Robert Samuelson apparently doesn’t understand much about the economy and economics. That’s fine, many people don’t. Unfortunately, Mr. Samuelson has an economics column in a major national newspaper and he wants to attribute his ignorance to the rest of us.
In his column today bemoaning the seeming end of a trade-off between inequality and efficiency (we could buy ourselves some more equality at the price of a loss of efficiency) he tells readers:
“We do not know enough to manipulate economic growth, productivity and income distribution. …
“Okun’s book is emblematic of an era of overconfident economics. The underlying questions remain. Is the convergence of rising inequality and falling economic growth simply a coincidence? Or is more inequality a cause of weaker growth, a consequence of it — perhaps both? We lack definitive answers. Government must routinely act without full knowledge. That’s the point: In the real world, we often don’t know the true tradeoffs.”
Actually “we” know pretty well what happened. Since the rise in the dollar in the late 1990s, the U.S. has had a large trade deficit, which creates a big gap in demand. This gap in demand was filled by a stock bubble at the end of the 1990s and a housing bubble in the last decade. When the housing bubble burst, there was nothing to fill the demand gap created by the trade deficit.
Since it is not politically acceptable to talk about large budget deficits, and there is little interest in work sharing and other policies to reduce supply, the economy is likely to remain well below full employment levels of output. When the economy is below full employment, workers lack the bargaining power to secure their share of productivity growth, leading to upward redistribution. Upward redistribution is also helped by stronger and longer patent and copyright protection, special tax breaks that cultivate niches for finance, and subsidies to top management at non-profits (e.g. universities, hospitals, and foundations) in the form of tax exempt status.
We could reverse the situation by either having the government spend more money, pushing legislation that will tighten the labor market by reducing average hours worked per worker, or by measures that will reduce the value of the dollar against other currencies, thereby reducing the trade deficit. All of these measures would boost growth and led to stronger wage growth, thereby lessening inequality.
There is very little mystery about any of this, even if Robert Samuelson finds the situation confusing.
Robert Samuelson apparently doesn’t understand much about the economy and economics. That’s fine, many people don’t. Unfortunately, Mr. Samuelson has an economics column in a major national newspaper and he wants to attribute his ignorance to the rest of us.
In his column today bemoaning the seeming end of a trade-off between inequality and efficiency (we could buy ourselves some more equality at the price of a loss of efficiency) he tells readers:
“We do not know enough to manipulate economic growth, productivity and income distribution. …
“Okun’s book is emblematic of an era of overconfident economics. The underlying questions remain. Is the convergence of rising inequality and falling economic growth simply a coincidence? Or is more inequality a cause of weaker growth, a consequence of it — perhaps both? We lack definitive answers. Government must routinely act without full knowledge. That’s the point: In the real world, we often don’t know the true tradeoffs.”
Actually “we” know pretty well what happened. Since the rise in the dollar in the late 1990s, the U.S. has had a large trade deficit, which creates a big gap in demand. This gap in demand was filled by a stock bubble at the end of the 1990s and a housing bubble in the last decade. When the housing bubble burst, there was nothing to fill the demand gap created by the trade deficit.
Since it is not politically acceptable to talk about large budget deficits, and there is little interest in work sharing and other policies to reduce supply, the economy is likely to remain well below full employment levels of output. When the economy is below full employment, workers lack the bargaining power to secure their share of productivity growth, leading to upward redistribution. Upward redistribution is also helped by stronger and longer patent and copyright protection, special tax breaks that cultivate niches for finance, and subsidies to top management at non-profits (e.g. universities, hospitals, and foundations) in the form of tax exempt status.
We could reverse the situation by either having the government spend more money, pushing legislation that will tighten the labor market by reducing average hours worked per worker, or by measures that will reduce the value of the dollar against other currencies, thereby reducing the trade deficit. All of these measures would boost growth and led to stronger wage growth, thereby lessening inequality.
There is very little mystery about any of this, even if Robert Samuelson finds the situation confusing.
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You have to admire Niall Ferguson. There aren’t many people who are willing to write lengthy diatribes on topics on which they seem to know next to nothing, but some would say that is the definition of a Harvard professor.
Anyhow, he apparently believes that the victory of the Conservative Party in the U.K. election last week showed that he was correct to endorse their austerity policy and that Paul Krugman was wrong to criticize it. If he was familiar at all with the literature on the impact of the economy on elections he would know that elections are largely determined by the economy’s performance in the last year before an election, not an administration’s entire term. And, since the conservatives relaxed their austerity in the last two years (as had been widely noted long before the election), the economy was not performing badly in the immediate lead up to the election.
Ferguson’s piece presents a cornucopia of silly mistakes, which I don’t have time to address, but I will give my favorite:
“On more than one occasion during the crisis, Krugman applauded Gordon Brown for injecting capital directly into the British banks rather than relying on purchases of “troubled assets,” the initial thrust of the Troubled Asset Relief Program in the United States. In October 2008, Krugman engaged in the kind of sycophancy that usually indicates a man angling for a knighthood:
‘Has Gordon Brown, the British prime minister, saved the world financial system? … The Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. …. Governments [should] provide financial institutions with more capital in return for a share of ownership … [a] sort of temporary part-nationalization … The British government went straight to the heart of the problem – and moved to address it with stunning speed.’
“TARP has of course proved far more successful than the UK’s nationalization of too-big-to-fail behemoths like RBS.”
The small detail that Ferguson apparently missed is that TARP also went the route of giving the banks capital in exchange for share ownership in the form of the purchase of shares of preferred stock. At the time, Plan A from the Bush administration was to directly purchase the bad assets from the banks (hence the name “Troubled Asset Relief Program”). Krugman and others argued that the better route was to give the banks capital, which is what TARP eventually did, following Gordon Brown’s lead. (I personally favored letting the market work its magic and then pick up the pieces after the Wall Street behemoths were buried in the ground.) In other words, Ferguson is bizarrely holding up TARP as an alternative course to the path set out by Brown, when in fact it followed the path set out by Brown.
But the real story is the overall performance of the U.K. economy, which Ferguson somehow thinks was extraordinary. The data beg to differ, even if the U.K. has done better in the last couple of years as the government relaxed its austerity. Here is the per capita GDP record of the G-7 economies since the crisis.
Source: International Monetary Fund.
As can be seen, the U.K. ties France for fifth place, only beating out Italy for last place. If we treat 2010 as the start point, it managed to close the gap with France in the next four years (which also was forced to pursue austerity since it was in the euro zone), but fell further behind Germany, Japan, Canada, and the U.S.
In 2014, seven years after the beginning of the crisis, per capita GDP in the U.K. was virtually identical to what it had been in 2007. By comparison, per capita GDP in the U.S. in 1988 was 20.1 percent higher than it had been at start of the 1981 recession. In 1997 it was 12.8 percent larger than it had been at the start of the recession in 1990. It would require some extraordinary affirmative action for conservative politicians to follow Ferguson and declare the Cameron record a success.
Addendum
For folks who thought I was being unfair to use 2010 as a reference point, since Cameron only took office mid-year, you’re right. The OECD has the quarterly data. The UK economy grew at a 2.0 percent annual rate in the first quarter and a 4.0 percent rate in the second quarter when Cameron took office. This slowed to 2.6 percent in the third quarter and 0.1 percent in the fourth quarter. So taking the year as a whole as the start point for Cameron is undoubtedly too generous.
I should also explain that there is a reason for using the pre-recession level of output as a reference point. In the old days (i.e. before the pathetic recovery from this downturn) economists expected economies to bounce back quickly from a recession, making up the ground lost in the recession. This is why we had years of 5-7 percent growth following the steep downturns in 1974-1975 and 1981-1982. This recession has been different in that we have not seen a steep bounce back in any country. I feel it is appropriate to apply normal economic standards to evaluate policy performance instead of using affirmative action for inept policymakers.
You have to admire Niall Ferguson. There aren’t many people who are willing to write lengthy diatribes on topics on which they seem to know next to nothing, but some would say that is the definition of a Harvard professor.
Anyhow, he apparently believes that the victory of the Conservative Party in the U.K. election last week showed that he was correct to endorse their austerity policy and that Paul Krugman was wrong to criticize it. If he was familiar at all with the literature on the impact of the economy on elections he would know that elections are largely determined by the economy’s performance in the last year before an election, not an administration’s entire term. And, since the conservatives relaxed their austerity in the last two years (as had been widely noted long before the election), the economy was not performing badly in the immediate lead up to the election.
Ferguson’s piece presents a cornucopia of silly mistakes, which I don’t have time to address, but I will give my favorite:
“On more than one occasion during the crisis, Krugman applauded Gordon Brown for injecting capital directly into the British banks rather than relying on purchases of “troubled assets,” the initial thrust of the Troubled Asset Relief Program in the United States. In October 2008, Krugman engaged in the kind of sycophancy that usually indicates a man angling for a knighthood:
‘Has Gordon Brown, the British prime minister, saved the world financial system? … The Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. …. Governments [should] provide financial institutions with more capital in return for a share of ownership … [a] sort of temporary part-nationalization … The British government went straight to the heart of the problem – and moved to address it with stunning speed.’
“TARP has of course proved far more successful than the UK’s nationalization of too-big-to-fail behemoths like RBS.”
The small detail that Ferguson apparently missed is that TARP also went the route of giving the banks capital in exchange for share ownership in the form of the purchase of shares of preferred stock. At the time, Plan A from the Bush administration was to directly purchase the bad assets from the banks (hence the name “Troubled Asset Relief Program”). Krugman and others argued that the better route was to give the banks capital, which is what TARP eventually did, following Gordon Brown’s lead. (I personally favored letting the market work its magic and then pick up the pieces after the Wall Street behemoths were buried in the ground.) In other words, Ferguson is bizarrely holding up TARP as an alternative course to the path set out by Brown, when in fact it followed the path set out by Brown.
But the real story is the overall performance of the U.K. economy, which Ferguson somehow thinks was extraordinary. The data beg to differ, even if the U.K. has done better in the last couple of years as the government relaxed its austerity. Here is the per capita GDP record of the G-7 economies since the crisis.
Source: International Monetary Fund.
As can be seen, the U.K. ties France for fifth place, only beating out Italy for last place. If we treat 2010 as the start point, it managed to close the gap with France in the next four years (which also was forced to pursue austerity since it was in the euro zone), but fell further behind Germany, Japan, Canada, and the U.S.
In 2014, seven years after the beginning of the crisis, per capita GDP in the U.K. was virtually identical to what it had been in 2007. By comparison, per capita GDP in the U.S. in 1988 was 20.1 percent higher than it had been at start of the 1981 recession. In 1997 it was 12.8 percent larger than it had been at the start of the recession in 1990. It would require some extraordinary affirmative action for conservative politicians to follow Ferguson and declare the Cameron record a success.
Addendum
For folks who thought I was being unfair to use 2010 as a reference point, since Cameron only took office mid-year, you’re right. The OECD has the quarterly data. The UK economy grew at a 2.0 percent annual rate in the first quarter and a 4.0 percent rate in the second quarter when Cameron took office. This slowed to 2.6 percent in the third quarter and 0.1 percent in the fourth quarter. So taking the year as a whole as the start point for Cameron is undoubtedly too generous.
I should also explain that there is a reason for using the pre-recession level of output as a reference point. In the old days (i.e. before the pathetic recovery from this downturn) economists expected economies to bounce back quickly from a recession, making up the ground lost in the recession. This is why we had years of 5-7 percent growth following the steep downturns in 1974-1975 and 1981-1982. This recession has been different in that we have not seen a steep bounce back in any country. I feel it is appropriate to apply normal economic standards to evaluate policy performance instead of using affirmative action for inept policymakers.
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In an interview with Matt Bai, a political columnist with Yahoo, President Obama took issue with Senator Elizabeth Warren’s claim that the Trans-Pacific Partnership (TPP) and other trade deals that could be allowed special rules under fast-track status, could unravel financial regulation put in place by Dodd-Frank.
“‘Think about the logic of that, right?’ he went on. ‘The notion that I had this massive fight with Wall Street to make sure that we don’t repeat what happened in 2007, 2008. And then I sign a provision that would unravel it?’
“’I’d have to be pretty stupid,’ Obama said, laughing.”
President Obama may not want to rest the case for TPP on the strength of his status as a foe of Wall Street. He has not always been the strongest proponent of financial reform. Among other noteworthy items:
1) He has not sought the criminal prosecution of any executives at major banks for issuing or securitizing fraudulent mortgages, nor against executives at credit rating agencies for knowingly granting investment grade ratings to securities containing large numbers of improper or fraudulent mortgages;
2) He opposed the Brown-Kauffman bill, which would have broken up the big banks;
3) He did nothing to push cram-down legislation in Congress, which would have required banks to write-down the value of some underwater mortgages to the current market value of the home;
4) He supported the stripping of the Franken Amendment from Dodd-Frank. This amendment (which was approved by a large bi-partisan majority in the Senate) would have eliminated the conflict of interest faced by bond-rating agencies by having the Securities and Exchange Commission, rather than the issuer, pick the rating agency. (The line from opponents was that the SEC might send over unqualified analysts. Think about that one for a while.)
5) He only began to push the Volcker rule as a political move to shore up support the day after Republican Scott Brown won an upset election for a Senate seat in Massachusetts.
6) The administration had to be pushed by labor and consumer groups to keep a strong and independent consumer financial protection bureau in Dodd-Frank.
If President Obama wants to push the case for TPP he should probably rely on something other than his status as a foe of Wall Street.
Addendum:
It is worth noting that the fast-track legislation being requested by President Obama would extend for five years. This means that if a Republican is elected in 2016, they would be able to have future trade agreements approved on a straight up or down vote by a majority in Congress. If it is difficult to see how President Obama can assure Senator Warren, and other critics of fast-track, that a future Republican president would not use this power to weaken financial regulation, if they could not otherwise get the 60 votes needed in the Senate to overcome a filibuster.
In an interview with Matt Bai, a political columnist with Yahoo, President Obama took issue with Senator Elizabeth Warren’s claim that the Trans-Pacific Partnership (TPP) and other trade deals that could be allowed special rules under fast-track status, could unravel financial regulation put in place by Dodd-Frank.
“‘Think about the logic of that, right?’ he went on. ‘The notion that I had this massive fight with Wall Street to make sure that we don’t repeat what happened in 2007, 2008. And then I sign a provision that would unravel it?’
“’I’d have to be pretty stupid,’ Obama said, laughing.”
President Obama may not want to rest the case for TPP on the strength of his status as a foe of Wall Street. He has not always been the strongest proponent of financial reform. Among other noteworthy items:
1) He has not sought the criminal prosecution of any executives at major banks for issuing or securitizing fraudulent mortgages, nor against executives at credit rating agencies for knowingly granting investment grade ratings to securities containing large numbers of improper or fraudulent mortgages;
2) He opposed the Brown-Kauffman bill, which would have broken up the big banks;
3) He did nothing to push cram-down legislation in Congress, which would have required banks to write-down the value of some underwater mortgages to the current market value of the home;
4) He supported the stripping of the Franken Amendment from Dodd-Frank. This amendment (which was approved by a large bi-partisan majority in the Senate) would have eliminated the conflict of interest faced by bond-rating agencies by having the Securities and Exchange Commission, rather than the issuer, pick the rating agency. (The line from opponents was that the SEC might send over unqualified analysts. Think about that one for a while.)
5) He only began to push the Volcker rule as a political move to shore up support the day after Republican Scott Brown won an upset election for a Senate seat in Massachusetts.
6) The administration had to be pushed by labor and consumer groups to keep a strong and independent consumer financial protection bureau in Dodd-Frank.
If President Obama wants to push the case for TPP he should probably rely on something other than his status as a foe of Wall Street.
Addendum:
It is worth noting that the fast-track legislation being requested by President Obama would extend for five years. This means that if a Republican is elected in 2016, they would be able to have future trade agreements approved on a straight up or down vote by a majority in Congress. If it is difficult to see how President Obama can assure Senator Warren, and other critics of fast-track, that a future Republican president would not use this power to weaken financial regulation, if they could not otherwise get the 60 votes needed in the Senate to overcome a filibuster.
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That was the main takeaway from a NYT article on his trip to Nike. According to the article, he made many claims about the Trans-Pacific Partnership (TPP) and opponents of the deal which are clearly wrong.
For example, the article tells readers:
“he [President Obama] scorned critics who say it would undermine American laws and regulations on food safety, worker rights and even financial regulations, an implicit pushback against Ms. Warren. ‘They’re making this stuff up,’ he said. ‘This is just not true. No trade agreement’s going to force us to change our laws.'”
President Obama apparently doesn’t realize that the TPP will create an investor-state dispute settlement mechanism which will allow tribunals to impose huge penalties on the federal government, as well as state and local governments, whose laws are found to be in violation of the TPP. These fines could effectively bankrupt a government unless they change the law.
It is also worth noting that rulings by these tribunals are not subject to appeal, nor are they bound by precedent. Given the structure of the tribunal (the investor appoints one member of the panel, the government appoints a second, and the third is appointed jointly), a future Bush or Walker administration could appoint panelists who would side with foreign investors to overturn environmental, safety, and labor regulations at all levels of government. (Think of Antonin Scalia.)
President Obama apparently also doesn’t realize that the higher drug prices that would result from the stronger patent and related protections will be a drag on growth. In addition to creating distortions in the economy, the higher licensing fees paid to Pfizer, Merck, and other U.S. drug companies will crowd out U.S. exports of other goods and services.
Obama is also mistaken in apparently believing that the only alternative to the TPP is the status quo. In fact, many critics of the TPP have argued that a deal that included rules on currency would have their support.
This issue is hugely important, since it is highly unlikely that the U.S. economy will be able to reach full employment with trade deficits close to current levels. (It could be done with larger budget deficits, but no one thinks this is politically realistic.) Without a considerably tighter labor market, workers will lack the bargaining power to achieve wage gains. This means that income would continue to be redistributed upward.
The only plausible way to bring the trade deficit down is with a lower valued dollar which would make U.S. goods and services more competitive internationally. The TPP would provide an opportunity to address currency values, as many critics of the trade agreement have pointed out. It seems that Mr. Obama is unaware of this argument.
That was the main takeaway from a NYT article on his trip to Nike. According to the article, he made many claims about the Trans-Pacific Partnership (TPP) and opponents of the deal which are clearly wrong.
For example, the article tells readers:
“he [President Obama] scorned critics who say it would undermine American laws and regulations on food safety, worker rights and even financial regulations, an implicit pushback against Ms. Warren. ‘They’re making this stuff up,’ he said. ‘This is just not true. No trade agreement’s going to force us to change our laws.'”
President Obama apparently doesn’t realize that the TPP will create an investor-state dispute settlement mechanism which will allow tribunals to impose huge penalties on the federal government, as well as state and local governments, whose laws are found to be in violation of the TPP. These fines could effectively bankrupt a government unless they change the law.
It is also worth noting that rulings by these tribunals are not subject to appeal, nor are they bound by precedent. Given the structure of the tribunal (the investor appoints one member of the panel, the government appoints a second, and the third is appointed jointly), a future Bush or Walker administration could appoint panelists who would side with foreign investors to overturn environmental, safety, and labor regulations at all levels of government. (Think of Antonin Scalia.)
President Obama apparently also doesn’t realize that the higher drug prices that would result from the stronger patent and related protections will be a drag on growth. In addition to creating distortions in the economy, the higher licensing fees paid to Pfizer, Merck, and other U.S. drug companies will crowd out U.S. exports of other goods and services.
Obama is also mistaken in apparently believing that the only alternative to the TPP is the status quo. In fact, many critics of the TPP have argued that a deal that included rules on currency would have their support.
This issue is hugely important, since it is highly unlikely that the U.S. economy will be able to reach full employment with trade deficits close to current levels. (It could be done with larger budget deficits, but no one thinks this is politically realistic.) Without a considerably tighter labor market, workers will lack the bargaining power to achieve wage gains. This means that income would continue to be redistributed upward.
The only plausible way to bring the trade deficit down is with a lower valued dollar which would make U.S. goods and services more competitive internationally. The TPP would provide an opportunity to address currency values, as many critics of the trade agreement have pointed out. It seems that Mr. Obama is unaware of this argument.
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The Trans-Pacific Partnership (TPP) is often referred to in the media as a “free-trade” agreement. This is not true. Most of the pact is about putting in place a business-friendly regulatory structure, not reducing trade barriers. Perhaps more importantly, the deal will explicitly increase protectionist barriers in the form of stronger and longer copyright and patent-related protections.
These forms of protection impose the same sort of costs as any other form of protection. Markets are not smart enough to know that they aren’t supposed to create distortions for protections that our politicians like (e.g. copyrights and patents) as opposed to the protections they ostensibly don’t like (tariffs and quotas).
These distortions are likely to be large since copyrights and patents raise prices by many multiples of their free market price. For example, the patent protected version of the Hepatitis-C drug Sovaldi sells for $84,000 for a treatment in the United States. A high quality generic version is sold in India for less than $1,000. This gap implies that the patent would have the same effect in creating distortions as a 9000 percent tariff. Since the TPP would strengthen such protections, we can assume that the resulting distortions would increase.
In the case of drugs, because there is such asymmetry in knowledge between the drug companies and the patients and doctors, patent monopolies provide both enormous incentive and opportunity for drug companies to increase profits at the expense of patients. An analysis of the damage done by mismarketing of just five drugs found average costs of $27 billion a year between 1994-2008.
While the TPP may be increasing the incentives for drug companies to mislead the public about the safety and effectiveness of drugs, it is possible that the government’s ability to restrain such abuses may get even weaker. A drug company is now suing the Food and Drug Administration (FDA), claiming that it has the right to provide information about off-label uses of its drugs. The company claims this is a free speech issue. Given recent rulings from the Supreme Court on efforts to restrict campaign spending, it is certainly possible that the Court will rule for the company.
If drug companies win the right to promote their drugs for off-label uses (i.e. provide information), then it will make the FDA even less effective in restraining abuses in the future than it has been in the past. And the TPP will give drug companies more incentive for such abuses.
The Trans-Pacific Partnership (TPP) is often referred to in the media as a “free-trade” agreement. This is not true. Most of the pact is about putting in place a business-friendly regulatory structure, not reducing trade barriers. Perhaps more importantly, the deal will explicitly increase protectionist barriers in the form of stronger and longer copyright and patent-related protections.
These forms of protection impose the same sort of costs as any other form of protection. Markets are not smart enough to know that they aren’t supposed to create distortions for protections that our politicians like (e.g. copyrights and patents) as opposed to the protections they ostensibly don’t like (tariffs and quotas).
These distortions are likely to be large since copyrights and patents raise prices by many multiples of their free market price. For example, the patent protected version of the Hepatitis-C drug Sovaldi sells for $84,000 for a treatment in the United States. A high quality generic version is sold in India for less than $1,000. This gap implies that the patent would have the same effect in creating distortions as a 9000 percent tariff. Since the TPP would strengthen such protections, we can assume that the resulting distortions would increase.
In the case of drugs, because there is such asymmetry in knowledge between the drug companies and the patients and doctors, patent monopolies provide both enormous incentive and opportunity for drug companies to increase profits at the expense of patients. An analysis of the damage done by mismarketing of just five drugs found average costs of $27 billion a year between 1994-2008.
While the TPP may be increasing the incentives for drug companies to mislead the public about the safety and effectiveness of drugs, it is possible that the government’s ability to restrain such abuses may get even weaker. A drug company is now suing the Food and Drug Administration (FDA), claiming that it has the right to provide information about off-label uses of its drugs. The company claims this is a free speech issue. Given recent rulings from the Supreme Court on efforts to restrict campaign spending, it is certainly possible that the Court will rule for the company.
If drug companies win the right to promote their drugs for off-label uses (i.e. provide information), then it will make the FDA even less effective in restraining abuses in the future than it has been in the past. And the TPP will give drug companies more incentive for such abuses.
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Wow, the Social Security trustees have no better grasp of the economy than Alan Greenspan and the clowns at the Fed, the Congressional Budget Office, and other economic forecasting outfits! That is the implicit punch line of an article NBC ran with the headline, “Social Security may be in worse shape than we thought: study.”
The gist of the piece is that the Trustees projections have been overly optimistic since 2000. This is true. The trustees failed to recognize that the stock market bubble would collapse and throw the economy into a recession in 2001 and that the recovery from this recession would be very weak. Nor did they recognize that the housing bubble would collapse and throw the economy into an even deeper recession in 2007-2009 and the recovery would be even weaker.
It is reasonable to blame the trustees for missing these really huge bubbles, the collapse of which and the resulting damage were predictable. However, they erred in the same way as the vast majority of the economics profession. This does not excuse these huge errors. These people and their staffs are paid very well — say compared to people who don’t make mistakes cleaning rest rooms. However, it is extremely misleading to imply that the trustees are uniquely wearing rose-colored glasses in their view of the economy. It’s also worth noting that they erred on the pessimistic side when the economy had a growth and employment boom in the late 1990s.
The piece then tells us about a preferred approach using an infinite horizon rather than Social Security’s 75-year forecast period:
“Kotlikoff [Boston University economics professor, Larry Kotlikoff] wants the administration to calculate unfunded obligations using the “infinite horizon,” which accounts for funding after 75 years. Under this accounting system, SSA’s projected unfunded liabilities would be $24.9 trillion (instead of the $10.6 trillion projected in 2088).”
Presumably the point is to make readers really scared with a liability of $24.9 trillion! Scaring people could be the only possible motivation, since almost no one reading this piece has any idea of how much money $24.9 trillion is over the infinite future.
It would not have been difficult to make the number understandable to readers, since it can be found expressed as a share of GDP right in the trustees report. Table V1.F1 shows that $24.9 trillion is equal to 1.4 percent of future GDP. By comparison, the increase in military spending associated with the wars in Iraq and Afghanistan was equal to 1.6 percent of GDP at its peak.
If the concern is that mistaken assumptions will generate misleading numbers then that concern should be far greater with an infinite horizon calculation than a calculation for a 75-year horizon. After all, our knowledge of the 22nd and 23rd century is really not very good. (That is where most of the infinite horizon shortfall comes from.) Of course, people alive today also don’t get to make policy for people living 100 and 200 years from now. Assuming the country remains a democracy, the people alive at the time will decide what their social insurance programs look like.
If the point is to inform people and not to scare them, NBC might have celebrated the sharp reduction in the infinite horizon shortfall in Medicare. Back in 2008 the Trustees (Table III.B10) projected it would be $34.4 trillion (in 2008 dollars). The most recent report puts the shortfall at just $1.9 trillion (in 2014 dollars) or 0.1 percent of GDP. The change implies a reduction in the infinite horizon shortfall of almost $36 trillion (in 2014 dollars). This should be cause for real celebration for those arguing that infinite horizon projections are the way to go.
We look forward to the NBC piece on this good news.
Correction:
Andrew Biggs called my attention to the fact that the main point in the underlying article is that people are living longer than had been projected by the Social Security trustees, not that the they had over-predicted economic growth. As a consequence, we should expect more people to collect benefits, which worsens the program’s finances. There appears to be good evidence for this view.
A flip side is that if people are living longer than projected, and therefore presumably healthier, then we may expect more people to work later in life, which would improve the system’s finances. The article did not attempt to assess projections on retirement ages.
It is worth noting that whether or not workers share in the gains of economic growth over the next two decades, will swamp the impact of any conceivable increase in Social Security taxes that might be used to fund the program. Wages will be on average more than 40 percent higher in three decades according to the Social Security trustees projections. If the tax rate were raised by 3 full percentage points, it would take back less than 10 percent of the increase in wages.
Wow, the Social Security trustees have no better grasp of the economy than Alan Greenspan and the clowns at the Fed, the Congressional Budget Office, and other economic forecasting outfits! That is the implicit punch line of an article NBC ran with the headline, “Social Security may be in worse shape than we thought: study.”
The gist of the piece is that the Trustees projections have been overly optimistic since 2000. This is true. The trustees failed to recognize that the stock market bubble would collapse and throw the economy into a recession in 2001 and that the recovery from this recession would be very weak. Nor did they recognize that the housing bubble would collapse and throw the economy into an even deeper recession in 2007-2009 and the recovery would be even weaker.
It is reasonable to blame the trustees for missing these really huge bubbles, the collapse of which and the resulting damage were predictable. However, they erred in the same way as the vast majority of the economics profession. This does not excuse these huge errors. These people and their staffs are paid very well — say compared to people who don’t make mistakes cleaning rest rooms. However, it is extremely misleading to imply that the trustees are uniquely wearing rose-colored glasses in their view of the economy. It’s also worth noting that they erred on the pessimistic side when the economy had a growth and employment boom in the late 1990s.
The piece then tells us about a preferred approach using an infinite horizon rather than Social Security’s 75-year forecast period:
“Kotlikoff [Boston University economics professor, Larry Kotlikoff] wants the administration to calculate unfunded obligations using the “infinite horizon,” which accounts for funding after 75 years. Under this accounting system, SSA’s projected unfunded liabilities would be $24.9 trillion (instead of the $10.6 trillion projected in 2088).”
Presumably the point is to make readers really scared with a liability of $24.9 trillion! Scaring people could be the only possible motivation, since almost no one reading this piece has any idea of how much money $24.9 trillion is over the infinite future.
It would not have been difficult to make the number understandable to readers, since it can be found expressed as a share of GDP right in the trustees report. Table V1.F1 shows that $24.9 trillion is equal to 1.4 percent of future GDP. By comparison, the increase in military spending associated with the wars in Iraq and Afghanistan was equal to 1.6 percent of GDP at its peak.
If the concern is that mistaken assumptions will generate misleading numbers then that concern should be far greater with an infinite horizon calculation than a calculation for a 75-year horizon. After all, our knowledge of the 22nd and 23rd century is really not very good. (That is where most of the infinite horizon shortfall comes from.) Of course, people alive today also don’t get to make policy for people living 100 and 200 years from now. Assuming the country remains a democracy, the people alive at the time will decide what their social insurance programs look like.
If the point is to inform people and not to scare them, NBC might have celebrated the sharp reduction in the infinite horizon shortfall in Medicare. Back in 2008 the Trustees (Table III.B10) projected it would be $34.4 trillion (in 2008 dollars). The most recent report puts the shortfall at just $1.9 trillion (in 2014 dollars) or 0.1 percent of GDP. The change implies a reduction in the infinite horizon shortfall of almost $36 trillion (in 2014 dollars). This should be cause for real celebration for those arguing that infinite horizon projections are the way to go.
We look forward to the NBC piece on this good news.
Correction:
Andrew Biggs called my attention to the fact that the main point in the underlying article is that people are living longer than had been projected by the Social Security trustees, not that the they had over-predicted economic growth. As a consequence, we should expect more people to collect benefits, which worsens the program’s finances. There appears to be good evidence for this view.
A flip side is that if people are living longer than projected, and therefore presumably healthier, then we may expect more people to work later in life, which would improve the system’s finances. The article did not attempt to assess projections on retirement ages.
It is worth noting that whether or not workers share in the gains of economic growth over the next two decades, will swamp the impact of any conceivable increase in Social Security taxes that might be used to fund the program. Wages will be on average more than 40 percent higher in three decades according to the Social Security trustees projections. If the tax rate were raised by 3 full percentage points, it would take back less than 10 percent of the increase in wages.
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Matt O’Brien gets the story right. By most measures the stock market is above its normal levels, but given unusually low interest rates, it is not unreasonably priced. The price to earnings ratios are only slightly higher than in 2007, when almost no one thought the market was in a bubble. Back then the interest rate on 10-year Treasury bonds was over 5.0 percent, compared to around 2.0 percent today. That makes today’s market look like a decent buy, but don’t expect high returns.
One point is worth qualifying in O’Brien’s piece. He notes Greenspan’s famous irrational exuberance remark and says it didn’t do much beyond its immediate impact (markets did fall). This is likely because Greenspan backed away from it with doublespeak about how market valuations may be justified if profits accelerated. It would have been interesting to see what would have happened if he doubled down and continued to hit on the point, backed by data from the Fed. Janet Yellen’s foray into attacking bubbles this way last summer suggests that it can work.
Matt O’Brien gets the story right. By most measures the stock market is above its normal levels, but given unusually low interest rates, it is not unreasonably priced. The price to earnings ratios are only slightly higher than in 2007, when almost no one thought the market was in a bubble. Back then the interest rate on 10-year Treasury bonds was over 5.0 percent, compared to around 2.0 percent today. That makes today’s market look like a decent buy, but don’t expect high returns.
One point is worth qualifying in O’Brien’s piece. He notes Greenspan’s famous irrational exuberance remark and says it didn’t do much beyond its immediate impact (markets did fall). This is likely because Greenspan backed away from it with doublespeak about how market valuations may be justified if profits accelerated. It would have been interesting to see what would have happened if he doubled down and continued to hit on the point, backed by data from the Fed. Janet Yellen’s foray into attacking bubbles this way last summer suggests that it can work.
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Most Post readers know that the paper is prepared to say pretty much anything to push the Trans-Pacific Partnership (TPP) and other trade deals that are likely to have the effect of redistributing income upward. Therefore it is not surprising to see a column by Edward Alden, a senior fellow at the Council on Foreign Relations, lecturing the labor movement that they should support President Obama’s trade deals.
Alden’s basic point is that rather than oppose a trade deal that would likely further the upward redistribution of income, labor should demand conditions that ensure workers will benefit.
“They could insist, for example, on linking trade to new investments in infrastructure that would help U.S. exports flow to world markets. Or they could demand funding for comprehensive worker retraining programs like those in Europe, rather than the paltry Trade Adjustment Assistance that isn’t available to 99 percent of the unemployed.”
This sounds great. My guess is that most unions would gladly sign on to a deal that included $2 trillion in spending on infrastructure and education over the next decade as a quid pro quo for TPP. Or, if we’re making comparisons to Europe, how about a package that made U.S. look more like European welfare states, with the government largely picking up the tab on health care, college education, and childcare. Also, no more dismissal at will. If an employer wants to dump workers who have been with the company for twenty five years, how about six months of severance pay. That’s small by European standards, but a big step over what they get now (i.e. nothing).
Anyhow, if Alden could produce a deal with these provisions from President Obama and the Republican leadership in Congress, I’m sure those dunderheads in the labor movement would quickly sign on. Of course, my guess is Alden is instead arguing that the labor movement should settle for a few largely meaningless trinkets, and pretend that they are a big deal. As a practical matter that is all that would be on the table.
At the beginning of the piece Alden quotes president Obama:
“The Chamber of Commerce didn’t elect me twice — working folks did.”
This is partly true. President Obama did win because of votes from workers, but like his Republican opponents he raised huge amounts of money from rich people. No presidential candidate can win election in the United States without raising large amounts of money from rich people. This likely explains the structure of the TPP (which increases protection in areas that benefit corporations) and the president’s determination to get it through Congress.
Most Post readers know that the paper is prepared to say pretty much anything to push the Trans-Pacific Partnership (TPP) and other trade deals that are likely to have the effect of redistributing income upward. Therefore it is not surprising to see a column by Edward Alden, a senior fellow at the Council on Foreign Relations, lecturing the labor movement that they should support President Obama’s trade deals.
Alden’s basic point is that rather than oppose a trade deal that would likely further the upward redistribution of income, labor should demand conditions that ensure workers will benefit.
“They could insist, for example, on linking trade to new investments in infrastructure that would help U.S. exports flow to world markets. Or they could demand funding for comprehensive worker retraining programs like those in Europe, rather than the paltry Trade Adjustment Assistance that isn’t available to 99 percent of the unemployed.”
This sounds great. My guess is that most unions would gladly sign on to a deal that included $2 trillion in spending on infrastructure and education over the next decade as a quid pro quo for TPP. Or, if we’re making comparisons to Europe, how about a package that made U.S. look more like European welfare states, with the government largely picking up the tab on health care, college education, and childcare. Also, no more dismissal at will. If an employer wants to dump workers who have been with the company for twenty five years, how about six months of severance pay. That’s small by European standards, but a big step over what they get now (i.e. nothing).
Anyhow, if Alden could produce a deal with these provisions from President Obama and the Republican leadership in Congress, I’m sure those dunderheads in the labor movement would quickly sign on. Of course, my guess is Alden is instead arguing that the labor movement should settle for a few largely meaningless trinkets, and pretend that they are a big deal. As a practical matter that is all that would be on the table.
At the beginning of the piece Alden quotes president Obama:
“The Chamber of Commerce didn’t elect me twice — working folks did.”
This is partly true. President Obama did win because of votes from workers, but like his Republican opponents he raised huge amounts of money from rich people. No presidential candidate can win election in the United States without raising large amounts of money from rich people. This likely explains the structure of the TPP (which increases protection in areas that benefit corporations) and the president’s determination to get it through Congress.
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A post by Paul Krugman on the price of credit default swaps (CDS) on bonds issued by the United Kingdom reminds me of the dark days of the financial crisis when otherwise serious people used the price of CDS on U.S. Treasury bonds as a measure of the risk of a default by the U.S. government. With the price of the CDS rising, we had some of these people getting very concerned about the prospect of a default.
As the more calm among us tried to explain, it’s not clear that the price of a CDS on U.S. Treasury bonds measured anything. A person holding the CDS can only get paid off, if the U.S. government defaults on its debt and the bank that issued the CDS is around to make the payment. If there is a real default (I don’t mean a delay of a few hours or days over debt ceiling fights), it is hard to imagine what banks would still be standing to make good on the CDS they had issued.
In other words the probability that the U.S. government would default and there would be bank in a situation to meet its CDS obligations is very close to zero. This is why the price of a CDS issued on U.S. Treasury bonds is virtually meaningless as a measure of default risk.
A post by Paul Krugman on the price of credit default swaps (CDS) on bonds issued by the United Kingdom reminds me of the dark days of the financial crisis when otherwise serious people used the price of CDS on U.S. Treasury bonds as a measure of the risk of a default by the U.S. government. With the price of the CDS rising, we had some of these people getting very concerned about the prospect of a default.
As the more calm among us tried to explain, it’s not clear that the price of a CDS on U.S. Treasury bonds measured anything. A person holding the CDS can only get paid off, if the U.S. government defaults on its debt and the bank that issued the CDS is around to make the payment. If there is a real default (I don’t mean a delay of a few hours or days over debt ceiling fights), it is hard to imagine what banks would still be standing to make good on the CDS they had issued.
In other words the probability that the U.S. government would default and there would be bank in a situation to meet its CDS obligations is very close to zero. This is why the price of a CDS issued on U.S. Treasury bonds is virtually meaningless as a measure of default risk.
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