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You probably knew that, but it told readers the story once again in an editorial in which the first paragraph told readers that if the Postal Service were a private company “it would undoubtedly be viewed as insolvent.”
Yes, the Postal Service is losing money, but there are two items that need to be mentioned in this story. First, the Postal Service losses in recent years are primarily the result of a unique accounting method under which the Postal Service is being required to 100 percent prefund its retiree health benefits. There is no private sector company that has such a prefunding level.
It makes a difference. If we look at the Postal Service’s finances from the first 9 months of 2015, we see that it lost $2.8 billion. But a more careful look shows that it paid $6.6 billion to for its retiree health benefits, $4.3 billion of which is to prefund future benefits. Without this payment, it would have shown a profit of almost $1.5 billion.
The other more important point is the absurd restriction under which the Postal Service operates. On the one hand, it is told that it has to be run at a profit, like a private company. On the other hand, it is prohibited from taking advantage of its resources to move into new potentially profitable lines of business.
One obvious line would be postal banking, a service that it used to provide and which other postal services still do provide. With an unbanked population in the tens of millions, the opportunity to have low cost checking accounts and other basic banking services would likely be welcomed especially in low and moderate income communities.
People like Senators Elizabeth Warren and Bernie Sanders have promoted postal banking, as has the Postal Service’s inspector general. This certainly would be a reform worth considering, but of course the competition would not make the financial industry happy.
Note: An earlier version had incorrectly treated the whole sum for retirement health care spending as prefunding, instead of just $4.3 billion.
You probably knew that, but it told readers the story once again in an editorial in which the first paragraph told readers that if the Postal Service were a private company “it would undoubtedly be viewed as insolvent.”
Yes, the Postal Service is losing money, but there are two items that need to be mentioned in this story. First, the Postal Service losses in recent years are primarily the result of a unique accounting method under which the Postal Service is being required to 100 percent prefund its retiree health benefits. There is no private sector company that has such a prefunding level.
It makes a difference. If we look at the Postal Service’s finances from the first 9 months of 2015, we see that it lost $2.8 billion. But a more careful look shows that it paid $6.6 billion to for its retiree health benefits, $4.3 billion of which is to prefund future benefits. Without this payment, it would have shown a profit of almost $1.5 billion.
The other more important point is the absurd restriction under which the Postal Service operates. On the one hand, it is told that it has to be run at a profit, like a private company. On the other hand, it is prohibited from taking advantage of its resources to move into new potentially profitable lines of business.
One obvious line would be postal banking, a service that it used to provide and which other postal services still do provide. With an unbanked population in the tens of millions, the opportunity to have low cost checking accounts and other basic banking services would likely be welcomed especially in low and moderate income communities.
People like Senators Elizabeth Warren and Bernie Sanders have promoted postal banking, as has the Postal Service’s inspector general. This certainly would be a reform worth considering, but of course the competition would not make the financial industry happy.
Note: An earlier version had incorrectly treated the whole sum for retirement health care spending as prefunding, instead of just $4.3 billion.
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According to a piece [sorry, no link] in Politico this morning, former New York City mayor and multi-billionaire Michael Bloomberg is considering running for president. The piece said that he would probably only enter the race if Bernie Sanders wins the Democratic nomination or if Hillary Clinton hangs on to win the nomination, but “is significantly weakened by Sanders and lurches hard to the left.”
This is the sort of story that people might think was a whacky conspiracy theory dreamed up by someone who had spent too much time listening to Senator Sanders’ tirades about the millionaires and billionaires who run the country. After all, Politico is telling us that one of the richest people in the country is holding out the possibility of entering the race, and possibly throwing the presidency to the Republicans, if the voters nominate the wrong candidate for president or push the right candidate too far to the left.
And, Bloomberg can make this a meaningful threat solely because he is a billionaire. (He does have some standing as a moderately successful 3-term mayor of New York City, but no one thinks that if Bill de Blasio serves two more terms as New York’s mayor, he will be in a position to threaten to run as an independent if he doesn’t like the 2028 Democratic nominee.)
This is certainly getting to be an interesting race now that we have a billionaire threatening the Democrats not to nominate anyone who is too progressive. It is worth noting in this context the origins of Bloomberg’s billions. Unlike a Steve Jobs or Jeff Bezos, who can point to innovations that improved people’s lives as the basis of their billions, Bloomberg made his money by making business information available to traders faster than anyone else.
Bloomberg’s terminals allow traders to be the first ones to get news on the state of Florida’s orange crop or the state of cacao harvest in West Africa. This might not matter much to the world (it’s hard to see a big difference to the economy if the markets take ten minutes rather than one minute to adjust to the news of frost damage to Florida’s orange trees), but it makes a huge difference if you’re trading tens or hundreds of millions of dollars daily in these markets.
For this reason, traders are willing to pay thousands of dollars a month to get access to the Bloomberg terminals, thereby making Mr. Bloomberg one of the richest people in the country. (Senator Sanders’ proposal for a financial transactions tax, which would make short-term trading far less profitable, would be bad news for Bloomberg’s main line of business.)
So there we have it. Put one more item in the corner of the millionaires and the billionaires to add to all the other advantages they have in the political system. If the Democrats move too far left, they will jump in to try to throw the race to the Republicans.
According to a piece [sorry, no link] in Politico this morning, former New York City mayor and multi-billionaire Michael Bloomberg is considering running for president. The piece said that he would probably only enter the race if Bernie Sanders wins the Democratic nomination or if Hillary Clinton hangs on to win the nomination, but “is significantly weakened by Sanders and lurches hard to the left.”
This is the sort of story that people might think was a whacky conspiracy theory dreamed up by someone who had spent too much time listening to Senator Sanders’ tirades about the millionaires and billionaires who run the country. After all, Politico is telling us that one of the richest people in the country is holding out the possibility of entering the race, and possibly throwing the presidency to the Republicans, if the voters nominate the wrong candidate for president or push the right candidate too far to the left.
And, Bloomberg can make this a meaningful threat solely because he is a billionaire. (He does have some standing as a moderately successful 3-term mayor of New York City, but no one thinks that if Bill de Blasio serves two more terms as New York’s mayor, he will be in a position to threaten to run as an independent if he doesn’t like the 2028 Democratic nominee.)
This is certainly getting to be an interesting race now that we have a billionaire threatening the Democrats not to nominate anyone who is too progressive. It is worth noting in this context the origins of Bloomberg’s billions. Unlike a Steve Jobs or Jeff Bezos, who can point to innovations that improved people’s lives as the basis of their billions, Bloomberg made his money by making business information available to traders faster than anyone else.
Bloomberg’s terminals allow traders to be the first ones to get news on the state of Florida’s orange crop or the state of cacao harvest in West Africa. This might not matter much to the world (it’s hard to see a big difference to the economy if the markets take ten minutes rather than one minute to adjust to the news of frost damage to Florida’s orange trees), but it makes a huge difference if you’re trading tens or hundreds of millions of dollars daily in these markets.
For this reason, traders are willing to pay thousands of dollars a month to get access to the Bloomberg terminals, thereby making Mr. Bloomberg one of the richest people in the country. (Senator Sanders’ proposal for a financial transactions tax, which would make short-term trading far less profitable, would be bad news for Bloomberg’s main line of business.)
So there we have it. Put one more item in the corner of the millionaires and the billionaires to add to all the other advantages they have in the political system. If the Democrats move too far left, they will jump in to try to throw the race to the Republicans.
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I was struck to see a news article reporting the estimate from Ireland’s central bank that the economy grew by 6.6 percent in 2015. The article reported that the economy is projected to grow 4.8 percent in 2016 and 4.4 percent in 2017. This is good news for the Irish economy since the country still has a long way to go to recover from its recession.
However what is even more striking is that this growth hugely exceeds what folks like the I.M.F. said was possible in Ireland. If we go back to the I.M.F.’s projections from 2013, they thought the country was 1.6 percent below the country’s potential GDP in 2012. It projected the economy would shrink by 0.3 percent in 2013, leaving the 2.6 percent below its potential GDP. This implies a potential growth rate of 0.7 percent annually.
As it turns out, Ireland’s economy grew by 1.4 percent in 2013 and 5.2 percent in 2014. If we add in the 6.6 percent growth in 2015, Ireland’s economy would now be almost 10 percent above the potential GDP that the I.M.F. projected for 2016. That would be the equivalent of the U.S. economy being $1.7 trillion above its potential level of output in 2016. Furthermore, Ireland’s growth is projected to exceed the potential projected back in 2013 by close to 4.0 percentage points in each of the next two years.
Naturally, we would expect a level of GDP far above potential and a growth rate that is also well above potential growth to lead to soaring inflation. That must explain why Ireland’s inflation rate has been 0.1 percent over the last year. (I know, it’s accelerating, the inflation rate had been negative.)
The reason for this Guinness-free trip to Ireland is to make a point about the widely used measures of potential GDP. They are worthless. They are generated mechanically based on current levels of output and the rate of inflation. If the inflation rate is not falling rapidly then we are close to potential GDP, end of story.
In this case, the I.M.F. appears to have been off by more than 15 percentage points, if we take the current growth estimates and assume hyper-inflation does not break out in Ireland in 2017. This should be a lesson for folks in the United States and elsewhere who are being told that our economy is now at or near its potential level of output. If we accept this view and it is wrong, we are throwing an incredible amount of potential output in the toilet.
And just to be clear, this is not a question of loving growth as an end in itself. This is about millions more people getting jobs. It’s about people in bad jobs who have the opportunity to get good jobs, or at least to get paid better wages in their bad jobs as the labor market improves. And, it is about governments having the resources they need to provide decent education, health care, and drinking water to their people.
This is a huge, huge deal. If the estimates of potential GDP are worthless, then we have reason to believe that we can expand the economy way beyond its current level of output. That should be a license to run very large budget deficits, but given the power of the deficit cult in Washington, that may not be politically feasible at the moment. But at the very least, we should be telling the Fed not to needlessly throw people out of work by raising interest rates.
I was struck to see a news article reporting the estimate from Ireland’s central bank that the economy grew by 6.6 percent in 2015. The article reported that the economy is projected to grow 4.8 percent in 2016 and 4.4 percent in 2017. This is good news for the Irish economy since the country still has a long way to go to recover from its recession.
However what is even more striking is that this growth hugely exceeds what folks like the I.M.F. said was possible in Ireland. If we go back to the I.M.F.’s projections from 2013, they thought the country was 1.6 percent below the country’s potential GDP in 2012. It projected the economy would shrink by 0.3 percent in 2013, leaving the 2.6 percent below its potential GDP. This implies a potential growth rate of 0.7 percent annually.
As it turns out, Ireland’s economy grew by 1.4 percent in 2013 and 5.2 percent in 2014. If we add in the 6.6 percent growth in 2015, Ireland’s economy would now be almost 10 percent above the potential GDP that the I.M.F. projected for 2016. That would be the equivalent of the U.S. economy being $1.7 trillion above its potential level of output in 2016. Furthermore, Ireland’s growth is projected to exceed the potential projected back in 2013 by close to 4.0 percentage points in each of the next two years.
Naturally, we would expect a level of GDP far above potential and a growth rate that is also well above potential growth to lead to soaring inflation. That must explain why Ireland’s inflation rate has been 0.1 percent over the last year. (I know, it’s accelerating, the inflation rate had been negative.)
The reason for this Guinness-free trip to Ireland is to make a point about the widely used measures of potential GDP. They are worthless. They are generated mechanically based on current levels of output and the rate of inflation. If the inflation rate is not falling rapidly then we are close to potential GDP, end of story.
In this case, the I.M.F. appears to have been off by more than 15 percentage points, if we take the current growth estimates and assume hyper-inflation does not break out in Ireland in 2017. This should be a lesson for folks in the United States and elsewhere who are being told that our economy is now at or near its potential level of output. If we accept this view and it is wrong, we are throwing an incredible amount of potential output in the toilet.
And just to be clear, this is not a question of loving growth as an end in itself. This is about millions more people getting jobs. It’s about people in bad jobs who have the opportunity to get good jobs, or at least to get paid better wages in their bad jobs as the labor market improves. And, it is about governments having the resources they need to provide decent education, health care, and drinking water to their people.
This is a huge, huge deal. If the estimates of potential GDP are worthless, then we have reason to believe that we can expand the economy way beyond its current level of output. That should be a license to run very large budget deficits, but given the power of the deficit cult in Washington, that may not be politically feasible at the moment. But at the very least, we should be telling the Fed not to needlessly throw people out of work by raising interest rates.
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A new study published by the Peterson Institute projects that the TPP will lead to an increase of $357 billion in annual imports when its effects are fully felt in 2030. This increase in imports will be equal to 1.4 percent of projected GDP in that year.
You probably didn’t see this projection in the write-ups of the analysis in the Washington Post, NYT, or elsewhere. That is likely because the study’s authors chose not to highlight it. Instead, in their abstract they told readers that they projected the TPP would increase exports by $357 billion. If you were curious about what happened to imports you had to go to page 7 to find:
“The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.”
In other words, by design the model assumes that trade balance for the United States is not changed as a result of the TPP. This means that whatever changes we see in exports, according to the model, will be matched by an equal change in imports. Unfortunately the implied projection for imports is never mentioned in the study, so some reporters may have missed this implication of the model.
There are several other important issues that may have been missed. First, the model is quite explicitly a full employment model. This means that, by assumption, the model rules out the possibility of the TPP leading to a larger trade deficit that reduces output and increases unemployment.
In prior decades most economists were comfortable with this sort of full employment assumption since it was widely believed that economies quickly bounced back from recessions or periods of less than full employment. In this view, if a trade agreement led to a larger trade deficit it would soon be offset by lower interest rates, which would provide a boost to investment and consumption.
Alternatively, a trade deficit would lead to a lower value of the dollar. A lower valued dollar would make our exports cheaper to people in other countries, leading them to buy more of them. At the same time, it would make imports more expensive for people in the United States, leading us to buy fewer imports. The net effect would be to lower the size of the trade deficit, bringing us back towards full employment.
Unfortunately, in the wake of the 2008 crash, fewer economists now believe that the economy has a natural tendency back to full employment. Many of the world’s most prominent economists (e.g. Larry Summers, Paul Krugman, Olivier Blanchard) now accept the idea of “secular stagnation.” This means that economies really can suffer from long periods of inadequate demand.
From the perspective of secular stagnation, if the TPP does lead to a larger trade deficit, then there is no automatic mechanism that will offset the lost demand and jobs. In this respect it is important to note that the TPP does nothing to address issues of currency management. This would mean that if one or more of the countries in the TPP began running larger trade surpluses with the United States, and then bought up large amounts of dollars to prevent an adjustment of their currency, there is nothing the United States could do within the terms of the agreement.
Unfortunately, the Peterson Institute’s model tells us nothing about whether the TPP is likely to lead to a growing trade deficit for the United States. It has ruled this possibility out by assumption.
There are some other items that are worth noting about the models assumptions. It assumes that 75 percent of the non-tariff barriers that are eliminated through the TPP will be protectionist in nature rather than welfare enhancing consumer, safety, or environmental regulation. That may prove to be to be correct, but it is very big assumption. This means that we will not see many cases where the investor-state dispute settlement (ISDS) mechanism is used to overturn (or more correctly impose penalties) for laws that allow consumers to purchase products they consider safe, such as country of origin labeling for meat. It means that the ISDS will not be used to overturn state or local bans on fracking, even if the purpose is to ensure safe drinking water. And, it means that the TPP will not make it more difficult to impose rules that prevent predatory lending by large financial institutions that happen to be based in other countries.
It is important to note that the bulk of the gains rest on this assumption about the nature of the non-tariff barriers that are overturned. Less than 12 percent of the projected gains are attributable to the reduction in tariff barriers in the TPP (page 15).
It is also worth noting that the study does not appear to factor in the losses associated with higher prices for the items that will be subject to stronger and longer patent and copyright protection. Stronger intellectual property protections were quite explicitly one of the main goals of the deal and were one of the last major issues to be resolved. As a result of the TPP, the countries that are party to the agreement will be paying more for prescription drugs and other protected products. The effect of longer and stronger IP rules is the same as a tariff, except we are talking about raising the price of protected items by many times above their free market price. This is equivalent to a tariff of several thousand percent on the protected items.
It does not appear as though the study has taken account of the losses associated with these implicit tariffs. There may be some offset if greater protection is associated with more innovation, but it would be a heroic assumption to assume this is automatically the case. Furthermore, even if innovation did offset the losses, it would not be done instantly, since there is a long lead time between when research is undertaken and when there is a product brought to market, especially with prescription drugs.
It is also worth noting, in the context of the balanced trade assumption of the Peterson Institute model, if the United States gets more money for its drugs patents and video game copyrights, then it gets less for its manufactured or agricultural goods. The greater income for drugs companies, the software industry, and other gainers from stronger IP protection imply less income for other exporters or import competing industries.
Finally, it is important to put the projected gain of 0.5 percent of GDP as of 2030 in some context. The Post article told readers:
“If those projections [from the Peterson Institute study] are correct, that additional growth would help a domestic economy that has struggled to regain the growth rates of previous decades in the wake of the Great Recession.”
The study’s projection of a cumulative gain to GDP of 0.5 percent by 2030 implies an increase in the annual growth rate of 0.036 percentage points. This means that if the economy was projected to grow by 2.2 percent a year in a baseline scenario, it will instead grow at a 2.236 percent rate with the TPP, assuming the Peterson Institute projections prove correct.
The projections imply that, as a result of the TPP, the country will be as rich on January 1, 2030 as it would otherwise be on April 1, 2030. Of course, other things equal, this would clearly be a positive story, but as noted above, there are reasons for believing that other things may not be equal and that these projections may not prove correct.
A new study published by the Peterson Institute projects that the TPP will lead to an increase of $357 billion in annual imports when its effects are fully felt in 2030. This increase in imports will be equal to 1.4 percent of projected GDP in that year.
You probably didn’t see this projection in the write-ups of the analysis in the Washington Post, NYT, or elsewhere. That is likely because the study’s authors chose not to highlight it. Instead, in their abstract they told readers that they projected the TPP would increase exports by $357 billion. If you were curious about what happened to imports you had to go to page 7 to find:
“The model assumes that the TPP will affect neither total employment nor the national savings (or equivalently trade balances) of countries.”
In other words, by design the model assumes that trade balance for the United States is not changed as a result of the TPP. This means that whatever changes we see in exports, according to the model, will be matched by an equal change in imports. Unfortunately the implied projection for imports is never mentioned in the study, so some reporters may have missed this implication of the model.
There are several other important issues that may have been missed. First, the model is quite explicitly a full employment model. This means that, by assumption, the model rules out the possibility of the TPP leading to a larger trade deficit that reduces output and increases unemployment.
In prior decades most economists were comfortable with this sort of full employment assumption since it was widely believed that economies quickly bounced back from recessions or periods of less than full employment. In this view, if a trade agreement led to a larger trade deficit it would soon be offset by lower interest rates, which would provide a boost to investment and consumption.
Alternatively, a trade deficit would lead to a lower value of the dollar. A lower valued dollar would make our exports cheaper to people in other countries, leading them to buy more of them. At the same time, it would make imports more expensive for people in the United States, leading us to buy fewer imports. The net effect would be to lower the size of the trade deficit, bringing us back towards full employment.
Unfortunately, in the wake of the 2008 crash, fewer economists now believe that the economy has a natural tendency back to full employment. Many of the world’s most prominent economists (e.g. Larry Summers, Paul Krugman, Olivier Blanchard) now accept the idea of “secular stagnation.” This means that economies really can suffer from long periods of inadequate demand.
From the perspective of secular stagnation, if the TPP does lead to a larger trade deficit, then there is no automatic mechanism that will offset the lost demand and jobs. In this respect it is important to note that the TPP does nothing to address issues of currency management. This would mean that if one or more of the countries in the TPP began running larger trade surpluses with the United States, and then bought up large amounts of dollars to prevent an adjustment of their currency, there is nothing the United States could do within the terms of the agreement.
Unfortunately, the Peterson Institute’s model tells us nothing about whether the TPP is likely to lead to a growing trade deficit for the United States. It has ruled this possibility out by assumption.
There are some other items that are worth noting about the models assumptions. It assumes that 75 percent of the non-tariff barriers that are eliminated through the TPP will be protectionist in nature rather than welfare enhancing consumer, safety, or environmental regulation. That may prove to be to be correct, but it is very big assumption. This means that we will not see many cases where the investor-state dispute settlement (ISDS) mechanism is used to overturn (or more correctly impose penalties) for laws that allow consumers to purchase products they consider safe, such as country of origin labeling for meat. It means that the ISDS will not be used to overturn state or local bans on fracking, even if the purpose is to ensure safe drinking water. And, it means that the TPP will not make it more difficult to impose rules that prevent predatory lending by large financial institutions that happen to be based in other countries.
It is important to note that the bulk of the gains rest on this assumption about the nature of the non-tariff barriers that are overturned. Less than 12 percent of the projected gains are attributable to the reduction in tariff barriers in the TPP (page 15).
It is also worth noting that the study does not appear to factor in the losses associated with higher prices for the items that will be subject to stronger and longer patent and copyright protection. Stronger intellectual property protections were quite explicitly one of the main goals of the deal and were one of the last major issues to be resolved. As a result of the TPP, the countries that are party to the agreement will be paying more for prescription drugs and other protected products. The effect of longer and stronger IP rules is the same as a tariff, except we are talking about raising the price of protected items by many times above their free market price. This is equivalent to a tariff of several thousand percent on the protected items.
It does not appear as though the study has taken account of the losses associated with these implicit tariffs. There may be some offset if greater protection is associated with more innovation, but it would be a heroic assumption to assume this is automatically the case. Furthermore, even if innovation did offset the losses, it would not be done instantly, since there is a long lead time between when research is undertaken and when there is a product brought to market, especially with prescription drugs.
It is also worth noting, in the context of the balanced trade assumption of the Peterson Institute model, if the United States gets more money for its drugs patents and video game copyrights, then it gets less for its manufactured or agricultural goods. The greater income for drugs companies, the software industry, and other gainers from stronger IP protection imply less income for other exporters or import competing industries.
Finally, it is important to put the projected gain of 0.5 percent of GDP as of 2030 in some context. The Post article told readers:
“If those projections [from the Peterson Institute study] are correct, that additional growth would help a domestic economy that has struggled to regain the growth rates of previous decades in the wake of the Great Recession.”
The study’s projection of a cumulative gain to GDP of 0.5 percent by 2030 implies an increase in the annual growth rate of 0.036 percentage points. This means that if the economy was projected to grow by 2.2 percent a year in a baseline scenario, it will instead grow at a 2.236 percent rate with the TPP, assuming the Peterson Institute projections prove correct.
The projections imply that, as a result of the TPP, the country will be as rich on January 1, 2030 as it would otherwise be on April 1, 2030. Of course, other things equal, this would clearly be a positive story, but as noted above, there are reasons for believing that other things may not be equal and that these projections may not prove correct.
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Robert Samuelson wades into the turf on the explanations for the recent worldwide stock plunge in his column today. Most of what he says is actually pretty reasonable, but the framing doesn’t make much sense.
He starts the piece by citing the view of several forecasters that the drop in worldwide markets does not indicate a recession is imminent. But then he tells readers:
“But there is a less reassuring interpretation: The global stock sell-off may reflect gloomy prospects for ‘emerging-market’ economies. …
“If this theory is correct, then the worldwide sell-off of stocks represents a logical response to reduced economic prospects.”
It is not clear that these are in any way opposing views. Most forecasts had actually been for very slow growth even before the plunge in stock prices. In fact, we have been seeing slow growth (@2.0 percent) for the last five years. This is very weak for an economy that still has a long way to go to make up the ground lost in the downturn.
As I and others had noted, the stock market was priced high for an economy that was experiencing slow growth and likely to continue to do so for the foreseeable future, absent some major boost in demand. For this reason, the drop in markets from their 2015 highs is totally consistent with the growth projections that the Congressional Budget Office, the I.M.F., and other forecasters have been publishing. In that sense, the markets are not providing new information, but rather coming into line with the existing information we had about the prospects for economic growth.
The other part of Samuelson’s argument makes less sense. He tells readers:
“Oil companies have canceled $1.6 trillion worth of projects through 2019, estimates the consulting company IHS. The loss of these projects (and jobs) represents a drag on the global economy and, to some extent, justifies lower stock prices.”
Okay, losing $1.6 trillion worth of projects over the next four years sounds like a big hit. How large is it? Well, it amounts to $400 billion a year or roughly 0.5 percent of world GDP. That is not trivial, but we have to take account of the other side of the story.
If we assume this is based on a drop in the average price of oil of $60 a barrel from the level of 2 years ago, this corresponds to savings on oil of more than $1.8 trillion a year. If just one quarter of this ends up in additional spending than it more than offsets the hit to the world economy from less money being spent on oil exploration.
If half of the savings, still a conservative number, gets spent on consumption, it would amount to an additional $900 billion in annual consumption spending, more than twice the size of the hit from less spending on exploration. In short, there is good cause to worry about the environmental implications of lower oil prices, but the economic ones are positive for the world as a whole, even if some countries and regions will be very hard hit.
Finally, Samuelson gives us a line that we have heard before:
“The stock slump could be self-fulfilling. The Great Recession was a traumatizing event. Because it was so deep and unexpected, it made both consumers and business managers more risk-averse. With risks now rising and rewards falling, firms and households might cut their spending just a bit — and cause the very slump they’re trying to avoid.”
Actually there is no evidence that consumers and business managers have become more risk averse. Consumers are spending a larger share of their income than at any point in the last three decades, except at the peak of the housing and stock bubbles. If they have become more risk averse, it is not showing up in their spending.
The same applies to business managers. Investment spending as a share of GDP is back to its pre-recession level. It would be great if businesses would invest more, but why would we expect them to?
The source of weakness in the economy is the unmentionable elephant in the center of the room, the trade deficit. We have an annual trade deficit of more than $500 billion (@3 percent of GDP). This is a gap that must be made up by increased spending in one of the other components of GDP. (This is basic accounting – it is inescapably true. If you don’t like it, then you have a problem with logic.)
In the late 1990s we filled the hole in demand with demand created by the stock bubble. In the last decade we filled the hole in demand with demand created by the housing bubble. In the absence of bubble-driven demand we could get back to full employment with larger budget deficits, but that is not fashionable with the politicians and policy wonks in Washington. Therefore, we have to spin out wheels and pretend that the weak economy is a big mystery and come up with all sorts of convoluted stories like Samuelson’s about the trauma of the Great Recession.
One more thing, we owe our large trade deficits to the huge over-valuation of the dollar that we got in the wake of the bailout from the East Asian financial crisis in the late 1990s. This was all the doings of the Clinton administration, which directed the I.M.F.’s bailout of the region.
The failure of the bailout and bubble-driven growth path on which it set the country is why many of us cringe when they hear Hillary Clinton talk about turning to her husband for economic advice in her administration. The last thing we need is another round of bubble-driven growth.
Robert Samuelson wades into the turf on the explanations for the recent worldwide stock plunge in his column today. Most of what he says is actually pretty reasonable, but the framing doesn’t make much sense.
He starts the piece by citing the view of several forecasters that the drop in worldwide markets does not indicate a recession is imminent. But then he tells readers:
“But there is a less reassuring interpretation: The global stock sell-off may reflect gloomy prospects for ‘emerging-market’ economies. …
“If this theory is correct, then the worldwide sell-off of stocks represents a logical response to reduced economic prospects.”
It is not clear that these are in any way opposing views. Most forecasts had actually been for very slow growth even before the plunge in stock prices. In fact, we have been seeing slow growth (@2.0 percent) for the last five years. This is very weak for an economy that still has a long way to go to make up the ground lost in the downturn.
As I and others had noted, the stock market was priced high for an economy that was experiencing slow growth and likely to continue to do so for the foreseeable future, absent some major boost in demand. For this reason, the drop in markets from their 2015 highs is totally consistent with the growth projections that the Congressional Budget Office, the I.M.F., and other forecasters have been publishing. In that sense, the markets are not providing new information, but rather coming into line with the existing information we had about the prospects for economic growth.
The other part of Samuelson’s argument makes less sense. He tells readers:
“Oil companies have canceled $1.6 trillion worth of projects through 2019, estimates the consulting company IHS. The loss of these projects (and jobs) represents a drag on the global economy and, to some extent, justifies lower stock prices.”
Okay, losing $1.6 trillion worth of projects over the next four years sounds like a big hit. How large is it? Well, it amounts to $400 billion a year or roughly 0.5 percent of world GDP. That is not trivial, but we have to take account of the other side of the story.
If we assume this is based on a drop in the average price of oil of $60 a barrel from the level of 2 years ago, this corresponds to savings on oil of more than $1.8 trillion a year. If just one quarter of this ends up in additional spending than it more than offsets the hit to the world economy from less money being spent on oil exploration.
If half of the savings, still a conservative number, gets spent on consumption, it would amount to an additional $900 billion in annual consumption spending, more than twice the size of the hit from less spending on exploration. In short, there is good cause to worry about the environmental implications of lower oil prices, but the economic ones are positive for the world as a whole, even if some countries and regions will be very hard hit.
Finally, Samuelson gives us a line that we have heard before:
“The stock slump could be self-fulfilling. The Great Recession was a traumatizing event. Because it was so deep and unexpected, it made both consumers and business managers more risk-averse. With risks now rising and rewards falling, firms and households might cut their spending just a bit — and cause the very slump they’re trying to avoid.”
Actually there is no evidence that consumers and business managers have become more risk averse. Consumers are spending a larger share of their income than at any point in the last three decades, except at the peak of the housing and stock bubbles. If they have become more risk averse, it is not showing up in their spending.
The same applies to business managers. Investment spending as a share of GDP is back to its pre-recession level. It would be great if businesses would invest more, but why would we expect them to?
The source of weakness in the economy is the unmentionable elephant in the center of the room, the trade deficit. We have an annual trade deficit of more than $500 billion (@3 percent of GDP). This is a gap that must be made up by increased spending in one of the other components of GDP. (This is basic accounting – it is inescapably true. If you don’t like it, then you have a problem with logic.)
In the late 1990s we filled the hole in demand with demand created by the stock bubble. In the last decade we filled the hole in demand with demand created by the housing bubble. In the absence of bubble-driven demand we could get back to full employment with larger budget deficits, but that is not fashionable with the politicians and policy wonks in Washington. Therefore, we have to spin out wheels and pretend that the weak economy is a big mystery and come up with all sorts of convoluted stories like Samuelson’s about the trauma of the Great Recession.
One more thing, we owe our large trade deficits to the huge over-valuation of the dollar that we got in the wake of the bailout from the East Asian financial crisis in the late 1990s. This was all the doings of the Clinton administration, which directed the I.M.F.’s bailout of the region.
The failure of the bailout and bubble-driven growth path on which it set the country is why many of us cringe when they hear Hillary Clinton talk about turning to her husband for economic advice in her administration. The last thing we need is another round of bubble-driven growth.
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World financial markets appear to be in a panic, partly over events in China, and partly over the plunge in oil prices. I will claim no expertise on the former, although people I respect who do write on China seem to think the country is not facing an economic meltdown.
This leaves lower oil prices as the main source of worry. There are some bad stories with lower oil prices. Developing countries that are heavily dependent on oil exports will be badly hit. Also, much of the debt issued by energy companies is likely to go bad. This may have some ripple effects in the financial markets, but is unlikely to set off any general collapses. Also, the energy sectors in the U.S., Canada, and a few other wealthy countries will be badly hurt.
But it is important to remember that lower oil prices also have an upside. Many countries are big net importers of oil. For them, the plunge in prices will free up large amounts of money for other goods and services.
Just to take a few prominent ones, France imports 470 million barrels of oil a year. If we envision average savings of $50 a barrel from the prices of two years ago, that comes to $23.5 billion in freed up money, and amount equal to 0.8 percent of GDP. (That would come to around $150 billion a year in the United States.) Turkey imports 124 million barrels a year, which would imply savings of $6.2 billion a year, or a bit less than 0.8 percent of GDP. Greece imports just under 150 million barrels a year, which would mean savings of $7.5 billion annually or more than 3.0 percent of GDP (equal to $540 billion a year in the U.S.).
These countries, and other big oil importers, should be seeing a spur to growth from the drop in oil prices as more money is ending up in consumers’ pockets. Any discussion of the impact of plunging oil prices on the world economy has to include these positive effects. (Of course the spur to fossil fuel consumption is horrible for the environment.)
World financial markets appear to be in a panic, partly over events in China, and partly over the plunge in oil prices. I will claim no expertise on the former, although people I respect who do write on China seem to think the country is not facing an economic meltdown.
This leaves lower oil prices as the main source of worry. There are some bad stories with lower oil prices. Developing countries that are heavily dependent on oil exports will be badly hit. Also, much of the debt issued by energy companies is likely to go bad. This may have some ripple effects in the financial markets, but is unlikely to set off any general collapses. Also, the energy sectors in the U.S., Canada, and a few other wealthy countries will be badly hurt.
But it is important to remember that lower oil prices also have an upside. Many countries are big net importers of oil. For them, the plunge in prices will free up large amounts of money for other goods and services.
Just to take a few prominent ones, France imports 470 million barrels of oil a year. If we envision average savings of $50 a barrel from the prices of two years ago, that comes to $23.5 billion in freed up money, and amount equal to 0.8 percent of GDP. (That would come to around $150 billion a year in the United States.) Turkey imports 124 million barrels a year, which would imply savings of $6.2 billion a year, or a bit less than 0.8 percent of GDP. Greece imports just under 150 million barrels a year, which would mean savings of $7.5 billion annually or more than 3.0 percent of GDP (equal to $540 billion a year in the U.S.).
These countries, and other big oil importers, should be seeing a spur to growth from the drop in oil prices as more money is ending up in consumers’ pockets. Any discussion of the impact of plunging oil prices on the world economy has to include these positive effects. (Of course the spur to fossil fuel consumption is horrible for the environment.)
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While economic debates can often get into complex questions of theory or statistical methods, many hang on more simple issues, like the right adjective. We got a great example of one such debate in a Wall Street journal column by Andrew Biggs, an economist at the American Enterprise Institute and former Deputy Commissioner of the Social Security Administration under President George W. Bush.
Biggs looks at some recent evidence, most notably a new study from the Congressional Budget Office (CBO), and dismisses the idea that there is a retirement crisis. At the center of this assertion is the CBO projection that a typical household in the middle quintile, born in 1960, can expect to get $19,000 a year from Social Security. Biggs sees this $19,000 as replacing 56 percent of pre-retirement income and says this is not far from the 70-80 percent usually viewed as adequate. He then touts data on total retirement savings and pronounces everything as okay.
If we step back from replacement rates, we can ask a rhetorical question, is $19,000 a year a middle class income? Odds are that most people would not consider $19,000 a reasonable income for a middle class household, hence the basis for the claim about a retirement crisis. Biggs does point to the record amount of retirement savings. This is indeed good news for those who have these savings, but unfortunately most middle class households don’t fall into this category.
According to the Federal Reserve Board’s 2013 Survey of Consumer Finance, the average net worth outside of housing equity for the middle quintile of households between the ages of 55 and 64 was less than $55,000. This includes all IRAs, 401(k)s and other retirement accounts. This will translate into roughly $3,000 a year in additional retirement income, bringing this middle income household’s income up to $22,000 a year.
Biggs looks at this and says everything is just fine and we should be looking to cut Social Security. Those raising concerns about a retirement crisis do not see $22,000 a year as a middle class income. We are just arguing about adjectives here, there is not much disagreement on the situation.
While economic debates can often get into complex questions of theory or statistical methods, many hang on more simple issues, like the right adjective. We got a great example of one such debate in a Wall Street journal column by Andrew Biggs, an economist at the American Enterprise Institute and former Deputy Commissioner of the Social Security Administration under President George W. Bush.
Biggs looks at some recent evidence, most notably a new study from the Congressional Budget Office (CBO), and dismisses the idea that there is a retirement crisis. At the center of this assertion is the CBO projection that a typical household in the middle quintile, born in 1960, can expect to get $19,000 a year from Social Security. Biggs sees this $19,000 as replacing 56 percent of pre-retirement income and says this is not far from the 70-80 percent usually viewed as adequate. He then touts data on total retirement savings and pronounces everything as okay.
If we step back from replacement rates, we can ask a rhetorical question, is $19,000 a year a middle class income? Odds are that most people would not consider $19,000 a reasonable income for a middle class household, hence the basis for the claim about a retirement crisis. Biggs does point to the record amount of retirement savings. This is indeed good news for those who have these savings, but unfortunately most middle class households don’t fall into this category.
According to the Federal Reserve Board’s 2013 Survey of Consumer Finance, the average net worth outside of housing equity for the middle quintile of households between the ages of 55 and 64 was less than $55,000. This includes all IRAs, 401(k)s and other retirement accounts. This will translate into roughly $3,000 a year in additional retirement income, bringing this middle income household’s income up to $22,000 a year.
Biggs looks at this and says everything is just fine and we should be looking to cut Social Security. Those raising concerns about a retirement crisis do not see $22,000 a year as a middle class income. We are just arguing about adjectives here, there is not much disagreement on the situation.
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The Wall Street Journal devoted an article to the presidential candidates economic plans and their potential to affect growth and to help the middle class. Remarkably, the piece never once mentions the Federal Reserve Board and its current plans to raise interest rates in order to slow growth.
The Fed’s plans should be front and center in any discussion of efforts to boost growth either through tax cuts or additional spending, since if the Fed believes that such plans will simply lead to more inflation, then it will accelerate its rate hikes in order to prevent the economy from growing more rapidly. This means that in order to boost the growth rate, a plan would not just have to be well-designed for the economy, but it also would be necessary to get the approval of the Fed to allow additional growth. This point should have been mentioned.
In this respect, it is worth noting that Senator Bernie Sanders plan for a financial transactions tax would directly open up a considerable amount of economic space by eliminating close to $100 billion annually in wasteful financial transactions. Most research indicates that trading is relatively elastic, meaning that trading volume will decline in rough proportion to the extent that a tax raises cost. This means that the amount of revenue raised by a tax will correspond to resources freed up in the financial sector by reduced trading volume. These resources (worker and capital) could then be diverted to more productive sectors.
In principle, since this involves a reallocation from finance to other sectors, rather than a net increase in output, the Fed should be content to allow it to take place. Since so many of the top incomes are in finance, Sanders’ proposal would be hugely redistributive from the rich to the middle class.
The piece also includes the bizarre comment:
“Some economists believe that 4% [the growth rate targeted by Governors Bush and Christie] would be a stretch, at least for any significant period of time, given an aging U.S. population and lethargic productivity, big factors in determining growth.”
Actually, nearly all economists believe that 4 percent would be completely impossible on a sustained basis. Even sustaining a 3 percent growth rate over the next decade would be an extraordinary accomplishment. In other words Bush and Christie are just using nutty numbers. They presumably are aware of this fact, WSJ readers should be as well.
The Wall Street Journal devoted an article to the presidential candidates economic plans and their potential to affect growth and to help the middle class. Remarkably, the piece never once mentions the Federal Reserve Board and its current plans to raise interest rates in order to slow growth.
The Fed’s plans should be front and center in any discussion of efforts to boost growth either through tax cuts or additional spending, since if the Fed believes that such plans will simply lead to more inflation, then it will accelerate its rate hikes in order to prevent the economy from growing more rapidly. This means that in order to boost the growth rate, a plan would not just have to be well-designed for the economy, but it also would be necessary to get the approval of the Fed to allow additional growth. This point should have been mentioned.
In this respect, it is worth noting that Senator Bernie Sanders plan for a financial transactions tax would directly open up a considerable amount of economic space by eliminating close to $100 billion annually in wasteful financial transactions. Most research indicates that trading is relatively elastic, meaning that trading volume will decline in rough proportion to the extent that a tax raises cost. This means that the amount of revenue raised by a tax will correspond to resources freed up in the financial sector by reduced trading volume. These resources (worker and capital) could then be diverted to more productive sectors.
In principle, since this involves a reallocation from finance to other sectors, rather than a net increase in output, the Fed should be content to allow it to take place. Since so many of the top incomes are in finance, Sanders’ proposal would be hugely redistributive from the rich to the middle class.
The piece also includes the bizarre comment:
“Some economists believe that 4% [the growth rate targeted by Governors Bush and Christie] would be a stretch, at least for any significant period of time, given an aging U.S. population and lethargic productivity, big factors in determining growth.”
Actually, nearly all economists believe that 4 percent would be completely impossible on a sustained basis. Even sustaining a 3 percent growth rate over the next decade would be an extraordinary accomplishment. In other words Bush and Christie are just using nutty numbers. They presumably are aware of this fact, WSJ readers should be as well.
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