In his Financial Times column Adam Posen gets out the old trade magic story, throwing away conventional economics to make bizarre arguments about trade’s wondrous impact on the U.S. economy. Among other things, he tells readers:
“Econometric studies have established that when US companies invest abroad, the net result is increased employment, stronger demand and more investment at home. This makes sense, since it should on average be the more competitive businesses that have the resources and opportunities to expand abroad, and investing should increase their productivity. This conclusion applies specifically to US companies that have invested in Mexico. Recent research has found that, on average, for every 100 jobs US manufacturers created in Mexican manufacturing, they added nearly 250 jobs at their larger US home operations, and increased their US research and development spending by 3 per cent.”
Hmmm, maybe we should subsidize the export of jobs. If we could export another 4 million jobs to Mexico, we could add 10 million here and close the employment gap. I doubt you will get many people, especially those familiar with economics, to agree that anything like this makes sense.
In fact econometric studies have shown that, consistent with economic theory, trade has been a source of downward pressure on the wages of the 70 percent of the workforce that lacks a college education. The basic story is that we put our manufacturing workers in direct competition with low paid workers in the developing world while protecting our doctors, lawyers, and other highly paid professionals. The predicted and actual result is lower pay for the vast majority of U.S. workers.
In additional to the negative impact of current trade patterns on wages, there is also the simple problem of the massive loss of demand due to the trade deficit. We currently import $500 billion a year more than we export. This is $500 billion that is creating demand in Canada, the European Union, Mexico, and elsewhere, rather than in the United States. Is there some story as to how domestic consumption or investment is somehow larger because of this trade deficit? If so, it would be worth a Nobel Prize if someone could lay it out with a straight face.
The $500 billion trade deficit, coupled with a standard multiplier of 1.5, translates into $750 billion of lost annual output (roughly 4.5 percent of GDP). This in turn would come to about 6 million jobs. That is close to enough to get us back to full employment. That would give workers enough bargaining power to secure real wages. So yes, trade is a big deal.
It is also worth noting that the “trade” deals currently on the table, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact, have little to do with trade. Both are primarily about putting in place a pro-corporate regulatory structure that would almost certainly not pass in Congress through the normal process or in any other democratically elected parliament. It will also include increased protectionism in the form of stronger patent and copyright protections. These will have the effect of raising prices, slowing growth, and costing jobs.
In his Financial Times column Adam Posen gets out the old trade magic story, throwing away conventional economics to make bizarre arguments about trade’s wondrous impact on the U.S. economy. Among other things, he tells readers:
“Econometric studies have established that when US companies invest abroad, the net result is increased employment, stronger demand and more investment at home. This makes sense, since it should on average be the more competitive businesses that have the resources and opportunities to expand abroad, and investing should increase their productivity. This conclusion applies specifically to US companies that have invested in Mexico. Recent research has found that, on average, for every 100 jobs US manufacturers created in Mexican manufacturing, they added nearly 250 jobs at their larger US home operations, and increased their US research and development spending by 3 per cent.”
Hmmm, maybe we should subsidize the export of jobs. If we could export another 4 million jobs to Mexico, we could add 10 million here and close the employment gap. I doubt you will get many people, especially those familiar with economics, to agree that anything like this makes sense.
In fact econometric studies have shown that, consistent with economic theory, trade has been a source of downward pressure on the wages of the 70 percent of the workforce that lacks a college education. The basic story is that we put our manufacturing workers in direct competition with low paid workers in the developing world while protecting our doctors, lawyers, and other highly paid professionals. The predicted and actual result is lower pay for the vast majority of U.S. workers.
In additional to the negative impact of current trade patterns on wages, there is also the simple problem of the massive loss of demand due to the trade deficit. We currently import $500 billion a year more than we export. This is $500 billion that is creating demand in Canada, the European Union, Mexico, and elsewhere, rather than in the United States. Is there some story as to how domestic consumption or investment is somehow larger because of this trade deficit? If so, it would be worth a Nobel Prize if someone could lay it out with a straight face.
The $500 billion trade deficit, coupled with a standard multiplier of 1.5, translates into $750 billion of lost annual output (roughly 4.5 percent of GDP). This in turn would come to about 6 million jobs. That is close to enough to get us back to full employment. That would give workers enough bargaining power to secure real wages. So yes, trade is a big deal.
It is also worth noting that the “trade” deals currently on the table, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact, have little to do with trade. Both are primarily about putting in place a pro-corporate regulatory structure that would almost certainly not pass in Congress through the normal process or in any other democratically elected parliament. It will also include increased protectionism in the form of stronger patent and copyright protections. These will have the effect of raising prices, slowing growth, and costing jobs.
Read More Leer más Join the discussion Participa en la discusión
Last week the Congressional Budget Office issued its new long-term budget projections. They were little changed from prior projections, but Robert Samuelson still wants to use them as a warning of impending doom.
“Under favorable assumptions, the CBO projects deficits of $7.6 trillion from 2015 to 2024. Under less favorable (maybe more realistic) assumptions, the added debt would total $9.6 trillion. The big drivers are an aging population and rising health spending. …
“The CBO pronounces present policies ‘unsustainable,’ but it does not know — no one does — when and how a breakdown might occur or what the consequences might be. It warns that large deficits will crowd out private investment, reducing future living standards. It speculates that excessive debt might someday so frighten investors that they would retreat from Treasury bonds and cause a financial crisis.”
Okay, there is lots to have fun with here. First, we get the really big numbers, $7.6 trillion and $9.6 trillion. Are you scared?
Next to no one reading this column has any clue as to what these numbers mean, Samuelson has opted to present them without any context to make them understandable to readers. This must have been a conscious choice on Samuelson’s part because CBO actually presents the numbers in context itself. Table 1-1 tells readers that the ratio of debt to GDP is projected to rise because of these deficits from 74 percent this year to 78 percent in 2024. Are you scared now?
If you are worried about the date when we see that “breakdown” or when frightened investors retreat from Treasury bonds and cause a financial crisis, you probably plan to live a very long life. The projections show the debt to GDP ratio rising to 106 percent in 2039. That’s not as high as the debt to GDP ratio that we saw at the end of World War II and still far lower than the 134 percent debt to GDP ratio faced by Italy today and the 244 percent ratio in Japan. Due to the fearful investors, Italy now has to pay 2.81 percent interest on its long-term debt and Japan has to pay 0.55 percent.
The other aspect of Samuelson’s piece that provides good Monday morning entertainment is that it is totally wrong about the origins of high debts and deficits. As recently as 2008 the debt to GDP was as low as 35 percent. It didn’t rise to its current 74 percent because of the moral failings of our political process as Samuelson claims, or at least not the ones to which he points. (The failings have more to do with an over-sensitivity to the profits of the financial industry.) The debt to GDP ratio soared because we actually did have a financial crisis when the housing bubble collapsed and sank the economy. Samuelson seems to have missed this one even though the economy still has not recovered with millions unnecessarily unemployed or underemployed.
The other item worth noting about Samuelson’s scare story and morality play is that he never mentions that the reason we face deficits is that our health care costs are hugely out of line with the rest of the world. If we paid the same amount per capita for our health care as people in other wealthy countries we would be looking at huge budget surpluses, not deficits. The reason that we pay more than everyone else is that we pay twice as much for our doctors, our drugs, our medical supplies and blow a fortune on an incredibly inefficient insurance system.
But Samuelson doesn’t like to talk about this. It’s more fun to complain about greedy seniors.
Last week the Congressional Budget Office issued its new long-term budget projections. They were little changed from prior projections, but Robert Samuelson still wants to use them as a warning of impending doom.
“Under favorable assumptions, the CBO projects deficits of $7.6 trillion from 2015 to 2024. Under less favorable (maybe more realistic) assumptions, the added debt would total $9.6 trillion. The big drivers are an aging population and rising health spending. …
“The CBO pronounces present policies ‘unsustainable,’ but it does not know — no one does — when and how a breakdown might occur or what the consequences might be. It warns that large deficits will crowd out private investment, reducing future living standards. It speculates that excessive debt might someday so frighten investors that they would retreat from Treasury bonds and cause a financial crisis.”
Okay, there is lots to have fun with here. First, we get the really big numbers, $7.6 trillion and $9.6 trillion. Are you scared?
Next to no one reading this column has any clue as to what these numbers mean, Samuelson has opted to present them without any context to make them understandable to readers. This must have been a conscious choice on Samuelson’s part because CBO actually presents the numbers in context itself. Table 1-1 tells readers that the ratio of debt to GDP is projected to rise because of these deficits from 74 percent this year to 78 percent in 2024. Are you scared now?
If you are worried about the date when we see that “breakdown” or when frightened investors retreat from Treasury bonds and cause a financial crisis, you probably plan to live a very long life. The projections show the debt to GDP ratio rising to 106 percent in 2039. That’s not as high as the debt to GDP ratio that we saw at the end of World War II and still far lower than the 134 percent debt to GDP ratio faced by Italy today and the 244 percent ratio in Japan. Due to the fearful investors, Italy now has to pay 2.81 percent interest on its long-term debt and Japan has to pay 0.55 percent.
The other aspect of Samuelson’s piece that provides good Monday morning entertainment is that it is totally wrong about the origins of high debts and deficits. As recently as 2008 the debt to GDP was as low as 35 percent. It didn’t rise to its current 74 percent because of the moral failings of our political process as Samuelson claims, or at least not the ones to which he points. (The failings have more to do with an over-sensitivity to the profits of the financial industry.) The debt to GDP ratio soared because we actually did have a financial crisis when the housing bubble collapsed and sank the economy. Samuelson seems to have missed this one even though the economy still has not recovered with millions unnecessarily unemployed or underemployed.
The other item worth noting about Samuelson’s scare story and morality play is that he never mentions that the reason we face deficits is that our health care costs are hugely out of line with the rest of the world. If we paid the same amount per capita for our health care as people in other wealthy countries we would be looking at huge budget surpluses, not deficits. The reason that we pay more than everyone else is that we pay twice as much for our doctors, our drugs, our medical supplies and blow a fortune on an incredibly inefficient insurance system.
But Samuelson doesn’t like to talk about this. It’s more fun to complain about greedy seniors.
Read More Leer más Join the discussion Participa en la discusión
Steven Pearlstein has a good piece on a proposal in Illinois to have the state administer retirement accounts for workers who don’t have access to one at their workplace, however he gets one part wrong. Under the proposal, 3.0 percent of a workers paycheck would be automatically deducted for a retirement account, but she would have the option to not have the deduction or to reduce (or increase) the amount. He tells readers:
“This concept goes by the name of “Automatic IRA.” It was first proposed in 2006 by two respected policy wonks, David John, then of the conservative Heritage Foundation (now at AARP), and Mark Iwry, then at the more liberal Brookings Institution (now at the Obama Treasury). It quickly won support from Democrats and Republican sponsors on Capitol Hill. In the 2008 presidential campaign, both John McCain and Barack Obama endorsed it.”
Actually the idea goes much further back than this. There were many similar concepts being debated in the 1990s. My friends at the Economic Opportunity Institute in Washington State had been working on this concept in the form of Washington Voluntary Accounts since 1998. So, it’s a good piece, but many more folks deserve credit on advancing this proposal.
Btw, he describes Illinois public employee pensions as “overgenerous.” I’ll let this one pass (workers did forgo pay for these pensions), since my mother gets one.
Steven Pearlstein has a good piece on a proposal in Illinois to have the state administer retirement accounts for workers who don’t have access to one at their workplace, however he gets one part wrong. Under the proposal, 3.0 percent of a workers paycheck would be automatically deducted for a retirement account, but she would have the option to not have the deduction or to reduce (or increase) the amount. He tells readers:
“This concept goes by the name of “Automatic IRA.” It was first proposed in 2006 by two respected policy wonks, David John, then of the conservative Heritage Foundation (now at AARP), and Mark Iwry, then at the more liberal Brookings Institution (now at the Obama Treasury). It quickly won support from Democrats and Republican sponsors on Capitol Hill. In the 2008 presidential campaign, both John McCain and Barack Obama endorsed it.”
Actually the idea goes much further back than this. There were many similar concepts being debated in the 1990s. My friends at the Economic Opportunity Institute in Washington State had been working on this concept in the form of Washington Voluntary Accounts since 1998. So, it’s a good piece, but many more folks deserve credit on advancing this proposal.
Btw, he describes Illinois public employee pensions as “overgenerous.” I’ll let this one pass (workers did forgo pay for these pensions), since my mother gets one.
Read More Leer más Join the discussion Participa en la discusión
It is fraud when an issuer of a loan knowingly puts down false information in order for the loan to be approved. When a securitizer includes large numbers of these loans in securities, as Floyd Norris reports was the case with Citigroup during the housing bubble, this is fraud.
The Obama administration decided not to pursue criminal cases against executives at the major banks who likely committed fraud on a large scale. As a result, most of these bank executives are almost certainly better off as a result of their decision to commit fraud, even though the fraud has been exposed, than if they had obeyed the law.
When crime goes unpunished it naturally leads to more crime. Hence the NYT reported today that subprime auto lenders are doing many of the same scams that subprime mortgage lenders did in the housing bubble days. They are issuing loans, often for more than the value of the car, based on phony income numbers that the lenders themselves wrote in. In a time of generally low interest rates, these loans can be attractive to investors and Wall Street banks are therefore anxious to purchase them and securitize them.
The scale of the subprime auto loan sector is an order of magnitude smaller than the subprime mortgage sector during the bubble days, so it does not pose the same risks to the financial system. (Also, there is not a risk of a downward spiral in car prices as was the case with house prices during the bubble.) However these loans can lead to enormous hardship for the people affected, causing many to be pursued by creditors for years or forced into bankruptcy.
It is fraud when an issuer of a loan knowingly puts down false information in order for the loan to be approved. When a securitizer includes large numbers of these loans in securities, as Floyd Norris reports was the case with Citigroup during the housing bubble, this is fraud.
The Obama administration decided not to pursue criminal cases against executives at the major banks who likely committed fraud on a large scale. As a result, most of these bank executives are almost certainly better off as a result of their decision to commit fraud, even though the fraud has been exposed, than if they had obeyed the law.
When crime goes unpunished it naturally leads to more crime. Hence the NYT reported today that subprime auto lenders are doing many of the same scams that subprime mortgage lenders did in the housing bubble days. They are issuing loans, often for more than the value of the car, based on phony income numbers that the lenders themselves wrote in. In a time of generally low interest rates, these loans can be attractive to investors and Wall Street banks are therefore anxious to purchase them and securitize them.
The scale of the subprime auto loan sector is an order of magnitude smaller than the subprime mortgage sector during the bubble days, so it does not pose the same risks to the financial system. (Also, there is not a risk of a downward spiral in car prices as was the case with house prices during the bubble.) However these loans can lead to enormous hardship for the people affected, causing many to be pursued by creditors for years or forced into bankruptcy.
Read More Leer más Join the discussion Participa en la discusión
Most economists agree that trade is one of the main reasons that less-educated workers have seen a decline in their relative wages over the last three decades. The story is pretty straightforward. Trade policy has been designed to put manufacturing workers in the United States in direct competition with workers in developing countries like Mexico or China, who sometimes earn less than $1 an hour. This causes many workers in the United States to lose their job and puts serious downward pressure on the wages of workers who manage to keep their jobs.
Given this fact, it is striking that trade, or more precisely allowing more foreign doctors to practice in the United States, does not even rate mention in a NYT editorial on a prospective doctor shortage. Doctors in other wealthy countries get paid on average about half of what they get in the United States. Doctors in developing countries get paid even less. This suggests the possibility of enormous gains from allowing more foreign doctors into the country to bring wages of physicians here in line with those in other wealthy countries. (We could easily compensate developing countries for losing doctors by providing them with the money to educate two or three doctors for every one that comes here — please think about that one for a minute before writing a silly complaint about brain drain.)
Anyhow, it striking that the class bias in trade policy is so extreme that any policy that is designed to provide even limited protection for less-educated workers, such as the temporary tariffs on imported steel that President Bush imposed in 2002, are immediately denounced as protectionist by all right-thinking people. Yet trade can not even be discussed, even when there is potential for enormous gains, if the losers would be highly-educated professionals like doctors.
Most economists agree that trade is one of the main reasons that less-educated workers have seen a decline in their relative wages over the last three decades. The story is pretty straightforward. Trade policy has been designed to put manufacturing workers in the United States in direct competition with workers in developing countries like Mexico or China, who sometimes earn less than $1 an hour. This causes many workers in the United States to lose their job and puts serious downward pressure on the wages of workers who manage to keep their jobs.
Given this fact, it is striking that trade, or more precisely allowing more foreign doctors to practice in the United States, does not even rate mention in a NYT editorial on a prospective doctor shortage. Doctors in other wealthy countries get paid on average about half of what they get in the United States. Doctors in developing countries get paid even less. This suggests the possibility of enormous gains from allowing more foreign doctors into the country to bring wages of physicians here in line with those in other wealthy countries. (We could easily compensate developing countries for losing doctors by providing them with the money to educate two or three doctors for every one that comes here — please think about that one for a minute before writing a silly complaint about brain drain.)
Anyhow, it striking that the class bias in trade policy is so extreme that any policy that is designed to provide even limited protection for less-educated workers, such as the temporary tariffs on imported steel that President Bush imposed in 2002, are immediately denounced as protectionist by all right-thinking people. Yet trade can not even be discussed, even when there is potential for enormous gains, if the losers would be highly-educated professionals like doctors.
Read More Leer más Join the discussion Participa en la discusión
Suppose a mob boss has his thugs go around and shake down a bunch of small business people. Imagine he then gives a portion of the haul to poor children. When the business people complain, the mobster then tells them they are being greedy, after all don’t they care about the poor children?
This is esentially the argument that Tyler Cowen gives us in the NYT this morning. There is little doubt that hundreds of millions of people in developing countries like China and India have benefited from the growth in the world economy over the last three decades. To some extent their gains have come from displacing workers in rich countries, especially the United States. However we did not have to structure the world economy this way.
People in developing countries could also have experienced enormous gains if their doctors and other highly educated professionals were allowed to compete on an even footing with their counterparts in the United States and other rich countries. Similarly, there would be enormous gains from allowing India’s generic drug industry to sell low cost drugs like generic Sovaldi in the United States and elsewhere. And, we all would benefit from taxing the financial industry like other sectors of the economy and ending too big to fail subsidies for Wall Street banks. Furthermore, in a period of secular stagnation like the present, everyone could benefit from just handing large amounts of cash to the world’s poor, since it would generate demand.
Just because the world’s poor benefited at the expense of the middle class in rich countries does not mean it had to be this way. We could help poor children without having a mobster shake down small businesses to finance his charitable contributions.
Suppose a mob boss has his thugs go around and shake down a bunch of small business people. Imagine he then gives a portion of the haul to poor children. When the business people complain, the mobster then tells them they are being greedy, after all don’t they care about the poor children?
This is esentially the argument that Tyler Cowen gives us in the NYT this morning. There is little doubt that hundreds of millions of people in developing countries like China and India have benefited from the growth in the world economy over the last three decades. To some extent their gains have come from displacing workers in rich countries, especially the United States. However we did not have to structure the world economy this way.
People in developing countries could also have experienced enormous gains if their doctors and other highly educated professionals were allowed to compete on an even footing with their counterparts in the United States and other rich countries. Similarly, there would be enormous gains from allowing India’s generic drug industry to sell low cost drugs like generic Sovaldi in the United States and elsewhere. And, we all would benefit from taxing the financial industry like other sectors of the economy and ending too big to fail subsidies for Wall Street banks. Furthermore, in a period of secular stagnation like the present, everyone could benefit from just handing large amounts of cash to the world’s poor, since it would generate demand.
Just because the world’s poor benefited at the expense of the middle class in rich countries does not mean it had to be this way. We could help poor children without having a mobster shake down small businesses to finance his charitable contributions.
Read More Leer más Join the discussion Participa en la discusión
It would be nice if someone could force Thomas Friedman to learn a little bit about the topics of his columns. Today he ran another ad for Airbnb, touting its hyperconnectiveness. While Friedman is ecstatic over the company’s hyperconnectiveness, he fails to answer the most basic questions.
Can Airbnb guarantee that its rooms are safe? If not, can we sue and imprison its executives if people who use the service die in fires? What about the nuisance of living next to a hotel room when you paid to buy a condo or rent an apartment? Can neighbors of popular guest rooms sue Airbnb for the diminution of the value of their homes?
These questions are probably too complex for someone like Thomas Friedman, but perhaps the NYT could hire someone to seriously deal with the issues that Thomas Friedman raises.
Note: An earlier version raised questions about local and state taxes, which Airbnb reports it tries to collect.
It would be nice if someone could force Thomas Friedman to learn a little bit about the topics of his columns. Today he ran another ad for Airbnb, touting its hyperconnectiveness. While Friedman is ecstatic over the company’s hyperconnectiveness, he fails to answer the most basic questions.
Can Airbnb guarantee that its rooms are safe? If not, can we sue and imprison its executives if people who use the service die in fires? What about the nuisance of living next to a hotel room when you paid to buy a condo or rent an apartment? Can neighbors of popular guest rooms sue Airbnb for the diminution of the value of their homes?
These questions are probably too complex for someone like Thomas Friedman, but perhaps the NYT could hire someone to seriously deal with the issues that Thomas Friedman raises.
Note: An earlier version raised questions about local and state taxes, which Airbnb reports it tries to collect.
Read More Leer más Join the discussion Participa en la discusión
Okay, this is really getting pathetic. Yet another piece on drug companies charging hundreds of thousands for drugs (wrongly described as their “cost”) which never mentions government granted patent monopolies.
Does the NYT and other media outlets have a ban on discussing patents? Look, we have an incredibly stupid way of financing the research and development of prescription drugs. We don’t have to do it this way. Anyone hear of the National Institutes of Health? Just think, if we paid for the research up front these drugs would cost hundreds of dollars instead of hundreds of thousands of dollars. All the information uncovered in their discovery would be immediately available for other researchers to benefit from. And, the drug companies would not have enormous incentive to lie about their safety and effectiveness.
And, we wouldn’t have all this absurd handwringing about the tough ethical choices in paying for incredibly expensive drugs. Are reporters and columnists prohibited from raising this question or do they really have so little imagination that they can’t even envision an alternative to patent financed research?
Okay, this is really getting pathetic. Yet another piece on drug companies charging hundreds of thousands for drugs (wrongly described as their “cost”) which never mentions government granted patent monopolies.
Does the NYT and other media outlets have a ban on discussing patents? Look, we have an incredibly stupid way of financing the research and development of prescription drugs. We don’t have to do it this way. Anyone hear of the National Institutes of Health? Just think, if we paid for the research up front these drugs would cost hundreds of dollars instead of hundreds of thousands of dollars. All the information uncovered in their discovery would be immediately available for other researchers to benefit from. And, the drug companies would not have enormous incentive to lie about their safety and effectiveness.
And, we wouldn’t have all this absurd handwringing about the tough ethical choices in paying for incredibly expensive drugs. Are reporters and columnists prohibited from raising this question or do they really have so little imagination that they can’t even envision an alternative to patent financed research?
Read More Leer más Join the discussion Participa en la discusión
The New York Times doesn’t seem to use the term “vast” the way the rest of us would. It told readers that President Obama is:
“stymied by Republican lawmakers who refuse to go along with Mr. Obama’s call for vast new spending on the nation’s infrastructure.”
The proposal in question would provide $300 billion in additional spending over the next four years. This is equal to roughly 0.4 percent of GDP over this period and less than 1.8 of projected federal spending.
Thanks to Robert Salzberg for calling this one to my attention.
The New York Times doesn’t seem to use the term “vast” the way the rest of us would. It told readers that President Obama is:
“stymied by Republican lawmakers who refuse to go along with Mr. Obama’s call for vast new spending on the nation’s infrastructure.”
The proposal in question would provide $300 billion in additional spending over the next four years. This is equal to roughly 0.4 percent of GDP over this period and less than 1.8 of projected federal spending.
Thanks to Robert Salzberg for calling this one to my attention.
Read More Leer más Join the discussion Participa en la discusión
The Washington Post really has to discover the Commerce Department. It is less than a mile from the WaPo office. Furthermore, if they had access to the Internet, they could get economic data from the Commerce Department in seconds.
If the WaPo knew about the Commerce Department and the data it produces it would not have told readers told readers in a headline:
“Amercians’ checking accounts are filling with cash, but they are afraid to spend it.”
The Commerce Department’s data would have told them that they actually are spending at a fairly rapid clip. The saving rate for the first quarter of 2014 was 4.4 percent. That’s somewhat higher than when the wealth effects from the stock and housing bubbles were leading to consumption booms in the late 1990s and the middle of the last decade, but well below the 8-plus percent average for the pre-bubble decades. In other words, there is no doubt that people are spending a lot relative to their incomes.
The accumulation in checking accounts reflects how people opt to save their money. (“Save” just means not spend. From an economic perspective, burning your cash is also a form of saving, since you would not be spending it.) With interest rates on money market funds and other short-term assets very low, it is understandable that people would not bother to transfer their money out of their checking accounts. The same story applies to longer term bonds which also carry a risk of capital losses. And, with price-to-earnings ratios that are higher than normal levels, people can also anticipate lower than normal returns on stock.
In short, the decision to hold money in checking accounts is easily explained as an asset choice. It is not an alternative to spending, which we know is actually fairly strong.
The Washington Post really has to discover the Commerce Department. It is less than a mile from the WaPo office. Furthermore, if they had access to the Internet, they could get economic data from the Commerce Department in seconds.
If the WaPo knew about the Commerce Department and the data it produces it would not have told readers told readers in a headline:
“Amercians’ checking accounts are filling with cash, but they are afraid to spend it.”
The Commerce Department’s data would have told them that they actually are spending at a fairly rapid clip. The saving rate for the first quarter of 2014 was 4.4 percent. That’s somewhat higher than when the wealth effects from the stock and housing bubbles were leading to consumption booms in the late 1990s and the middle of the last decade, but well below the 8-plus percent average for the pre-bubble decades. In other words, there is no doubt that people are spending a lot relative to their incomes.
The accumulation in checking accounts reflects how people opt to save their money. (“Save” just means not spend. From an economic perspective, burning your cash is also a form of saving, since you would not be spending it.) With interest rates on money market funds and other short-term assets very low, it is understandable that people would not bother to transfer their money out of their checking accounts. The same story applies to longer term bonds which also carry a risk of capital losses. And, with price-to-earnings ratios that are higher than normal levels, people can also anticipate lower than normal returns on stock.
In short, the decision to hold money in checking accounts is easily explained as an asset choice. It is not an alternative to spending, which we know is actually fairly strong.
Read More Leer más Join the discussion Participa en la discusión
