That’s the question that millions of readers of the NYT will be asking after seeing an analysis of the deal between Greece and the European Union that told readers:
“Moreover, the finance ministers made clear that Greece will not get any more cash until it satisfies them it can keep a lid on spending.”
In fact, Greece has already cut government spending by almost 15 percent in real terms from 2008 to 2014, according to the International Monetary Fund (I.M.F.). This spending cut is equal to almost 9.0 percent of Greece’s potential GDP. This would be the equivalent of a cut in annual spending of $1.6 trillion in the United States in terms of its economic impact.
The piece also asserts that “leaders in the rest of Europe do not want to join or, more important, finance the Greek-led revolt.” Actually the financing is going from Greece to the rest of Europe since Greece is now running a primary budget surplus. That means that the government is collecting enough revenue to finance its spending, excluding interest payments. It is the size of the interest payments, which go primarily from Greece to the European Union, European Central Bank, and I.M.F. that is at issue. Greece is not asking for additional money from the rest of Europe. In the event that Greece leaves the euro the payments on its debt will almost certainly stop altogether, so the question is how much financing the rest of Europe gets from Greece, not how much financing Greece gets from Europe.
That’s the question that millions of readers of the NYT will be asking after seeing an analysis of the deal between Greece and the European Union that told readers:
“Moreover, the finance ministers made clear that Greece will not get any more cash until it satisfies them it can keep a lid on spending.”
In fact, Greece has already cut government spending by almost 15 percent in real terms from 2008 to 2014, according to the International Monetary Fund (I.M.F.). This spending cut is equal to almost 9.0 percent of Greece’s potential GDP. This would be the equivalent of a cut in annual spending of $1.6 trillion in the United States in terms of its economic impact.
The piece also asserts that “leaders in the rest of Europe do not want to join or, more important, finance the Greek-led revolt.” Actually the financing is going from Greece to the rest of Europe since Greece is now running a primary budget surplus. That means that the government is collecting enough revenue to finance its spending, excluding interest payments. It is the size of the interest payments, which go primarily from Greece to the European Union, European Central Bank, and I.M.F. that is at issue. Greece is not asking for additional money from the rest of Europe. In the event that Greece leaves the euro the payments on its debt will almost certainly stop altogether, so the question is how much financing the rest of Europe gets from Greece, not how much financing Greece gets from Europe.
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The NYT reported that efforts by rich Chinese to get some of their wealth out of the country have led to downward pressure on the value of the country’s currency. It noted that the central bank is trying to counteract some of this pressure by selling some its foreign exchange reserves to buy up yuan. It then tells readers:
“A weaker renminbi could produce greater tensions with the United States, by widening that trade imbalance. The Obama administration is in a tricky position, however. It has long argued that Beijing should guide the value of the renminbi less and let market forces prevail. But following that logic now and letting the renminbi fall further could make it even harder for American producers to compete.”
This is not accurate. As the article notes, China’s central bank holds $3.8 trillion in foreign exchange reserves. This is close to four times what a country with an economy the size of China’s would be expected to hold. The holdings of dollars and other reserves prop up the dollar against the yuan even if China’s bank decides to sell off some of its holdings.
In this way, it is very similar to the situation of the Fed with respect to quantitative easing. Even if the Fed sells off some of its bonds, the net effect of its policy is still to lower interest rates, as long as it still has a large stock of long-term debt on its balance sheets.
The NYT reported that efforts by rich Chinese to get some of their wealth out of the country have led to downward pressure on the value of the country’s currency. It noted that the central bank is trying to counteract some of this pressure by selling some its foreign exchange reserves to buy up yuan. It then tells readers:
“A weaker renminbi could produce greater tensions with the United States, by widening that trade imbalance. The Obama administration is in a tricky position, however. It has long argued that Beijing should guide the value of the renminbi less and let market forces prevail. But following that logic now and letting the renminbi fall further could make it even harder for American producers to compete.”
This is not accurate. As the article notes, China’s central bank holds $3.8 trillion in foreign exchange reserves. This is close to four times what a country with an economy the size of China’s would be expected to hold. The holdings of dollars and other reserves prop up the dollar against the yuan even if China’s bank decides to sell off some of its holdings.
In this way, it is very similar to the situation of the Fed with respect to quantitative easing. Even if the Fed sells off some of its bonds, the net effect of its policy is still to lower interest rates, as long as it still has a large stock of long-term debt on its balance sheets.
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To paraphrase a line from an iconic American toy doll, “currency values are hard.” That is probably the best way to describe the Washington Post’s editorial against including rules on currency values in trade agreements.
The Post’s essential argument against including rules on currency values is that some measures whose main purpose is not to affect currency values may nonetheless affect currency values. Its example is the Fed’s quantitative easing (QE) policy, which by lowering interest rates also had the effect of lowering the value of the dollar. (It’s not clear why the Post singles out QE, since any Fed cut in interest rates would also lower the value of the dollar, other things equal.) The Post then argues that other countries could have contested QE policy as an unfair effort to lower the value of the dollar.
If the Post editorial board really believes this argument then it would be opposed to almost any possible trade agreement. Almost all trade agreements prohibit subsidies on exports. For example, the United States and other parties to trade deals are prohibiting from giving a 20 percent subsidy to steel exports so as to help their domestic steel industries. That’s about as basic as it gets.
But what about providing public education and training for the workers in the steel industry, is that a subsidy? How about having the government pick up the tab for the roads and ports used to export the steel? How about tax abatements and land condemnations for the construction of new steel factories? How about providing below-market interest loans through the Export-Import Bank? All of these are arguably forms of export subsidies and in fact raise far more difficult questions than quantitative easing.
If the Washington Post’s editors really can’t tell the difference between a policy whose primary purpose and effect is boosting aggregate demand in the United States by lowering interest rates and policy that directly lowers the value of the dollar by purchasing trillions of dollars of foreign currency, then surely they can’t tell the difference between education and infrastructure policy and export subsidies.
In short, the Washington Post editorial board apparently thinks our trade officials lack the competence to do trade policy. If they took their own logic seriously they would recommend just canning trade deals altogether; they are too complicated.
Addendum:
There is one point worth noting on this issue that the WaPo editorial doesn’t quite make. If the Obama administration cared about currency values there are measures it could take now. For example, it could push the Fed to actually buy up $1 trillion of currencies that are under-valued against the dollar. For currencies that are not freely traded it can try to put indirect pressure on their value by buying up futures or by offering to buy the currency directly from holders at a price above the pegged exchange rate. For example if the yuan is being targeted at a price of 16 cents, the Treasury could offer to pay 25 cents per yuan.
There is nothing that prevents the United States from going this route, although it would obviously be seen as a hostile step by our trading partners. Presumably the threat of going this route would lead to serious negotiations on currency values and end up with an agreement that resulted in a lower valued dollar.
To paraphrase a line from an iconic American toy doll, “currency values are hard.” That is probably the best way to describe the Washington Post’s editorial against including rules on currency values in trade agreements.
The Post’s essential argument against including rules on currency values is that some measures whose main purpose is not to affect currency values may nonetheless affect currency values. Its example is the Fed’s quantitative easing (QE) policy, which by lowering interest rates also had the effect of lowering the value of the dollar. (It’s not clear why the Post singles out QE, since any Fed cut in interest rates would also lower the value of the dollar, other things equal.) The Post then argues that other countries could have contested QE policy as an unfair effort to lower the value of the dollar.
If the Post editorial board really believes this argument then it would be opposed to almost any possible trade agreement. Almost all trade agreements prohibit subsidies on exports. For example, the United States and other parties to trade deals are prohibiting from giving a 20 percent subsidy to steel exports so as to help their domestic steel industries. That’s about as basic as it gets.
But what about providing public education and training for the workers in the steel industry, is that a subsidy? How about having the government pick up the tab for the roads and ports used to export the steel? How about tax abatements and land condemnations for the construction of new steel factories? How about providing below-market interest loans through the Export-Import Bank? All of these are arguably forms of export subsidies and in fact raise far more difficult questions than quantitative easing.
If the Washington Post’s editors really can’t tell the difference between a policy whose primary purpose and effect is boosting aggregate demand in the United States by lowering interest rates and policy that directly lowers the value of the dollar by purchasing trillions of dollars of foreign currency, then surely they can’t tell the difference between education and infrastructure policy and export subsidies.
In short, the Washington Post editorial board apparently thinks our trade officials lack the competence to do trade policy. If they took their own logic seriously they would recommend just canning trade deals altogether; they are too complicated.
Addendum:
There is one point worth noting on this issue that the WaPo editorial doesn’t quite make. If the Obama administration cared about currency values there are measures it could take now. For example, it could push the Fed to actually buy up $1 trillion of currencies that are under-valued against the dollar. For currencies that are not freely traded it can try to put indirect pressure on their value by buying up futures or by offering to buy the currency directly from holders at a price above the pegged exchange rate. For example if the yuan is being targeted at a price of 16 cents, the Treasury could offer to pay 25 cents per yuan.
There is nothing that prevents the United States from going this route, although it would obviously be seen as a hostile step by our trading partners. Presumably the threat of going this route would lead to serious negotiations on currency values and end up with an agreement that resulted in a lower valued dollar.
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The NYT completely abandoned its commitment to put numbers in context in an article on the budget cuts proposed by Illinois’ new governor, Bruce Rauner. The piece tells readers that the governor had proposed cuts of more than $6 billion. Since most NYT readers are not familiar with the size of Illinois’ budget, this is not providing very much information. In fact, the cuts (actually $6.7 billion) would be equal to approximately 17.5 percent of baseline spending (see page 2-23). It refers to a cut of $1.5 billion in state Medicaid spending. This is just under 20 percent of baseline spending on the program.
The piece notes a projected shortfall of $110 billion in the state’s pension plans. This is equal to approximately 0.8 percent of the state’s projected income over the pension’s 30-year planning period. The piece refers to a plan to cut pension benefits by $100 billion. This would imply cuts of more than $200,000 per active employee. (This calculation does not apply any discounting since it’s not clear if any discounting is applied to the $100 billion figure.)
The NYT completely abandoned its commitment to put numbers in context in an article on the budget cuts proposed by Illinois’ new governor, Bruce Rauner. The piece tells readers that the governor had proposed cuts of more than $6 billion. Since most NYT readers are not familiar with the size of Illinois’ budget, this is not providing very much information. In fact, the cuts (actually $6.7 billion) would be equal to approximately 17.5 percent of baseline spending (see page 2-23). It refers to a cut of $1.5 billion in state Medicaid spending. This is just under 20 percent of baseline spending on the program.
The piece notes a projected shortfall of $110 billion in the state’s pension plans. This is equal to approximately 0.8 percent of the state’s projected income over the pension’s 30-year planning period. The piece refers to a plan to cut pension benefits by $100 billion. This would imply cuts of more than $200,000 per active employee. (This calculation does not apply any discounting since it’s not clear if any discounting is applied to the $100 billion figure.)
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Yes folks, the news just keeps getting worse. The NYT had an article touting India’s economic prospects, which it contrasts with China. It told readers:
“China’s investigations of multinationals, persistent tensions with neighboring countries and surging blue-collar wages have prompted many companies to start looking elsewhere for large labor forces.”
The piece also includes a box with a figure showing that the number of people in China between the ages of 15-24 (prime factory worker age) is projected to fall from 250 million in 2009 to roughly 160 million in 2019. It adds the information that, “a sharp increase in college attendance has made the problem more acute.” Needless to say, this story is being told from the standpoint of businesses seeking low cost labor.
It’s fine for the NYT to run such pieces, but it would also be worth having a piece that described the impact that surging blue collar wages and a sharp increase in college attendance are having on the standard of living of hundreds of millions of people in China. From the standpoint of businesses looking for cheap labor this might be bad news, but from the standpoint of those who would like to see poor people lifted out of poverty, this sounds like very encouraging news. It would be great to see more coverage from the NYT from the perspective of workers in China.
Yes folks, the news just keeps getting worse. The NYT had an article touting India’s economic prospects, which it contrasts with China. It told readers:
“China’s investigations of multinationals, persistent tensions with neighboring countries and surging blue-collar wages have prompted many companies to start looking elsewhere for large labor forces.”
The piece also includes a box with a figure showing that the number of people in China between the ages of 15-24 (prime factory worker age) is projected to fall from 250 million in 2009 to roughly 160 million in 2019. It adds the information that, “a sharp increase in college attendance has made the problem more acute.” Needless to say, this story is being told from the standpoint of businesses seeking low cost labor.
It’s fine for the NYT to run such pieces, but it would also be worth having a piece that described the impact that surging blue collar wages and a sharp increase in college attendance are having on the standard of living of hundreds of millions of people in China. From the standpoint of businesses looking for cheap labor this might be bad news, but from the standpoint of those who would like to see poor people lifted out of poverty, this sounds like very encouraging news. It would be great to see more coverage from the NYT from the perspective of workers in China.
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The NYT seems to be backsliding again in its commitment to put numbers in context. A NYT article on the prospects of tax reform threw around many big numbers which would almost certainly be meaningless to nearly all of its readers.
I will pick on one here, because it doesn’t seem to make any sense. According to the article, President Obama’s proposal to end the tax deductions for money placed in 529 accounts in future years would have saved the government $1 billion over the next decade. (These accounts allow people to deposit after-tax dollars and have the money accumulate tax free, if used for educational purposes.) I have seen this figure cited elsewhere, but it is surprisingly small.
According to a recent GAO report, there were 11 million accounts in 2011 with a total balance of $167 billion. The report estimates that the lost revenue due to the accounts was $1.6 billion in 2011. If we adjust upward for 2015 based on the nominal growth over the economy, the implied lost revenue for the current year would be just under $2.0 billion. This would almost certainly be an understatement, since the sharp rise in the stock market would mean that the holdings in 529 accounts would have grown far more rapidly than the economy over the last four years. Furthermore, since the top tax rate has been raised, the implicit tax savings from these accounts would be higher for the same amount of holdings in 2015 than in 2011.
If the one-year cost of the program is $2 billion, then how can ending future deductions only save $1 billion over ten years? President Obama proposal did protect the tax sheltered status of current deposits, but unlike retirement accounts, there is a limited period of time over which people can accumulate money in 529 accounts, basically from when a child is born until they complete their college education. This means that by the end of the ten-year budget horizon, most of the 529 money with grandfathered tax exempt status would already have been spent.
If the counter-factual assumes that 529 withdrawals grow in step with projected economic growth over the next decade, then they would be costing the Treasury over $3 billion in lost taxes in 2025. If 70 percent of this represents money contributed in 2016 and later, then the implicit savings in 2025 alone from President Obama’s proposal would be more than $2.1 billion. If this calculation is anywhere close to accurate, how can the 10-year savings be just $1 billion?
Another way to think about this is the cost per account. If the number of accounts does not rise from the 11 million in 2011, then the implicit tax cost per account holder over 10 years is $91 or $9.10 per year. Is this plausible? Did hundreds of thousands of middle class families really get outraged over a proposal that would have cost them 18 cents a week in higher taxes?
Something in this picture is not adding up. The $1 billion figure over 10 years (0.002 percent of projected spending) doesn’t make sense. If the paper had been tried to put this number in a context that made it meaningful to readers it might have gotten the number right.
The NYT seems to be backsliding again in its commitment to put numbers in context. A NYT article on the prospects of tax reform threw around many big numbers which would almost certainly be meaningless to nearly all of its readers.
I will pick on one here, because it doesn’t seem to make any sense. According to the article, President Obama’s proposal to end the tax deductions for money placed in 529 accounts in future years would have saved the government $1 billion over the next decade. (These accounts allow people to deposit after-tax dollars and have the money accumulate tax free, if used for educational purposes.) I have seen this figure cited elsewhere, but it is surprisingly small.
According to a recent GAO report, there were 11 million accounts in 2011 with a total balance of $167 billion. The report estimates that the lost revenue due to the accounts was $1.6 billion in 2011. If we adjust upward for 2015 based on the nominal growth over the economy, the implied lost revenue for the current year would be just under $2.0 billion. This would almost certainly be an understatement, since the sharp rise in the stock market would mean that the holdings in 529 accounts would have grown far more rapidly than the economy over the last four years. Furthermore, since the top tax rate has been raised, the implicit tax savings from these accounts would be higher for the same amount of holdings in 2015 than in 2011.
If the one-year cost of the program is $2 billion, then how can ending future deductions only save $1 billion over ten years? President Obama proposal did protect the tax sheltered status of current deposits, but unlike retirement accounts, there is a limited period of time over which people can accumulate money in 529 accounts, basically from when a child is born until they complete their college education. This means that by the end of the ten-year budget horizon, most of the 529 money with grandfathered tax exempt status would already have been spent.
If the counter-factual assumes that 529 withdrawals grow in step with projected economic growth over the next decade, then they would be costing the Treasury over $3 billion in lost taxes in 2025. If 70 percent of this represents money contributed in 2016 and later, then the implicit savings in 2025 alone from President Obama’s proposal would be more than $2.1 billion. If this calculation is anywhere close to accurate, how can the 10-year savings be just $1 billion?
Another way to think about this is the cost per account. If the number of accounts does not rise from the 11 million in 2011, then the implicit tax cost per account holder over 10 years is $91 or $9.10 per year. Is this plausible? Did hundreds of thousands of middle class families really get outraged over a proposal that would have cost them 18 cents a week in higher taxes?
Something in this picture is not adding up. The $1 billion figure over 10 years (0.002 percent of projected spending) doesn’t make sense. If the paper had been tried to put this number in a context that made it meaningful to readers it might have gotten the number right.
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It speaks to the state of economic debate in the United States that we have prominent voices arguing both that we face a future in which productivity growth will be near zero (Robert Gordon) and that productivity is about to soar through the roof so that most of us will not have any work to do (Erik Brynjolfsson and Andrew McAfee). If we envisioned the same debate in climate science, a substantial group of climatologists would be warning of an impending ice age even as others raise concerns about global warming. Needless to say, this sort of split would encourage most people to disregard the pronouncements of climatologists about anything, which is perhaps what the public should do in the case of economists.
When confronted with two sharply divided views about the world, the NYT doesn’t help matters by adding a large dose of confusion, as it did in printing a column by Daniel Cohen, a French economist. Cohen’s ostensible contribution is to tell us:
“both sides in this debate are right: We’re living an industrial revolution without economic growth. Powerful software is doing the work of humans, but the humans thus replaced are unable to find productive jobs.” He then goes on to say that we will have to adjust to a world without growth because living standards will not be rising.
Apparently Cohen does not realize that he has taken Brynjolfsson and McAfee’s side in this debate. The problem he has described is one of too much productivity growth. Workers find themselves without jobs because there is not enough demand for goods and services.
To see this point, imagine in the world Cohen describes that we ran the printing presses overtime and handed out $1 million in cash to every man, women, and child in the country. (Yep, we’ll give a $1 million to deadbeat welfare cheats, hardworking middle income people, and even Bill Gates.) Now all you right-thinking people out there will want to scream that this will lead to massive inflation. After all, we’re just printing money.
But the problem that we supposedly see is that the robots are doing all the work and there is no demand for most of our labor. If we there is more demand for goods and services now that we have been given our handouts, then we will ask the robots to work harder and a few of the formerly unemployed will get jobs doing robot maintenance or other such tasks. What in this story would cause prices to rise? Would the robots demand a pay hike?
If Brynjolfsson and McAfee are right, and we are not seeing growth, it’s because boneheaded policymakers (I didn’t say the European Union) are pointlessly restraining demand. In this context it is foolish to talk about “when the growth model fails.” What we should be talking about is teaching economics 101 to the people determining economic policy.
Since no one asked, I think Brynjolfsson and McAfee are probably closer to the mark than Robert Gordon in that I see no reason to believe that our ability to achieve large gains in productivity is hitting any sort of limit. Nonetheless, I also don’t expect a quantum leap in productivity growth. If we could get anywhere near the 3.0 percent annual productivity growth of the golden age (1947-1973) I would be very impressed.
It speaks to the state of economic debate in the United States that we have prominent voices arguing both that we face a future in which productivity growth will be near zero (Robert Gordon) and that productivity is about to soar through the roof so that most of us will not have any work to do (Erik Brynjolfsson and Andrew McAfee). If we envisioned the same debate in climate science, a substantial group of climatologists would be warning of an impending ice age even as others raise concerns about global warming. Needless to say, this sort of split would encourage most people to disregard the pronouncements of climatologists about anything, which is perhaps what the public should do in the case of economists.
When confronted with two sharply divided views about the world, the NYT doesn’t help matters by adding a large dose of confusion, as it did in printing a column by Daniel Cohen, a French economist. Cohen’s ostensible contribution is to tell us:
“both sides in this debate are right: We’re living an industrial revolution without economic growth. Powerful software is doing the work of humans, but the humans thus replaced are unable to find productive jobs.” He then goes on to say that we will have to adjust to a world without growth because living standards will not be rising.
Apparently Cohen does not realize that he has taken Brynjolfsson and McAfee’s side in this debate. The problem he has described is one of too much productivity growth. Workers find themselves without jobs because there is not enough demand for goods and services.
To see this point, imagine in the world Cohen describes that we ran the printing presses overtime and handed out $1 million in cash to every man, women, and child in the country. (Yep, we’ll give a $1 million to deadbeat welfare cheats, hardworking middle income people, and even Bill Gates.) Now all you right-thinking people out there will want to scream that this will lead to massive inflation. After all, we’re just printing money.
But the problem that we supposedly see is that the robots are doing all the work and there is no demand for most of our labor. If we there is more demand for goods and services now that we have been given our handouts, then we will ask the robots to work harder and a few of the formerly unemployed will get jobs doing robot maintenance or other such tasks. What in this story would cause prices to rise? Would the robots demand a pay hike?
If Brynjolfsson and McAfee are right, and we are not seeing growth, it’s because boneheaded policymakers (I didn’t say the European Union) are pointlessly restraining demand. In this context it is foolish to talk about “when the growth model fails.” What we should be talking about is teaching economics 101 to the people determining economic policy.
Since no one asked, I think Brynjolfsson and McAfee are probably closer to the mark than Robert Gordon in that I see no reason to believe that our ability to achieve large gains in productivity is hitting any sort of limit. Nonetheless, I also don’t expect a quantum leap in productivity growth. If we could get anywhere near the 3.0 percent annual productivity growth of the golden age (1947-1973) I would be very impressed.
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