Clive Crooks apparently thought he stumbled on some new revelation when he read a piece by Robert Lawrence at the Peterson Institute for International Economics. Lawrence showed that we look at the pattern in average wages, and use a net measure of productivity (rather than gross), and a common deflator for adjusted wages and output, real wages kept pace with productivity growth, at least until the Great Recession.
I suppose Lawrence deserves some sort of congratulations, it took him less than a decade to replicate our work. Of course progressive economists had long known that the story of wage stagnation was overwhelmingly a story of redistribution among workers, from factory workers and retail clerks, to doctors, bankers, and CEOs. For this reason, the fact that average compensation had kept pace with productivity was hardly news to any of us, but I suppose the fact that Robert Lawrence and his centrist colleagues are now discovering this fact may qualify as news.
Clive Crooks apparently thought he stumbled on some new revelation when he read a piece by Robert Lawrence at the Peterson Institute for International Economics. Lawrence showed that we look at the pattern in average wages, and use a net measure of productivity (rather than gross), and a common deflator for adjusted wages and output, real wages kept pace with productivity growth, at least until the Great Recession.
I suppose Lawrence deserves some sort of congratulations, it took him less than a decade to replicate our work. Of course progressive economists had long known that the story of wage stagnation was overwhelmingly a story of redistribution among workers, from factory workers and retail clerks, to doctors, bankers, and CEOs. For this reason, the fact that average compensation had kept pace with productivity was hardly news to any of us, but I suppose the fact that Robert Lawrence and his centrist colleagues are now discovering this fact may qualify as news.
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Actually, after running many near hysterical pieces on the horrors of the Social Security disability program, yesterday’s editorial was reasonably moderate. Nonetheless, it concludes by telling readers:
“Though hardly the sole, or leading, cause of declining labor-force participation in the United States, SSDI is nevertheless a factor. Reforming it could raise the economy’s potential growth, as well as millions of people’s life prospects. The pending crisis creates an opportunity for bipartisan compromise, in which Congress diverts more money to SSDI — linked to structural changes. The last tax reallocation, 20 years ago, ‘was intended to create the time and opportunity for such reforms,’ as the Social Security trustees’ report puts it; it would seem that the time, and the opportunity, are finally here.”
There are a couple of points worth making here. First, the reason that the program is projected to face a shortfall next year, rather than a decade from now, is due to the fact that we had incompetent people at the Fed and Treasury who were not able to recognize a $8 trillion housing bubble and that its collapse would do serious damage to the economy. If they had recognized this fact, they would have taken steps to stem its growth before it posed such a danger to the economy. If we had stayed on the pre-recession growth path, the program would be fully funded through 2025.
The other obvious problem with the Post’s position is that it implies that the Disability program is too generous. In fact, the United States ranks near the bottom among wealthy countries in the share of GDP that goes to disability insurance.
There is a point that the program could be better structured to make it easier for people on disability to re-enter the labor market. Some steps have already been taken along these lines in recent years, but undoubtedly more can be done.
Note: The link to Eurostat data on spending on disability insurance as a share of GDP was broken. I replaced it with an link to OECD data, which is to a broader category (would include SSI), but should give the general story.
Actually, after running many near hysterical pieces on the horrors of the Social Security disability program, yesterday’s editorial was reasonably moderate. Nonetheless, it concludes by telling readers:
“Though hardly the sole, or leading, cause of declining labor-force participation in the United States, SSDI is nevertheless a factor. Reforming it could raise the economy’s potential growth, as well as millions of people’s life prospects. The pending crisis creates an opportunity for bipartisan compromise, in which Congress diverts more money to SSDI — linked to structural changes. The last tax reallocation, 20 years ago, ‘was intended to create the time and opportunity for such reforms,’ as the Social Security trustees’ report puts it; it would seem that the time, and the opportunity, are finally here.”
There are a couple of points worth making here. First, the reason that the program is projected to face a shortfall next year, rather than a decade from now, is due to the fact that we had incompetent people at the Fed and Treasury who were not able to recognize a $8 trillion housing bubble and that its collapse would do serious damage to the economy. If they had recognized this fact, they would have taken steps to stem its growth before it posed such a danger to the economy. If we had stayed on the pre-recession growth path, the program would be fully funded through 2025.
The other obvious problem with the Post’s position is that it implies that the Disability program is too generous. In fact, the United States ranks near the bottom among wealthy countries in the share of GDP that goes to disability insurance.
There is a point that the program could be better structured to make it easier for people on disability to re-enter the labor market. Some steps have already been taken along these lines in recent years, but undoubtedly more can be done.
Note: The link to Eurostat data on spending on disability insurance as a share of GDP was broken. I replaced it with an link to OECD data, which is to a broader category (would include SSI), but should give the general story.
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Paul Krugman rightly mocks Jeb Bush for taking credit for the strong growth in Florida during his tenure as governor. As Krugman points out, the reason for the strong growth was that Florida had one of the worst housing bubbles in the country. Its collapse gave Florida one of the worst downturns in the country. (I had made the same point a couple weeks earlier to a reporter fact-checking Bush’s claim on growth.) The weak banking regulation that facilitated the bubble is not the sort of thing you would think the Bush campaign wants to boast about.
But it is not just Governor Bush who is prone to boasting about bubble driven growth. The boom in the last four years of the Clinton presidency was largely driven by the stock bubble that developed in these years, with price to earning ratio rising to levels not seen since the 1920s. The collapse of this bubble gave us the recession in 2001. While this downturn was very mild if measured by GDP, from the standpoint of the labor market it was quite severe. We did not get back the jobs lost in the downturn until January of 2005. Until the more recent recession this was the longest period without job growth since the Great Depression.
The interesting lesson from the 1990s boom was that the economy could sustain much lower rates of unemployment than had been previously believed. The unemployment rate hit 4.0 percent as a year-round average in 2000, most economists had previously argued that the unemployment rate could not fall much below 6.0 percent without causing spiraling inflation. This indicated that as a supply side matter, the economy could support the high levels of employment/low levels of unemployment of the late 1990s.
However, the problem is the demand side. The channels to create the demand needed to get to low rates of unemployment — either larger budget deficits or lower trade deficits caused by a lower valued dollar — are blocked politically. (We could also look to reduce work hours through work-sharing, more vacation, paid family leave, etc.) This means that we may not see a strong labor market, like the one of the late 1990s, for some time.
But the key point here is that both parties are happy to take credit for bubble driven growth. Maybe there can be a quid pro quo where Jeb Bush will stop taking credit for the growth generated by the Florida housing bubble and the Democrats stop taken credit for the bubble driven growth of the Clinton years.
Paul Krugman rightly mocks Jeb Bush for taking credit for the strong growth in Florida during his tenure as governor. As Krugman points out, the reason for the strong growth was that Florida had one of the worst housing bubbles in the country. Its collapse gave Florida one of the worst downturns in the country. (I had made the same point a couple weeks earlier to a reporter fact-checking Bush’s claim on growth.) The weak banking regulation that facilitated the bubble is not the sort of thing you would think the Bush campaign wants to boast about.
But it is not just Governor Bush who is prone to boasting about bubble driven growth. The boom in the last four years of the Clinton presidency was largely driven by the stock bubble that developed in these years, with price to earning ratio rising to levels not seen since the 1920s. The collapse of this bubble gave us the recession in 2001. While this downturn was very mild if measured by GDP, from the standpoint of the labor market it was quite severe. We did not get back the jobs lost in the downturn until January of 2005. Until the more recent recession this was the longest period without job growth since the Great Depression.
The interesting lesson from the 1990s boom was that the economy could sustain much lower rates of unemployment than had been previously believed. The unemployment rate hit 4.0 percent as a year-round average in 2000, most economists had previously argued that the unemployment rate could not fall much below 6.0 percent without causing spiraling inflation. This indicated that as a supply side matter, the economy could support the high levels of employment/low levels of unemployment of the late 1990s.
However, the problem is the demand side. The channels to create the demand needed to get to low rates of unemployment — either larger budget deficits or lower trade deficits caused by a lower valued dollar — are blocked politically. (We could also look to reduce work hours through work-sharing, more vacation, paid family leave, etc.) This means that we may not see a strong labor market, like the one of the late 1990s, for some time.
But the key point here is that both parties are happy to take credit for bubble driven growth. Maybe there can be a quid pro quo where Jeb Bush will stop taking credit for the growth generated by the Florida housing bubble and the Democrats stop taken credit for the bubble driven growth of the Clinton years.
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In a Wonkblog post, Ana Swanson complained that people are not sufficiently worried about the wealth gap by age. This should rate high on the list of items for people not to worry about. The basic reason is simple, for most people wealth is not a very good measure of their well-being and furthermore, the meaning of “wealth” has changed substantially over time.
If that sounds strange, let me make it simpler. If we go back thirty years, most middle income retirees could count on getting a substantial amount of retirement income from a defined benefit pension. Today that is much less likely to be the case. This means that to maintain the same standard of living in retirement, someone reaching retirement age would need much more wealth today than was true thirty years ago. They are also likely to need considerably more money, relative to their income, to cover health care costs since Medicare covers a much smaller share of health care costs today than it did thirty years ago. For this reason, the sort of comparison of the wealth of retirees or near retirees shown in the figures in this blog are not very useful for showing trends in wealth through time.
There is a similar story for young people. Young people never had much wealth so whether a 30-year-old has 40 percent more or less of a net worth of $8,000 is not going to mean much for their life’s prospects. Furthermore, measured wealth may actually be inversely related to a young person’s economic prospects. While someone who accrued $30,000 in student loan debt getting a degree (or possibly not getting a degree) from Corinthian College is in bad shape, a person who ran up $150,000 in debt getting a Harvard MBA is likely to do just fine.
For these reasons, the wealth of young people is not a very useful measure. We can look at their income and see how that has changed over time. That does not look good for high school grads, nor even people with a college degree. This should provide a serious basis for concern about the economic well-being of the young, much more so than their lack of wealth.
In a Wonkblog post, Ana Swanson complained that people are not sufficiently worried about the wealth gap by age. This should rate high on the list of items for people not to worry about. The basic reason is simple, for most people wealth is not a very good measure of their well-being and furthermore, the meaning of “wealth” has changed substantially over time.
If that sounds strange, let me make it simpler. If we go back thirty years, most middle income retirees could count on getting a substantial amount of retirement income from a defined benefit pension. Today that is much less likely to be the case. This means that to maintain the same standard of living in retirement, someone reaching retirement age would need much more wealth today than was true thirty years ago. They are also likely to need considerably more money, relative to their income, to cover health care costs since Medicare covers a much smaller share of health care costs today than it did thirty years ago. For this reason, the sort of comparison of the wealth of retirees or near retirees shown in the figures in this blog are not very useful for showing trends in wealth through time.
There is a similar story for young people. Young people never had much wealth so whether a 30-year-old has 40 percent more or less of a net worth of $8,000 is not going to mean much for their life’s prospects. Furthermore, measured wealth may actually be inversely related to a young person’s economic prospects. While someone who accrued $30,000 in student loan debt getting a degree (or possibly not getting a degree) from Corinthian College is in bad shape, a person who ran up $150,000 in debt getting a Harvard MBA is likely to do just fine.
For these reasons, the wealth of young people is not a very useful measure. We can look at their income and see how that has changed over time. That does not look good for high school grads, nor even people with a college degree. This should provide a serious basis for concern about the economic well-being of the young, much more so than their lack of wealth.
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Apparently the NYT believes it does. A lengthy article on the growth of Chinese foreign investment told readers:
“But the show of financial strength [foreign investment by China] also makes China — and the world — more vulnerable. Long an engine of global growth, China is taking on new risks by exposing itself to shaky political regimes, volatile emerging markets and other economic forces beyond its control.
“Any major problems could weigh on China’s growth, particularly at a time when it is already slowing.”
Usually investing in other countries is thought to both increase returns to the country doing the investment and diversify risks, since it is unlikely that foreign countries will be subject to the same problems that may be hitting China (or the U.S.) at the same time. It is interesting that the NYT seems to hold the opposite perspective.
The piece seems to imply that China is unusual in the demands it makes on the countries in which it invests:
“China is forcing countries to play by its financial rules, which can be onerous. Many developing countries, in exchange for loans, pay steep interest rates and give up the rights to their natural resources for years. China has a lock on close to 90 percent of Ecuador’s oil exports, which mostly goes to paying off its loans.”
The United States took the lead in establishing the International Monetary Fund, which often acts as its agent in disputes. For example, in the East Asian financial crisis the I.M.F. imposed very detailed programs on the countries of the region, which set tax and spending schedules, changed regulations throughout the economy, and required the privatization of various industries. The conditions placed by China on the countries in which it invests may be different, but there are not without precedent.
The piece also bizarrely implies that labor abuses by U.S. companies or their contractors is a thing of the past, telling readers:
“Chinese mining and manufacturing operations, like many American and European companies in previous decades, have been accused of abusing workers overseas.”
Of course there are many places in the world, most notably Bangladesh and Cambodia, where there are regular reports of workers, often children, working long hours in dangerous conditions to make goods under contract with U.S. corporations. Sometimes these workers are held against their will and have their pay stolen by their employers. This is an ongoing problem, not a historical concern.
In discussing the new Chinese infrastructure bank the piece tells readers:
“Washington is worried that China will create its own rules, with lower expectations for transparency, governance and the environment.”
It would be helpful to know who in Washington says they are worried about these issues. Presumably all of Washington does not have these concerns. Also, just because politicians say these are their concerns, it doesn’t mean they are their actual concerns. For example, it may just be possible they fear competition from a Chinese investment bank.
Thanks to Keane Bhatt for calling this piece to my attention.
Note: I edited this to make it clear that the labor abuses in Cambodia and Bangladesh are occuring at factories that produce items for U.S. corporations.
Apparently the NYT believes it does. A lengthy article on the growth of Chinese foreign investment told readers:
“But the show of financial strength [foreign investment by China] also makes China — and the world — more vulnerable. Long an engine of global growth, China is taking on new risks by exposing itself to shaky political regimes, volatile emerging markets and other economic forces beyond its control.
“Any major problems could weigh on China’s growth, particularly at a time when it is already slowing.”
Usually investing in other countries is thought to both increase returns to the country doing the investment and diversify risks, since it is unlikely that foreign countries will be subject to the same problems that may be hitting China (or the U.S.) at the same time. It is interesting that the NYT seems to hold the opposite perspective.
The piece seems to imply that China is unusual in the demands it makes on the countries in which it invests:
“China is forcing countries to play by its financial rules, which can be onerous. Many developing countries, in exchange for loans, pay steep interest rates and give up the rights to their natural resources for years. China has a lock on close to 90 percent of Ecuador’s oil exports, which mostly goes to paying off its loans.”
The United States took the lead in establishing the International Monetary Fund, which often acts as its agent in disputes. For example, in the East Asian financial crisis the I.M.F. imposed very detailed programs on the countries of the region, which set tax and spending schedules, changed regulations throughout the economy, and required the privatization of various industries. The conditions placed by China on the countries in which it invests may be different, but there are not without precedent.
The piece also bizarrely implies that labor abuses by U.S. companies or their contractors is a thing of the past, telling readers:
“Chinese mining and manufacturing operations, like many American and European companies in previous decades, have been accused of abusing workers overseas.”
Of course there are many places in the world, most notably Bangladesh and Cambodia, where there are regular reports of workers, often children, working long hours in dangerous conditions to make goods under contract with U.S. corporations. Sometimes these workers are held against their will and have their pay stolen by their employers. This is an ongoing problem, not a historical concern.
In discussing the new Chinese infrastructure bank the piece tells readers:
“Washington is worried that China will create its own rules, with lower expectations for transparency, governance and the environment.”
It would be helpful to know who in Washington says they are worried about these issues. Presumably all of Washington does not have these concerns. Also, just because politicians say these are their concerns, it doesn’t mean they are their actual concerns. For example, it may just be possible they fear competition from a Chinese investment bank.
Thanks to Keane Bhatt for calling this piece to my attention.
Note: I edited this to make it clear that the labor abuses in Cambodia and Bangladesh are occuring at factories that produce items for U.S. corporations.
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That’s the assertion at the end of Robert Samuelson’s piece on the 50th anniversary of the creation of Medicare and Medicaid. Samuelson tells readers:
“By 2030, the number of Medicare beneficiaries is projected to reach 81 million, an almost 50 percent increase from today. Meanwhile, higher health spending has squeezed other programs. That’s an ironic footnote for the triumph of ’65: By threatening the rest of government, the instruments of a liberal agenda — Medicare and Medicaid — have bred illiberal consequences.”
In fact, the federal government spends considerably more, as a share of GDP, on education than it did before Medicare and Medicaid were created. There have also been expansions of spending in other areas, most notably the insurance subsidies in the Affordable Care Act. It is not clear that we would be spending more money in other areas if we did not have Medicare and Medicaid. It is possible that the success of these programs make the public willing to support spending in other areas.
Addendum:
Robert’s comment reminds me of the obvious point that I should have included originally. Because seniors have most of their health care costs covered by Medicare, they have more money to pay for other things, like taxes for other government services. Samuelson is effectively arguing that if people had their taxes reduced by the amount they pay for Medicare and Medicaid, but had their health care costs increase by an even larger amount (Medicare is far more efficient than the private health care system) then they would be willing to pay more in taxes for other services. There is no reason to believe this is true.
That’s the assertion at the end of Robert Samuelson’s piece on the 50th anniversary of the creation of Medicare and Medicaid. Samuelson tells readers:
“By 2030, the number of Medicare beneficiaries is projected to reach 81 million, an almost 50 percent increase from today. Meanwhile, higher health spending has squeezed other programs. That’s an ironic footnote for the triumph of ’65: By threatening the rest of government, the instruments of a liberal agenda — Medicare and Medicaid — have bred illiberal consequences.”
In fact, the federal government spends considerably more, as a share of GDP, on education than it did before Medicare and Medicaid were created. There have also been expansions of spending in other areas, most notably the insurance subsidies in the Affordable Care Act. It is not clear that we would be spending more money in other areas if we did not have Medicare and Medicaid. It is possible that the success of these programs make the public willing to support spending in other areas.
Addendum:
Robert’s comment reminds me of the obvious point that I should have included originally. Because seniors have most of their health care costs covered by Medicare, they have more money to pay for other things, like taxes for other government services. Samuelson is effectively arguing that if people had their taxes reduced by the amount they pay for Medicare and Medicaid, but had their health care costs increase by an even larger amount (Medicare is far more efficient than the private health care system) then they would be willing to pay more in taxes for other services. There is no reason to believe this is true.
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A New York Times article may have misled readers by implying that a state or local government with inadequate pension funds is relieved of its pension liabilities. In the context of a court ruling on the constitutionality of a plan negotiated between the city of Chicago and most of its unions, the article told readers:
“An insolvent system would be able to pay retirees only about 30 percent of their benefits. The cuts before the court were less drastic, and in combination with other changes, were supposed to leave the workers and retirees better off.”
Actually the city is still legally obligated to make the full payment for workers’ pensions even if the funds are depleted. In this case the payment would have to come directly from current revenue or the sale of assets. Workers may in fact be better off with a reduced pension in the sense that they would care about the city’s ability to pay current workers, in addition to retirees, and also its ability to provide necessary services, however it is wrong to imply that the insolvency of the pension funds would end the city’s obligations to retired workers.
A New York Times article may have misled readers by implying that a state or local government with inadequate pension funds is relieved of its pension liabilities. In the context of a court ruling on the constitutionality of a plan negotiated between the city of Chicago and most of its unions, the article told readers:
“An insolvent system would be able to pay retirees only about 30 percent of their benefits. The cuts before the court were less drastic, and in combination with other changes, were supposed to leave the workers and retirees better off.”
Actually the city is still legally obligated to make the full payment for workers’ pensions even if the funds are depleted. In this case the payment would have to come directly from current revenue or the sale of assets. Workers may in fact be better off with a reduced pension in the sense that they would care about the city’s ability to pay current workers, in addition to retirees, and also its ability to provide necessary services, however it is wrong to imply that the insolvency of the pension funds would end the city’s obligations to retired workers.
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The Washington Post reported on a speech by former Secretary of State Hillary Clinton in which she decried corporate America’s short-term focus and called on companies to invest in their workers. She did not indicate any specific proposals for bringing this about. In an earlier speech she had suggested tax incentives to promote profit sharing.
It actually is not hard to give companies more incentive to invest in their workers, we can just make it harder for them to fire them. According to the OECD the United States has by far the weakest employment protection legislation, meaning that it is extremely easy to fire workers. The United States is the only country in which even long-term workers can be fired immediately for no reason and with no compensation.
Laws that imposed some cost for firing long-term workers would give companies more incentive to invest in workers and ensure that their productivity continues to rise. This is a very simple and well-established mechanism that is likely to be far more direct than any tax scheme that Ms. Clinton might put forward.
While she has not put out any specifics of her plan to promote profit sharing, it is worth noting that Carter administration tax incentive to promote employee ownership has largely been used as a tax break for creative owners. For example, when Sam Zell bought up the Tribune Company in 2007 he used the money in the workers’ pensions to create an employee stock ownership plan, which provided much of the money for the purchase. While this did nothing to give workers any effective control of the company, it potentially provided enormous tax advantages to Zell. (Since the company lost money, he turned out not to need the tax break.)
The Washington Post reported on a speech by former Secretary of State Hillary Clinton in which she decried corporate America’s short-term focus and called on companies to invest in their workers. She did not indicate any specific proposals for bringing this about. In an earlier speech she had suggested tax incentives to promote profit sharing.
It actually is not hard to give companies more incentive to invest in their workers, we can just make it harder for them to fire them. According to the OECD the United States has by far the weakest employment protection legislation, meaning that it is extremely easy to fire workers. The United States is the only country in which even long-term workers can be fired immediately for no reason and with no compensation.
Laws that imposed some cost for firing long-term workers would give companies more incentive to invest in workers and ensure that their productivity continues to rise. This is a very simple and well-established mechanism that is likely to be far more direct than any tax scheme that Ms. Clinton might put forward.
While she has not put out any specifics of her plan to promote profit sharing, it is worth noting that Carter administration tax incentive to promote employee ownership has largely been used as a tax break for creative owners. For example, when Sam Zell bought up the Tribune Company in 2007 he used the money in the workers’ pensions to create an employee stock ownership plan, which provided much of the money for the purchase. While this did nothing to give workers any effective control of the company, it potentially provided enormous tax advantages to Zell. (Since the company lost money, he turned out not to need the tax break.)
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Bloomberg got into the act today with a quote from a Chinese economist telling readers:
“‘A lot of entrepreneurs probably have invested in the stock market and now they have seen a significant loss,’ Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in a Bloomberg Television interview. ‘As a result business confidence has lowered. In the past, sentiment tends to have a lot of impact on this survey.'”
The problem with story for arithmetic fans everywhere is that people only lost money on what they have invested since April. The Shanghai stock market is still up by more than 25 percent since the start of the year and nearly double its year ago level. In other words, not many people could be on net losers in this story, even if they are not quite as rich as they hoped to be.
Bloomberg got into the act today with a quote from a Chinese economist telling readers:
“‘A lot of entrepreneurs probably have invested in the stock market and now they have seen a significant loss,’ Liu Li-Gang, chief Greater China economist at Australia & New Zealand Banking Group Ltd. in Hong Kong, said in a Bloomberg Television interview. ‘As a result business confidence has lowered. In the past, sentiment tends to have a lot of impact on this survey.'”
The problem with story for arithmetic fans everywhere is that people only lost money on what they have invested since April. The Shanghai stock market is still up by more than 25 percent since the start of the year and nearly double its year ago level. In other words, not many people could be on net losers in this story, even if they are not quite as rich as they hoped to be.
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The NYT gave us a bit of the old “he said, she said” in an article reporting on the Obama administration’s latest push for reauthorizing the Export-Import Bank. It told readers:
“While opponents contend that most of the bank’s money benefits corporate giants like Boeing, General Electric and Caterpillar, the small-business owners invited to the White House underscored supporters’ counterargument that most of the bank’s beneficiaries are smaller companies. Mr. Obama’s guests included the owners of Love & Quiches Gourmet in New York, Ferra Coffee in Texas and Bob’s Red Mill in Oregon.”
Of course the opponents are right. The largest beneficiaries include companies like Boeing, Caterpillar and other huge companies. In a typical year the fifteen largest beneficiaries will get more than 85 percent of the bank’s loans or guarantees and often more than 95 percent.
If President Obama and other supporters of the bank were actually concerned about the smaller companies who are the bulk of the bank’s beneficiaries it could presumably propose that the bank be reauthorized with a cap of something like $10-20 million on loans per beneficiary. This would ensure that the small companies who were President Obama’s guests could still get their loans, without giving taxpayer handouts to some of the country’s biggest companies.
The article concludes by telling readers:
“‘The Export-Import Bank makes money for the U.S. government,’ Mr. Obama said, referring to the loan repayments and proceeds from borrowers. ‘This is not a situation in which taxpayers are subsidizing these companies.’
In a fully employed economy (i.e. one in which the Federal Reserve Board is raising interest rates to slow the pace of job creation and economic growth) a below market interest rate loan that is issued or guaranteed by the Export-Import Bank is pulling capital away from other uses. This means that companies not favored by the Export-Import Bank will pay higher interest rates on their loans because of the loans supported by the Export-Import Bank. This is in effect a tax on other borrowers to support the companies getting loans from the Export-Import Bank.
Every economist in the Obama administration knows this to be true. It would have been helpful to point this fact out to readers who might otherwise believe that the Export-Import Bank has free money as President Obama appears to be claiming.
The NYT gave us a bit of the old “he said, she said” in an article reporting on the Obama administration’s latest push for reauthorizing the Export-Import Bank. It told readers:
“While opponents contend that most of the bank’s money benefits corporate giants like Boeing, General Electric and Caterpillar, the small-business owners invited to the White House underscored supporters’ counterargument that most of the bank’s beneficiaries are smaller companies. Mr. Obama’s guests included the owners of Love & Quiches Gourmet in New York, Ferra Coffee in Texas and Bob’s Red Mill in Oregon.”
Of course the opponents are right. The largest beneficiaries include companies like Boeing, Caterpillar and other huge companies. In a typical year the fifteen largest beneficiaries will get more than 85 percent of the bank’s loans or guarantees and often more than 95 percent.
If President Obama and other supporters of the bank were actually concerned about the smaller companies who are the bulk of the bank’s beneficiaries it could presumably propose that the bank be reauthorized with a cap of something like $10-20 million on loans per beneficiary. This would ensure that the small companies who were President Obama’s guests could still get their loans, without giving taxpayer handouts to some of the country’s biggest companies.
The article concludes by telling readers:
“‘The Export-Import Bank makes money for the U.S. government,’ Mr. Obama said, referring to the loan repayments and proceeds from borrowers. ‘This is not a situation in which taxpayers are subsidizing these companies.’
In a fully employed economy (i.e. one in which the Federal Reserve Board is raising interest rates to slow the pace of job creation and economic growth) a below market interest rate loan that is issued or guaranteed by the Export-Import Bank is pulling capital away from other uses. This means that companies not favored by the Export-Import Bank will pay higher interest rates on their loans because of the loans supported by the Export-Import Bank. This is in effect a tax on other borrowers to support the companies getting loans from the Export-Import Bank.
Every economist in the Obama administration knows this to be true. It would have been helpful to point this fact out to readers who might otherwise believe that the Export-Import Bank has free money as President Obama appears to be claiming.
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