Ross Douthat Has Trouble Remembering the 1990s

February 14, 2016

14 Febrero 2016

Ross Douthat used his NYT column to remind progressives of the 1990s and harangue them for not wanting them back. While he gets some of the points right, he misses a really big one: the 1990s prosperity was driven by a stock bubble, which would inevitably burst. Furthermore, Clinton’s policies lead to an over-valued dollar and a large trade deficit that persists to this day. This trade deficit has made it impossible to get to full employment without an asset bubble. Just to briefly recount the good stuff, we saw the unemployment rate fall to 4.0 percent as a year round average in 2000. In the early and mid-1990s the consensus within the mainstream of the economics profession was that the unemployment rate could not get much below 6.0 percent without sparking inflation. The low unemployment rate disproportionately helped those at the bottom. This was the only period in the last forty years in which workers at the middle and bottom of the wage distribution saw sustained gains in real wages. African Americans were actually closing the earnings gap with whites and women were reducing the earning gap with men.

• GovernmentEl GobiernoHealth and Social ProgramsLos Programas Sociales y de Salud

Robert Samuelson’s Candor Deficit

By Dean BakerDean Baker

February 14, 2016

14 Febrero 2016

Robert Samuelson really, really wants to cut Social Security and Medicare and he is not going to let the data get in the way. His column today complains about the lack of straight talk on the budget. He calls for candor when discussing the budget. Unfortunately he resists this standard himself. The argument is the usual, rising Social Security and Medicare spending are going to crowd out other areas of the budget. As he tells us: “The basic conflict posed by the budget is not between rich and poor but between workers and retirees. Present policy favors retirees over workers — the past over the present and future — because, politically, tampering with benefits is off-limits. The rest of government absorbs the fiscal consequences of an aging population.” Okay, let’s inject a little straight talk and candor into Samuelson’s discussion. First, he tells us that he wants to free up money for other programs by:

• Economic GrowthEl Desarollo

Going Negative: What it Means for the Fed

By Dean BakerDean Baker

February 13, 2016

13 Febrero 2016

Neil Irwin had an interesting NYT Upshot piece on the use of negative interest rates by central banks as a way of boosting demand. There are three points worth adding to this discussion. First, the Fed has other tools to try to boost the economy. The obvious one is to explicitly target a long-term interest rate. For example, the Fed could say that it will push the 5-year Treasury note rate down to 1.0 percent. It would then buy enough 5-year notes to bring the rate down to this level. Since longer term rates have much more impact on the economy than short-term rates, this would more directly affect the economy than trying to bring down long-term rates with lower short-term rates. If the Fed was really concerned about inadequate demand in the economy, it is difficult to see why it would not consider this sort of targeting. For some reason targeting long-term rates has not featured in discussions of potential Fed actions.

Strike Three for the Congressional Budget Office? Social Security Retirement Income Projections

By Dean BakerDean Baker

February 12, 2016

12 Febrero 2016

Yesterday the Congressional Budget Office (CBO) corrected an error that it made in projecting the share of earnings that will be replaced by Social Security for those nearing retirement. In a report published last fall, CBO projected that for people born in the 1960s, the annual Social Security benefit for those retiring at age 65, would be 60 percent of their earnings for middle income retirees and 95 percent of earnings for those in the bottom quintile. The correction showed that benefits would replace 41 percent of earnings for middle income retirees and 60 percent of earnings for those in the bottom quintile. This mattered a great deal because the originally published numbers were quickly seized upon by those advocating cuts in Social Security benefits. For example, Andrew Biggs, who served in the Social Security Administration under President George W. Bush, used the projections as a basis for a column in the Wall Street Journal with the headline “new evidence on the phony retirement income crisis.” The piece argued that benefits were overly generous and should be cut back, at least for better off retirees. (To his credit, Biggs quickly retracted the piece after CBO acknowledged the mistake.) While this was a serious error, unfortunately it was not the first time that CBO had made a major error in an authoritative publication. In 2010, in its annual long-term budget projections it grossly overstated the negative effect on the economy of budget deficits. The 2010 long-term projections showed a modest increase in future deficits relative to the 2009 projections, yet the impact on the economy was far worse. The 2010 projections showed a drop in GDP of almost 18 percent by 2025, compared to a balanced budget scenario. This was more than twice as large as the impact shown in the prior year’s projections. The sharp projected drop in GDP could have been used to emphasize the urgency of deficit reduction. As was the case with the recent Social Security projections, CBO corrected its numbers after the error was exposed.

• Wall StreetEl Mundo Financiero

Paul Krugman, Bernie Sanders, and the Fed

By Dean BakerDean Baker

February 12, 2016

12 Febrero 2016

Paul Krugman used most of his column this morning to take some well-aimed shots at the Republican presidential contenders and congressional leadership. He points to their hostility to the Federal Reserve Board’s efforts to boost the economy because of fears of hyper-inflation. These fears have been shown to be completely ungrounded, as inflation continues to be far lower than the Fed’s target of 2.0 percent. However, Krugman also takes a shot at Senator Bernie Sanders for supporting a bill to audit the Federal Reserve Board’s conduct of monetary policy. There are two points worth making here. First, an outcome of an earlier version of this bill was an amendment to Dodd-Frank which required the Fed to disclose the beneficiaries of the loans from the special lending facilities it created at the peak of the crisis. At the time, the Fed was insisting that beneficiaries and the terms of the loans had to be kept secret.

• Financial Transaction Tax

Will Sanders’ Financial Transaction Tax be a Free Lunch for Those Who Don’t Live on Wall Street?

By Dean BakerDean Baker

February 12, 2016

12 Febrero 2016

Morning Edition had a good piece this morning on Senator Bernie Sanders’ proposal for a financial transactions tax (FTT). There are a couple of additional points worth making. First, while the piece noted a wide range of estimates of the amount that could be raised through such a tax, we do have some real world experience. As was noted, the United Kingdom has had a transactions tax on stock trades since the 17th century. This tax raises an amount equal to roughly 0.2 percent of GDP, which would be $36 billion annually in the current U.S. economy or roughly $400 billion over a 10-year budget horizon. This tax applies only to stocks, which allows traders to avoid it through options and other derivative instruments.

David Brooks Doesn’t Like Bernie Sanders or Northern Europe

By Dean BakerDean Baker

February 12, 2016

12 Febrero 2016

David Brooks used his column today to tell readers how Bernie Sanders' programs would destroy the dynamism of the U.S. economy. I don’t have time to go through the whole story, but it is important to make one point. Brooks complains that Sanders' agenda would raise total spending at all levels of government from the current 36.0 percent to 47.5 percent. He argues this would require higher taxes on most people thereby depriving them of the freedom to spend their own money as they see fit.

With Inflation Well Below Targets and Interest Rates Near Record Lows, the Washington Post Wants to Reduce the Deficit

By Dean BakerDean Baker

February 10, 2016

10 Febrero 2016

Yep, we have such clear warning signs of imminent disaster. I should probably also point out that the interest burden measured as a share of GDP (net of money refunded from the Fed) is at the lowest level since before World War II. You can see we are imposing a terrible burden on our children. At least the Post is honest and says that its deficit reduction means cutting Social Security and Medicare.

Oh well, here on Planet Earth low interest rates and low inflation are a very good market signal that the economy could use much more demand (i.e. larger budget deficits). The Post actually seems to support this, but tells us about the Congressional Budget Office’s (CBO) projection of higher deficits in future years. As we pointed out yesterday, those higher deficits are the result of CBO’s projection that interest rates will rise sharply. They have a great track record of being badly wrong on this score six years in a row. I suppose seventh time could be a charm, but I wouldn’t bet on it.

Anyhow, serious people would be worried about boosting the economy now and putting people back to work. People are suffering today and our children our suffering. This is both because we have plenty of money so that they don’t have to drink lead and also because putting their parents out of work is a horrible thing to do to kids.

Yep, we have such clear warning signs of imminent disaster. I should probably also point out that the interest burden measured as a share of GDP (net of money refunded from the Fed) is at the lowest level since before World War II. You can see we are imposing a terrible burden on our children. At least the Post is honest and says that its deficit reduction means cutting Social Security and Medicare.

Oh well, here on Planet Earth low interest rates and low inflation are a very good market signal that the economy could use much more demand (i.e. larger budget deficits). The Post actually seems to support this, but tells us about the Congressional Budget Office’s (CBO) projection of higher deficits in future years. As we pointed out yesterday, those higher deficits are the result of CBO’s projection that interest rates will rise sharply. They have a great track record of being badly wrong on this score six years in a row. I suppose seventh time could be a charm, but I wouldn’t bet on it.

Anyhow, serious people would be worried about boosting the economy now and putting people back to work. People are suffering today and our children our suffering. This is both because we have plenty of money so that they don’t have to drink lead and also because putting their parents out of work is a horrible thing to do to kids.

The Pent-Up-Demand for Quits

By Dean BakerDean Baker

February 10, 2016

10 Febrero 2016

Yesterday the Labor Department released data from its December Job Openings and Labor Turnover Survey (JOLTS). One of the items that got lots of attention was a rise in the quit rate to its highest level of the recovery. In fact, it is now pretty much back to pre-recession levels. (This is especially true of workers in the public sector — interesting story for another day.)

While it is good news if workers feel they can leave a job where they are unhappy or which does not fully utilize their skills, the news may not be as good as it first appears. The weak labor market of the last seven years led to very low quit rates. This means that many people who would have left their jobs in a more normal labor market stayed at their job because they were worried about finding a new one. As a result, we should expect there are many more people at jobs they would like to leave in early 2016 than would be the case say in 2007 before the recession hit.

The implication would be that quit rates should not just be returning to their pre-recession level, but rather they should rise substantially above their pre-recession level, at least for a period of time. I’m not sure whether this makes sense or not. We don’t have data on quit rates prior to 2000, so we can’t look back at what happened after prior recoveries from a steep downturn.

Anyhow, it seems plausible to me that the quit rate should be elevated for a period of time to compensate for the unusually low quit rate of prior years. If someone wants to tell me why this is wrong, I’m listening.

Yesterday the Labor Department released data from its December Job Openings and Labor Turnover Survey (JOLTS). One of the items that got lots of attention was a rise in the quit rate to its highest level of the recovery. In fact, it is now pretty much back to pre-recession levels. (This is especially true of workers in the public sector — interesting story for another day.)

While it is good news if workers feel they can leave a job where they are unhappy or which does not fully utilize their skills, the news may not be as good as it first appears. The weak labor market of the last seven years led to very low quit rates. This means that many people who would have left their jobs in a more normal labor market stayed at their job because they were worried about finding a new one. As a result, we should expect there are many more people at jobs they would like to leave in early 2016 than would be the case say in 2007 before the recession hit.

The implication would be that quit rates should not just be returning to their pre-recession level, but rather they should rise substantially above their pre-recession level, at least for a period of time. I’m not sure whether this makes sense or not. We don’t have data on quit rates prior to 2000, so we can’t look back at what happened after prior recoveries from a steep downturn.

Anyhow, it seems plausible to me that the quit rate should be elevated for a period of time to compensate for the unusually low quit rate of prior years. If someone wants to tell me why this is wrong, I’m listening.

Budget Deficit Mania and the Congressional Budget Office

By Dean BakerDean Baker

February 09, 2016

09 Febrero 2016

By Dean Baker and Nick Buffie The Peter Peterson gang has been hard at work lately trying to get people worried about the budget deficit. After all, with interest payments on the debt as a share of GDP at a post-war low and an interest rate on long-term Treasury bonds of almost 2.0 percent, things look pretty bleak. (That’s sarcasm.) But the Washington deficit hawks (great name for a NFL team) have never let the real world interfere with their ranting about deficits, which invariably turn to the need to cut Social Security and Medicare. Unfortunately, they are getting some support in this effort from the folks at the Congressional Budget Office (CBO). While the CBO forecasts don’t look exactly like the sky is falling end of the world stuff, they do show that the debt and deficit will both rise as a share of GDP. And, if the debt is rising as a share of GDP, and we never do anything, then at some point it will do real damage to the economy. Most of this logic is beyond silly in a context where the economy is still far below its full employment level of output. Debt or deficits can only be an issue when the economy is close to full employment, until that point the only problem with deficits is that they are not large enough. Cutting deficits when the economy is below full employment means slowing growth and throwing people out of work. But that is not the point I wanted to make. I thought it was worth showing why CBO is projecting that deficits will rise over the next decade. If we turn to Table 1-2 of the latest CBO Budget and Economic Outlook, we find that the deficit for this year is projected to be 2.9 percent of GDP. This should leave the ratio of debt-to-GDP more or less constant, depending on the exact growth and inflation numbers for the year. However if we look out to 2026, the end of the CBO projection period, the deficit is projected to be 4.9 percent of GDP. At that level, the debt-to-GDP ratio would be rising, and we would be down the road toward higher interest payments leading to higher deficits, leading to higher interest payments and pretty soon, Zimbabwe.