The NYT had an article reporting on the possibility that China will use anti-monopoly laws and other regulations to limit Microsoft’s operations in the country. This raises an interesting issue. Presumably the Obama administration will step in to try to protect Microsoft’s interests. Since the United States cannot just dictate policy to China, if it wins concessions on the treatment of Microsoft then it presumably will make less progress in other areas like getting China to raise the value of its currency against the dollar.
If negotiating over Microsoft leads to the dollar having a higher value than would otherwise be the case, it would mean that we have a larger trade deficit. This raises the question of how many steel workers and auto workers will lose their jobs to protect Bill Gates’ profits?
The NYT had an article reporting on the possibility that China will use anti-monopoly laws and other regulations to limit Microsoft’s operations in the country. This raises an interesting issue. Presumably the Obama administration will step in to try to protect Microsoft’s interests. Since the United States cannot just dictate policy to China, if it wins concessions on the treatment of Microsoft then it presumably will make less progress in other areas like getting China to raise the value of its currency against the dollar.
If negotiating over Microsoft leads to the dollar having a higher value than would otherwise be the case, it would mean that we have a larger trade deficit. This raises the question of how many steel workers and auto workers will lose their jobs to protect Bill Gates’ profits?
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Morning Edition had a piece on the possibility that Argentina will again default on its debt. The risk follows the decision by the Supreme Court to refuse to review a New York district court judge’s ruling that Argentina had to pay a group of holdout bondholders 100 cents on the dollar and requiring U.S. banks to help enforce this ruling. As the piece explains, this is likely to lead to a second default since a provision in the agreement with the bondholders who had settled from the 2001 default required the government to treat all bondholders the same. This means that if the holdouts get 100 cents on the dollar then all bondholders would have to be paid 100 cents on the dollar.
There are a few points in this story that deserve clarification. The piece notes that Argentina refers to the holdout investors as “vultures.” This is not a term the country invented. The term “vulture fund” goes back decades. It refers to a fund that buys assets at a seriously depressed price in the hope of being able to use the legal system to increase their value. The funds that have brought the legal case in U.S. courts are pretty much the textbook definition of vulture funds.
It is also would have been worth noting that Thomas P. Griesa, the judge whose ruling has created the current impasse, seems not to understand the implications of his actions. Given the large range of judges across the country, it is not surprising that complex cases will occasionally be assigned to a judge who does not fully appreciate the issues involved. However the appeals process usually allows for mistaken rulings to be corrected by higher courts. That did not happen in this case.
Morning Edition had a piece on the possibility that Argentina will again default on its debt. The risk follows the decision by the Supreme Court to refuse to review a New York district court judge’s ruling that Argentina had to pay a group of holdout bondholders 100 cents on the dollar and requiring U.S. banks to help enforce this ruling. As the piece explains, this is likely to lead to a second default since a provision in the agreement with the bondholders who had settled from the 2001 default required the government to treat all bondholders the same. This means that if the holdouts get 100 cents on the dollar then all bondholders would have to be paid 100 cents on the dollar.
There are a few points in this story that deserve clarification. The piece notes that Argentina refers to the holdout investors as “vultures.” This is not a term the country invented. The term “vulture fund” goes back decades. It refers to a fund that buys assets at a seriously depressed price in the hope of being able to use the legal system to increase their value. The funds that have brought the legal case in U.S. courts are pretty much the textbook definition of vulture funds.
It is also would have been worth noting that Thomas P. Griesa, the judge whose ruling has created the current impasse, seems not to understand the implications of his actions. Given the large range of judges across the country, it is not surprising that complex cases will occasionally be assigned to a judge who does not fully appreciate the issues involved. However the appeals process usually allows for mistaken rulings to be corrected by higher courts. That did not happen in this case.
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A NYT article reported on a study from Russell Sage reporting that median household wealth was 36 percent lower in 2013 than 2003. While this is disturbing, an even more striking finding from the study is that median wealth is down by around 20 percent from 1984.
This is noteworthy because this cannot be explained as largely the result of the collapse of house prices that triggered the Great Recession. This indicates that we have gone thirty years, during which time output per worker has more than doubled, but real wealth has actually fallen for the typical family. It is also important to realize that the drop in wealth reported in the study understates the true drop since a typical household in 1984 would have been able to count on a defined benefit pension. This is not true at present, so the effective drop in wealth is even larger than reported by the study. (Defined benefit pensions are not included in its measure of wealth.)
A NYT article reported on a study from Russell Sage reporting that median household wealth was 36 percent lower in 2013 than 2003. While this is disturbing, an even more striking finding from the study is that median wealth is down by around 20 percent from 1984.
This is noteworthy because this cannot be explained as largely the result of the collapse of house prices that triggered the Great Recession. This indicates that we have gone thirty years, during which time output per worker has more than doubled, but real wealth has actually fallen for the typical family. It is also important to realize that the drop in wealth reported in the study understates the true drop since a typical household in 1984 would have been able to count on a defined benefit pension. This is not true at present, so the effective drop in wealth is even larger than reported by the study. (Defined benefit pensions are not included in its measure of wealth.)
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The Washington Post told readers that New Jersey’s public pension faces a shortfall of $40 billion. Just in case some readers aren’t familiar with the size of New Jersey’s economy over the next 30 years (the relevant period for pension planning), it will have a discounted state product of more than $12 trillion. This means that the shortfall is roughly equal to 0.3 percent of future GDP. This is considerably larger than the shortfall faced by most states.
The Washington Post told readers that New Jersey’s public pension faces a shortfall of $40 billion. Just in case some readers aren’t familiar with the size of New Jersey’s economy over the next 30 years (the relevant period for pension planning), it will have a discounted state product of more than $12 trillion. This means that the shortfall is roughly equal to 0.3 percent of future GDP. This is considerably larger than the shortfall faced by most states.
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It’s hard to know what else it could possibly mean, but the Washington Post dutifully reported to readers:
“The aging population is shrinking here, with the 2011 census showing a loss of about 1.5 million people since the 1980s. As the decline accelerates, by 2030 the government predicts a hole as big as 2.3 million workers in the German labor force.”
In a market economy, wages adjust to equilibrate supply and demand. If there are fewer workers in Germany it means that workers will leave less productive sectors, like retail trade, restaurants, and hotels, and instead move to sectors in which they can get a higher wage. Many of the firms in the less productive sectors will go out of business.
This sort of transition happens all the time. It is the reason that half of the U.S. population is not still working in agriculture. In the context of a market economy it is not clear what it can mean to have a hole in the labor force. This would just mean that low productivity jobs cease to exist. So what?
It’s hard to know what else it could possibly mean, but the Washington Post dutifully reported to readers:
“The aging population is shrinking here, with the 2011 census showing a loss of about 1.5 million people since the 1980s. As the decline accelerates, by 2030 the government predicts a hole as big as 2.3 million workers in the German labor force.”
In a market economy, wages adjust to equilibrate supply and demand. If there are fewer workers in Germany it means that workers will leave less productive sectors, like retail trade, restaurants, and hotels, and instead move to sectors in which they can get a higher wage. Many of the firms in the less productive sectors will go out of business.
This sort of transition happens all the time. It is the reason that half of the U.S. population is not still working in agriculture. In the context of a market economy it is not clear what it can mean to have a hole in the labor force. This would just mean that low productivity jobs cease to exist. So what?
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That’s because the data don’t give any evidence of a great success. Nonetheless after noting the difficulties that France and Italy are facing in the implementation of labor market reforms, the NYT told readers:
“By contrast, the idea of making Luis De Guindos the new head of the Eurogroup, which brings together the zone’s finance ministers, is a good one. Spain’s finance minister is in a perfect position to explain to his colleagues the value of structural overhauls, because they have worked so well in his country.”
The OECD’s data on employment rates doesn’t show much evidence of a structural overhaul working well in Spain. Its employment rate (EPOP) for workers between the ages 15 to 64 has risen by 0.5 percentage points over the last year to 55.3 percent. Over the same period, France’s employment rate also rose by 0.5 percentage points to 64.4 percent. It’s not obvious France has much to learn from Spain based on these numbers.
There’s a little better story for Spain if we look at prime age workers between the ages of 25-54. The EPOP for this group rose by 0.7 percentage points over the last year to 66.5 percent. By comparison, in France the EPOP for prime age workers rose by just 0.3 percentage points to 80.8 percent. If these trends continue, Spain’s EPOP for prime age workers will exceed France’s by 2055. It will get back to its pre-recession level by 2043.
Given the data, it would be understandable if other European leaders were hesitant about taking advice from the Spanish government.
Note: Age range corrected, thanks Urban Legend.
That’s because the data don’t give any evidence of a great success. Nonetheless after noting the difficulties that France and Italy are facing in the implementation of labor market reforms, the NYT told readers:
“By contrast, the idea of making Luis De Guindos the new head of the Eurogroup, which brings together the zone’s finance ministers, is a good one. Spain’s finance minister is in a perfect position to explain to his colleagues the value of structural overhauls, because they have worked so well in his country.”
The OECD’s data on employment rates doesn’t show much evidence of a structural overhaul working well in Spain. Its employment rate (EPOP) for workers between the ages 15 to 64 has risen by 0.5 percentage points over the last year to 55.3 percent. Over the same period, France’s employment rate also rose by 0.5 percentage points to 64.4 percent. It’s not obvious France has much to learn from Spain based on these numbers.
There’s a little better story for Spain if we look at prime age workers between the ages of 25-54. The EPOP for this group rose by 0.7 percentage points over the last year to 66.5 percent. By comparison, in France the EPOP for prime age workers rose by just 0.3 percentage points to 80.8 percent. If these trends continue, Spain’s EPOP for prime age workers will exceed France’s by 2055. It will get back to its pre-recession level by 2043.
Given the data, it would be understandable if other European leaders were hesitant about taking advice from the Spanish government.
Note: Age range corrected, thanks Urban Legend.
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Sometimes it seems like we are living in the Bizarro World when it comes to talking about drug prices. This is one of those times.
The Washington Post’s Wonkblog had a Q& A on Sovaldi, the new drug for Hepatitis C that is being sold for $84,000 in the United States. In the final answer about the price of the drug the piece tells readers:
“Sovaldi is cheaper in countries where the government sets drug prices, ranging from $900 in Egypt to $66,000 in Germany.”
This is almost the opposite of reality. The price is very high in the United States because the government gives Gilead Sciences (the drug’s patent holder) a complete monopoly on the drug’s sale. The price is low in Egypt because there is no patent monopoly and manufacturers are free to sell generic versions of the drug. That means the price in Egypt is closer to a free market price. The price in the U.S. is a price that is high because the government will arrest competitors.
Sometimes it seems like we are living in the Bizarro World when it comes to talking about drug prices. This is one of those times.
The Washington Post’s Wonkblog had a Q& A on Sovaldi, the new drug for Hepatitis C that is being sold for $84,000 in the United States. In the final answer about the price of the drug the piece tells readers:
“Sovaldi is cheaper in countries where the government sets drug prices, ranging from $900 in Egypt to $66,000 in Germany.”
This is almost the opposite of reality. The price is very high in the United States because the government gives Gilead Sciences (the drug’s patent holder) a complete monopoly on the drug’s sale. The price is low in Egypt because there is no patent monopoly and manufacturers are free to sell generic versions of the drug. That means the price in Egypt is closer to a free market price. The price in the U.S. is a price that is high because the government will arrest competitors.
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A New York Times article on the senate race in North Carolina referred to cuts in the state’s unemployment benefits and tax breaks for businesses. It then told readers:
“The resulting business climate, Mr. Jordan said, has played a role in an unemployment rate drop from 10.4 percent, when Mr. Tillis was elected speaker in January 2011, to 6.2 percent today.”
The reason that unemployment dropped more rapidly in North Carolina than in most other states was that people gave up looking for work and left the labor force. North Carolina’s labor force increased by just 0.9 percent over this period, from 4,647,000 in January of 2011 to 4,688,000 in June of 2014. By comparison, the South Atlantic region as a whole had an increase in its labor force of 4.4 percent, from 29,062,000 in January of 2011 to 30,319,000 in June of 2014. If North Carolina’s labor force had increased in step with rest of the region, its unemployment rate would still be far higher than the rate for the rest of the country.
A New York Times article on the senate race in North Carolina referred to cuts in the state’s unemployment benefits and tax breaks for businesses. It then told readers:
“The resulting business climate, Mr. Jordan said, has played a role in an unemployment rate drop from 10.4 percent, when Mr. Tillis was elected speaker in January 2011, to 6.2 percent today.”
The reason that unemployment dropped more rapidly in North Carolina than in most other states was that people gave up looking for work and left the labor force. North Carolina’s labor force increased by just 0.9 percent over this period, from 4,647,000 in January of 2011 to 4,688,000 in June of 2014. By comparison, the South Atlantic region as a whole had an increase in its labor force of 4.4 percent, from 29,062,000 in January of 2011 to 30,319,000 in June of 2014. If North Carolina’s labor force had increased in step with rest of the region, its unemployment rate would still be far higher than the rate for the rest of the country.
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Justin Wolfers shows more of a commitment to coming down in the middle than to being true to the data in his pox on both your houses piece on the impact of North Carolina’s cut in unemployment benefits. The basic story is that in July of last year North Carolina both cut the duration of unemployment benefits and vastly ramped up the job search requirements. The result was that the number of people getting benefits fell by 48,500, a decline of 53.4 percent between May of 2013 and May of 2014.
The conservative position on this cut was that ending benefits would give people the incentive they needed to get a job. The idea was that the government was needlessly coddling these people, when what they really needed was a little push to get them going. This story gives a very clear prediction.
The loss of benefits should lead to notably faster job growth in North Carolina than in the rest of the country. After all, the number of people losing benefits was more than 1.0 percent of the state’s labor force. If the necessary kick story is right then we should have seen a notably faster increase in jobs in North Carolina than in neighboring states with similar economies.
By contrast, the liberal position is that the spending from benefits helps to boost the economy. However, this impact is likely to be relatively limited. First of all, we are not talking about that much money relative to the economy as a whole, and second all the spending will not boost employment in North Carolina. This is in part because North Carolians don’t necessarily spend their money in North Carolina (some will spend it in neighboring states) and also because the spending itself will go to producers around the country and around the world.
Most of what someone pays for a car in North Carolina will go to a car company located in another state or country. The workers at the factories that assembled the car and produced the parts will almost all live outside of North Carolina. Similarly, the rent or mortgage payments made by a worker may go to a landlord or mortgage holder anywhere in the country. Therefore only a fraction of the impact of the spending will be seen in North Carolina.
If we back out the predicted impact of North Carolina’s benefit cut on the state’s economy, it is easy to see that it would be relatively modest. If we assume an average benefit level of $15,000 ($300 a week), the reduction in beneficiaries would lower payments by $720 million over the course of the year. Assuming a multiplier of 1.5 this would cut GDP for the country as a whole by roughly $1,080 million. If half of this loss accrues to North Carolina, it would lower demand in its economy by $540 million. This is roughly 0.12 percent of the state’s $470 billion economy.
Okay, now lets get back to Wolfers’ pox on both your houses story. If the people thrown off unemployment insurance are getting the kick they need to get a job then we should see some visible impact on job growth in the state. As Wolfers notes, we don’t. North Carolina’s job growth is no better than in neighboring states.
On the other hand, if we assume the liberal story is true, it would be very hard to detect a decline in growth of 0.12 percentage point, even if it did in fact occur. There are enough random factors and errors in the data that we could never expect to find such a modest impact even if the economy really did suffer from the cut in benefits.
Certainly some liberals did exaggerate the negative impact from the benefit cuts on the economy. But the evidence that Wolfers presents hardly disproves that the cuts did not have the negative impact that any reasonable analysis would have predicted.
Corrected Note: “billion” corrected to “million.” Thanks to Michael Epton and Robert Salzberg.
Justin Wolfers shows more of a commitment to coming down in the middle than to being true to the data in his pox on both your houses piece on the impact of North Carolina’s cut in unemployment benefits. The basic story is that in July of last year North Carolina both cut the duration of unemployment benefits and vastly ramped up the job search requirements. The result was that the number of people getting benefits fell by 48,500, a decline of 53.4 percent between May of 2013 and May of 2014.
The conservative position on this cut was that ending benefits would give people the incentive they needed to get a job. The idea was that the government was needlessly coddling these people, when what they really needed was a little push to get them going. This story gives a very clear prediction.
The loss of benefits should lead to notably faster job growth in North Carolina than in the rest of the country. After all, the number of people losing benefits was more than 1.0 percent of the state’s labor force. If the necessary kick story is right then we should have seen a notably faster increase in jobs in North Carolina than in neighboring states with similar economies.
By contrast, the liberal position is that the spending from benefits helps to boost the economy. However, this impact is likely to be relatively limited. First of all, we are not talking about that much money relative to the economy as a whole, and second all the spending will not boost employment in North Carolina. This is in part because North Carolians don’t necessarily spend their money in North Carolina (some will spend it in neighboring states) and also because the spending itself will go to producers around the country and around the world.
Most of what someone pays for a car in North Carolina will go to a car company located in another state or country. The workers at the factories that assembled the car and produced the parts will almost all live outside of North Carolina. Similarly, the rent or mortgage payments made by a worker may go to a landlord or mortgage holder anywhere in the country. Therefore only a fraction of the impact of the spending will be seen in North Carolina.
If we back out the predicted impact of North Carolina’s benefit cut on the state’s economy, it is easy to see that it would be relatively modest. If we assume an average benefit level of $15,000 ($300 a week), the reduction in beneficiaries would lower payments by $720 million over the course of the year. Assuming a multiplier of 1.5 this would cut GDP for the country as a whole by roughly $1,080 million. If half of this loss accrues to North Carolina, it would lower demand in its economy by $540 million. This is roughly 0.12 percent of the state’s $470 billion economy.
Okay, now lets get back to Wolfers’ pox on both your houses story. If the people thrown off unemployment insurance are getting the kick they need to get a job then we should see some visible impact on job growth in the state. As Wolfers notes, we don’t. North Carolina’s job growth is no better than in neighboring states.
On the other hand, if we assume the liberal story is true, it would be very hard to detect a decline in growth of 0.12 percentage point, even if it did in fact occur. There are enough random factors and errors in the data that we could never expect to find such a modest impact even if the economy really did suffer from the cut in benefits.
Certainly some liberals did exaggerate the negative impact from the benefit cuts on the economy. But the evidence that Wolfers presents hardly disproves that the cuts did not have the negative impact that any reasonable analysis would have predicted.
Corrected Note: “billion” corrected to “million.” Thanks to Michael Epton and Robert Salzberg.
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The NYT ran a confused column by Kwasi Kwarteng, a Conservative member of the U.K.’s parliament, calling for China to adopt the gold standard. The piece has many bizarre claims, most importantly attributing the U.K.’s prosperity in the 19th century and the U.S.’s prosperity in the post-World War II period to the gold standard, as opposed to the strength of their manufacturing sectors and overall economy.
However the most misleading item is the contrast of China, which does not have much government debt, with the rich countries, that mostly do. These are not unrelated situations. As the piece notes, China has pursued a mercantilist policy of deliberately keeping down the value of its currency in order to make its goods cheaper to people in other countries. This allowed it to increase its exports to the West. (It’s important to note that U.S. corporations have also been major beneficiaries of this policy, taking advantage of low-cost labor to gain a competitive edge and increase profits.)
The flip side of this policy is that the rich countries, most importantly the United States, ran large trade deficits. This created a huge hole in demand. There is no easy mechanism for a market economy to make up this sort of gap in demand, which now passes under the name “secular stagnation.” In the late 1990s the gap was made up with a stock bubble, in the last decade it was made up with a housing bubble. The bursting of these bubbles left nothing other than government budget deficits to fill the demand gap.
As a practical matter, when rich countries have large trade deficits, their choices are bubbles, large budget deficits, or high unemployment. They also could look to redivide work with shorter workweeks and longer vacations. (The standard economic story is that rich countries should have trade surpluses. Capital is supposed to flow from rich countries that have lots of it to poor countries where it is scarce. But economists never have much problem ignoring their theory when its implications prove inconvenient.) In any case, the issue of China’s trade surpluses and rich country government debt are directly related, not independent events.
The NYT ran a confused column by Kwasi Kwarteng, a Conservative member of the U.K.’s parliament, calling for China to adopt the gold standard. The piece has many bizarre claims, most importantly attributing the U.K.’s prosperity in the 19th century and the U.S.’s prosperity in the post-World War II period to the gold standard, as opposed to the strength of their manufacturing sectors and overall economy.
However the most misleading item is the contrast of China, which does not have much government debt, with the rich countries, that mostly do. These are not unrelated situations. As the piece notes, China has pursued a mercantilist policy of deliberately keeping down the value of its currency in order to make its goods cheaper to people in other countries. This allowed it to increase its exports to the West. (It’s important to note that U.S. corporations have also been major beneficiaries of this policy, taking advantage of low-cost labor to gain a competitive edge and increase profits.)
The flip side of this policy is that the rich countries, most importantly the United States, ran large trade deficits. This created a huge hole in demand. There is no easy mechanism for a market economy to make up this sort of gap in demand, which now passes under the name “secular stagnation.” In the late 1990s the gap was made up with a stock bubble, in the last decade it was made up with a housing bubble. The bursting of these bubbles left nothing other than government budget deficits to fill the demand gap.
As a practical matter, when rich countries have large trade deficits, their choices are bubbles, large budget deficits, or high unemployment. They also could look to redivide work with shorter workweeks and longer vacations. (The standard economic story is that rich countries should have trade surpluses. Capital is supposed to flow from rich countries that have lots of it to poor countries where it is scarce. But economists never have much problem ignoring their theory when its implications prove inconvenient.) In any case, the issue of China’s trade surpluses and rich country government debt are directly related, not independent events.
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