games in Scaring People About Social Security

By Dean BakerDean Baker

April 10, 2016

10 Abril 2016

As we all know, one of the major recreational sports of media outlets is finding new and innovative ways to scare people about Social Security. One of my favorites is “infinite horizon accounting.” This is when you project out Social Security spending and revenue into the infinite future and then calculate the difference. It gives you a REALLY BIG NUMBER.

We got an example of the casual use of this infinite horizon accounting in a column by Wharton Business School Professor Olivia Mitchell. The column was actually on a different topic, but towards the end the piece tells readers:

“The Social Security shortfall is enormous. Actuaries have estimated that it’s on the order of $28 trillion in present value. That’s twice the size of the gross domestic product of the U.S.”

Note that there is no mention of the time horizon for the $28 trillion shortfall, so readers would have no way of knowing that it is for all future time. The comparison to current GDP is both wrong (GDP in 2016 will be over $18 trillion) and misleading. Why would we compare a deficit measured for all future time to this year’s GDP? If we compared the deficit to future GDP it would be 1.3 percent, a bit more than one-third of the annual military budget.

It’s also worth noting that the bulk of this deficit is for years after 2100. In other words, we are being cruel to children not yet born by writing down Social Security spending paths that exceed what they are projected to tax themselves. Can you envision anything so cruel? (The big problem is that the projections assume they will live longer and therefore have longer retirements.)

As we all know, one of the major recreational sports of media outlets is finding new and innovative ways to scare people about Social Security. One of my favorites is “infinite horizon accounting.” This is when you project out Social Security spending and revenue into the infinite future and then calculate the difference. It gives you a REALLY BIG NUMBER.

We got an example of the casual use of this infinite horizon accounting in a column by Wharton Business School Professor Olivia Mitchell. The column was actually on a different topic, but towards the end the piece tells readers:

“The Social Security shortfall is enormous. Actuaries have estimated that it’s on the order of $28 trillion in present value. That’s twice the size of the gross domestic product of the U.S.”

Note that there is no mention of the time horizon for the $28 trillion shortfall, so readers would have no way of knowing that it is for all future time. The comparison to current GDP is both wrong (GDP in 2016 will be over $18 trillion) and misleading. Why would we compare a deficit measured for all future time to this year’s GDP? If we compared the deficit to future GDP it would be 1.3 percent, a bit more than one-third of the annual military budget.

It’s also worth noting that the bulk of this deficit is for years after 2100. In other words, we are being cruel to children not yet born by writing down Social Security spending paths that exceed what they are projected to tax themselves. Can you envision anything so cruel? (The big problem is that the projections assume they will live longer and therefore have longer retirements.)

Protectionist Washington Post Never Mentions Role of Patent Monopolies in High Prices for Cancer Drugs

By Dean BakerDean Baker

April 10, 2016

10 Abril 2016

The Washington Post is well known as a hotbed of protectionist sentiment, at least when it comes to policies that redistribute income upward. For that reason it was not altogether surprising that the paper never once mentioned the role of patent monopolies and related protections in a front page article on the difficulties cancer patients face in dealing with the high price of drugs.

The article begins by talking about a patient, Scott Steiner, who needed the cancer drug Gleevec. The manufacturer, Novartis, charges $3,500 a month for the drug. The article tells readers that the Mr. Steiner’s insurer was unwilling to pay for the drug and there was no way that he and his family could afford this expense. Fortunately, an oncology social worker (the hero of this article) was able to negotiate a free supply of the drug from the manufacturer.

While this is good news for Mr. Steiner, what the article neglected to mention is that the only reason Gleevec costs $3,500 a month is because the government granted the company a patent monopoly. A high quality of generic version is produced by Indian manufacturers for $2,500 a year.

This difference in prices is equivalent to the United States imposing a 1,600 percent tariff on Gleevec. This patent monopoly leads to all the waste and economic distortions that economists would predict from massive tariffs. Undoubtedly many cancer patients don’t get Gleevec because they can’t afford its patent protected price and are not as lucky as Mr. Steiner in having a social worker who can work out an arrangement with Novartis.

In addition, the whole struggle to get a drug whose price is artificially inflated is a needless waste that is being imposed on people facing a potentially fatal disease. And of course the time spent by a third party is a total waste of resources that would not be necessary if Gleevec were sold at its free market price. In addition, the enormous mark-up received by Novartis gives it an incentive to oversell its drug, promoting it in cases where it may not be the best treatment. (Yes, we have to finance the research, but there are far more efficient mechanisms than this relic of the middle ages.)

While economists have written endless articles and books on the costs of protectionism, none of this information finds its way into the Post’s article. It is probably worth noting that drug companies are a major source of advertising revenue for the Post.

The Washington Post is well known as a hotbed of protectionist sentiment, at least when it comes to policies that redistribute income upward. For that reason it was not altogether surprising that the paper never once mentioned the role of patent monopolies and related protections in a front page article on the difficulties cancer patients face in dealing with the high price of drugs.

The article begins by talking about a patient, Scott Steiner, who needed the cancer drug Gleevec. The manufacturer, Novartis, charges $3,500 a month for the drug. The article tells readers that the Mr. Steiner’s insurer was unwilling to pay for the drug and there was no way that he and his family could afford this expense. Fortunately, an oncology social worker (the hero of this article) was able to negotiate a free supply of the drug from the manufacturer.

While this is good news for Mr. Steiner, what the article neglected to mention is that the only reason Gleevec costs $3,500 a month is because the government granted the company a patent monopoly. A high quality of generic version is produced by Indian manufacturers for $2,500 a year.

This difference in prices is equivalent to the United States imposing a 1,600 percent tariff on Gleevec. This patent monopoly leads to all the waste and economic distortions that economists would predict from massive tariffs. Undoubtedly many cancer patients don’t get Gleevec because they can’t afford its patent protected price and are not as lucky as Mr. Steiner in having a social worker who can work out an arrangement with Novartis.

In addition, the whole struggle to get a drug whose price is artificially inflated is a needless waste that is being imposed on people facing a potentially fatal disease. And of course the time spent by a third party is a total waste of resources that would not be necessary if Gleevec were sold at its free market price. In addition, the enormous mark-up received by Novartis gives it an incentive to oversell its drug, promoting it in cases where it may not be the best treatment. (Yes, we have to finance the research, but there are far more efficient mechanisms than this relic of the middle ages.)

While economists have written endless articles and books on the costs of protectionism, none of this information finds its way into the Post’s article. It is probably worth noting that drug companies are a major source of advertising revenue for the Post.