The Wall Street Journal noted that this recovery is about to pass the average duration for post-war recoveries with no recession clouds on the horizon. The piece also noted the weakness of the recovery and that the unemployment rate is higher now than at the same point in any prior post-war recovery. This weakness is treated as a source of mystery.
Of course arithmetic fans have no difficulty explaining the weakness. In the last business cycle the economy was being driven by the housing bubble. This led to record rates of housing construction (measured as a share of GDP) and record consumption, with the savings rate falling to near zero. Now that the bubble has burst housing has fallen to below normal levels due to the overbuilding of the bubble years and consumption is closer to normal levels, albeit still unusually high relative to income.
What did anyone think could fill the resulting gap in demand? The government sector could do it, but the balanced budget cultists will not let the government run large deficits. Investment is not going to spike to record highs in a weak economy. The trade deficit could close to fill the demand gap, but that would require a sharp fall in the dollar which we have not seen.
In short there is nothing surprising about the weakness of this recovery. The only aspect that is surprising is that economists seem surprised.
The Wall Street Journal noted that this recovery is about to pass the average duration for post-war recoveries with no recession clouds on the horizon. The piece also noted the weakness of the recovery and that the unemployment rate is higher now than at the same point in any prior post-war recovery. This weakness is treated as a source of mystery.
Of course arithmetic fans have no difficulty explaining the weakness. In the last business cycle the economy was being driven by the housing bubble. This led to record rates of housing construction (measured as a share of GDP) and record consumption, with the savings rate falling to near zero. Now that the bubble has burst housing has fallen to below normal levels due to the overbuilding of the bubble years and consumption is closer to normal levels, albeit still unusually high relative to income.
What did anyone think could fill the resulting gap in demand? The government sector could do it, but the balanced budget cultists will not let the government run large deficits. Investment is not going to spike to record highs in a weak economy. The trade deficit could close to fill the demand gap, but that would require a sharp fall in the dollar which we have not seen.
In short there is nothing surprising about the weakness of this recovery. The only aspect that is surprising is that economists seem surprised.
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In an article on the likely political implications of the Affordable Care Act (ACA) in the November election, the NYT wrongly implied that the beneficiaries are a relatively small segment of the population. It told readers:
“Democrats could ultimately see some political benefit from the law. But in this midterm election, they are confronting a vexing reality: Many of those helped by the health care law — notably young people and minorities — are the least likely to cast votes that could preserve it, even though millions have gained health insurance and millions more will benefit from some of its popular provisions.”
Actually, virtually the entire pre-Medicare age population stands to benefit from the ACA. Millions of insured people lose their insurance every year, typically because they lose their job. These people will now be able to get insurance through the exchanges, in most cases at prices far below what they would have paid in the individual market previously. In this way, the ACA is effectively giving the insured population security in their insurance that they did not previously have.This is especially important in cases where the reason people lost their job was due to bad health.
This is a huge benefit that is being extended to tens of millions of people who will be voting in November. Due to poor coverage of the impact of the law, it is likely that most of these people do not recognize the extent to which the ACA provides them with security in their insurance coverage.
In an article on the likely political implications of the Affordable Care Act (ACA) in the November election, the NYT wrongly implied that the beneficiaries are a relatively small segment of the population. It told readers:
“Democrats could ultimately see some political benefit from the law. But in this midterm election, they are confronting a vexing reality: Many of those helped by the health care law — notably young people and minorities — are the least likely to cast votes that could preserve it, even though millions have gained health insurance and millions more will benefit from some of its popular provisions.”
Actually, virtually the entire pre-Medicare age population stands to benefit from the ACA. Millions of insured people lose their insurance every year, typically because they lose their job. These people will now be able to get insurance through the exchanges, in most cases at prices far below what they would have paid in the individual market previously. In this way, the ACA is effectively giving the insured population security in their insurance that they did not previously have.This is especially important in cases where the reason people lost their job was due to bad health.
This is a huge benefit that is being extended to tens of millions of people who will be voting in November. Due to poor coverage of the impact of the law, it is likely that most of these people do not recognize the extent to which the ACA provides them with security in their insurance coverage.
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Joe Nocera had an interesting column, based on a book by Lawrence Goldstone, that discussed how disputes over the Wright brothers’ patents held up the development of the airplane. Unfortunately Nocera concludes the piece with a quote from Goldstone:
“That is, of course, the irony of the patent system. Without patent protection, a competitor can simply replicate an invention and undercut the inventor’s price — which necessarily includes all the time and expense of research and development — so the incentive to experiment and create is severely inhibited. But if innovators such as Glenn Curtiss [the Wright brothers’ main competitor] cannot build on the progress of others without paying exorbitantly for the privilege, the incentive to continue to experiment and create is similarly inhibited.”
In fact, patents are not the only mechanism for supporting innovation. The federal government spends $30 billion a year financing bio-medical research through the National Institutes of Health. It also funds research in other areas. Most of this research is directed towards more basic science, but it nonetheless has led to many important innovations. If funding were targeted for developing marketable products (possibly through private contractors) there is no reason for believing it would not be successful.
Given the enormous inefficiencies associated with patent financed research, we should be discussing alternatives. It is unfortunate that Nocera’s article implies there are no alternatives to patent financed research.
Note: Thanks to Peter for calling this column to my attention. I also see from comments below that Lawrence Goldstone has explicitly argued that we need to pursue alternatives mechanisms to patents for financing innovation. This is encouraging.
Joe Nocera had an interesting column, based on a book by Lawrence Goldstone, that discussed how disputes over the Wright brothers’ patents held up the development of the airplane. Unfortunately Nocera concludes the piece with a quote from Goldstone:
“That is, of course, the irony of the patent system. Without patent protection, a competitor can simply replicate an invention and undercut the inventor’s price — which necessarily includes all the time and expense of research and development — so the incentive to experiment and create is severely inhibited. But if innovators such as Glenn Curtiss [the Wright brothers’ main competitor] cannot build on the progress of others without paying exorbitantly for the privilege, the incentive to continue to experiment and create is similarly inhibited.”
In fact, patents are not the only mechanism for supporting innovation. The federal government spends $30 billion a year financing bio-medical research through the National Institutes of Health. It also funds research in other areas. Most of this research is directed towards more basic science, but it nonetheless has led to many important innovations. If funding were targeted for developing marketable products (possibly through private contractors) there is no reason for believing it would not be successful.
Given the enormous inefficiencies associated with patent financed research, we should be discussing alternatives. It is unfortunate that Nocera’s article implies there are no alternatives to patent financed research.
Note: Thanks to Peter for calling this column to my attention. I also see from comments below that Lawrence Goldstone has explicitly argued that we need to pursue alternatives mechanisms to patents for financing innovation. This is encouraging.
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The Washington Post decided to highlight the fact that a review of Illinois Medicaid documents going back to 1970 found that less than 0.01 percent of the programs spending were payments made for people who are already dead. This information was the basis of a major page 3 AP story in the Sunday paper.
The article actually never informed readers how large the improper payments were as a share of the program’s budget. Instead it told readers that $12 million in such payments had been made, $7 million of which were already recovered. If the article had been competently reported, the real story would be that Illinois’ Medicaid program seems to be fairly well run in this respect. (It did include a statement from the director of the state program saying that these overpayments involved less than one tenth of one percent of their caseloads and an ever smaller share of the budget. It would have been more useful if the article directly provided this information to readers rather than leaving this as an assertion by an interested party.)
Any time large amounts of money are being spent there will be mistakes. Private companies make improper payments all the time. A real newspaper would have tried to assess the size of these mistaken payments relative to the size of the program and compared them to improper payments by other large organizations. Apparently Jeff Bezos has no interest in trying to inform the readers of his newspaper, he would rather use the news section to try to convince readers that the government is run by hopeless incompetents.
Note: The fact that the piece was from AP was added after the original post.
The Washington Post decided to highlight the fact that a review of Illinois Medicaid documents going back to 1970 found that less than 0.01 percent of the programs spending were payments made for people who are already dead. This information was the basis of a major page 3 AP story in the Sunday paper.
The article actually never informed readers how large the improper payments were as a share of the program’s budget. Instead it told readers that $12 million in such payments had been made, $7 million of which were already recovered. If the article had been competently reported, the real story would be that Illinois’ Medicaid program seems to be fairly well run in this respect. (It did include a statement from the director of the state program saying that these overpayments involved less than one tenth of one percent of their caseloads and an ever smaller share of the budget. It would have been more useful if the article directly provided this information to readers rather than leaving this as an assertion by an interested party.)
Any time large amounts of money are being spent there will be mistakes. Private companies make improper payments all the time. A real newspaper would have tried to assess the size of these mistaken payments relative to the size of the program and compared them to improper payments by other large organizations. Apparently Jeff Bezos has no interest in trying to inform the readers of his newspaper, he would rather use the news section to try to convince readers that the government is run by hopeless incompetents.
Note: The fact that the piece was from AP was added after the original post.
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It is remarkable that no country has outlawed economics as a dangerous occupation on a par with drug dealing or murder for hire. The damage done to the world over the last seven years based on policies designed by economists has been incredible.
Floyd Norris documents this fact in a nice piece comparing the change in employment rates (the percentage of the population employed) in rich countries since 2007. The only two countries with higher employment to population ratios today than at the start of the downturn are Germany and Japan. Both countries have broken with the economic orthodoxy in important ways.
In Germany, the government has adopted policies that encourage employers to keep workers on the payroll by cutting back hours rather than laying them off. As a result, their unemployment rate is almost three percentage points below its pre-recession level even though its growth has actually been somewhat slower than in the United States.
Japan has adopted a policy of aggressive deficit spending even though its debt to GDP ratio is already more than twice that of the United States. It also has deliberately targeted a higher rate of inflation as a way of lowering real interest rates and reducing debt burden. As a result, it has created a number of jobs that would be the equivalent of more than 4 million in the United States.
In short, ignoring the economic orthodoxy works. Listening to orthodox economists brings destruction to the economy and devastates peoples’ lives.
Addendum:
The increase in the employment rates of prime age women in Germany and Japan, 4.0 percentage points and 3.6 percentage points, is especially impressive. This compares to a drop of 3.1 percentage points in the United States.
It is remarkable that no country has outlawed economics as a dangerous occupation on a par with drug dealing or murder for hire. The damage done to the world over the last seven years based on policies designed by economists has been incredible.
Floyd Norris documents this fact in a nice piece comparing the change in employment rates (the percentage of the population employed) in rich countries since 2007. The only two countries with higher employment to population ratios today than at the start of the downturn are Germany and Japan. Both countries have broken with the economic orthodoxy in important ways.
In Germany, the government has adopted policies that encourage employers to keep workers on the payroll by cutting back hours rather than laying them off. As a result, their unemployment rate is almost three percentage points below its pre-recession level even though its growth has actually been somewhat slower than in the United States.
Japan has adopted a policy of aggressive deficit spending even though its debt to GDP ratio is already more than twice that of the United States. It also has deliberately targeted a higher rate of inflation as a way of lowering real interest rates and reducing debt burden. As a result, it has created a number of jobs that would be the equivalent of more than 4 million in the United States.
In short, ignoring the economic orthodoxy works. Listening to orthodox economists brings destruction to the economy and devastates peoples’ lives.
Addendum:
The increase in the employment rates of prime age women in Germany and Japan, 4.0 percentage points and 3.6 percentage points, is especially impressive. This compares to a drop of 3.1 percentage points in the United States.
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The NYT again obsessed about the number of young people signing up for the exchanges, telling readers they “tend to be healthier.” Yes, everyone knows they tend to be healthier, which is why they pay on average a third of the premium of the oldest age band (55-64). As the Kaiser Foundation showed, a skewing by age would have little consequence since the difference in premiums largely reflects the difference in average costs. What will matter for the success of the exchanges is if there is a skewing by health conditions with less healthy people of all ages being disproportionately likely to enroll.
The NYT again obsessed about the number of young people signing up for the exchanges, telling readers they “tend to be healthier.” Yes, everyone knows they tend to be healthier, which is why they pay on average a third of the premium of the oldest age band (55-64). As the Kaiser Foundation showed, a skewing by age would have little consequence since the difference in premiums largely reflects the difference in average costs. What will matter for the success of the exchanges is if there is a skewing by health conditions with less healthy people of all ages being disproportionately likely to enroll.
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The Republicans apparently think they got a powerful piece of ammunition from the Congressional Budget Office this week when it came out with an estimate that President Obama’s minimum wage proposal would cost employers $15 billion a year. Under the “really big number” approach to public policy, many Republicans think they can scare people with a number that is much more money that almost anyone will see in their lifetime.
Fortunately at least some folks in the media recognize that their job is to inform rather than scare readers. The AP story on the report pointed out that the $15 billion represented roughly one third of one penny of every dollar paid out in wages. Are you scared yet?
Those looking for useful comparisons of the costs imposed by the higher minimum wage may also want to compare it to the savings we have seen from slower health care cost growth. Back in 2008 the Centers for Medicare and Medicaid Services projected that we would be spending $3,313 billion on health care in 2014. Their most recent numbers show us spending $3093 billion in 2014. This amounts to a savings of $220 billion, or more than 14 times as much as CBO projects the higher minimum wage will cost employers.
We can argue over the extent to which the Obama administration deserves credit for lower cost growth. But, there is no doubt that the savings on health care, which have largely passed on unnoticed, are a hugely bigger deal than any costs to employers due to a higher minimum wage.
Of course just because this money is not a big deal to employers doesn’t mean it is not a big deal to minimum wage workers. It will make a big difference in the living standards of the families of minimum wage workers, 70 percent of whom live in families with incomes of less than $60,000 a year.
Note: Numbers corrected, thanks to Robert Salzberg.
The Republicans apparently think they got a powerful piece of ammunition from the Congressional Budget Office this week when it came out with an estimate that President Obama’s minimum wage proposal would cost employers $15 billion a year. Under the “really big number” approach to public policy, many Republicans think they can scare people with a number that is much more money that almost anyone will see in their lifetime.
Fortunately at least some folks in the media recognize that their job is to inform rather than scare readers. The AP story on the report pointed out that the $15 billion represented roughly one third of one penny of every dollar paid out in wages. Are you scared yet?
Those looking for useful comparisons of the costs imposed by the higher minimum wage may also want to compare it to the savings we have seen from slower health care cost growth. Back in 2008 the Centers for Medicare and Medicaid Services projected that we would be spending $3,313 billion on health care in 2014. Their most recent numbers show us spending $3093 billion in 2014. This amounts to a savings of $220 billion, or more than 14 times as much as CBO projects the higher minimum wage will cost employers.
We can argue over the extent to which the Obama administration deserves credit for lower cost growth. But, there is no doubt that the savings on health care, which have largely passed on unnoticed, are a hugely bigger deal than any costs to employers due to a higher minimum wage.
Of course just because this money is not a big deal to employers doesn’t mean it is not a big deal to minimum wage workers. It will make a big difference in the living standards of the families of minimum wage workers, 70 percent of whom live in families with incomes of less than $60,000 a year.
Note: Numbers corrected, thanks to Robert Salzberg.
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Morning Edition had an interesting segment reporting on a new effort to promote open source seeds. These seeds could be freely reproduced and varied, as long as any resulting seeds were also freely available.
Unfortunately this piece did not fully flesh out the economic implications of this movement. While it included the comments of the representative of a seed company, saying that it would likely avoid open source seed in order to be able to continue to sell patent protected seed, it didn’t include any discussion of the larger implications of patents in seeds.
The seed companies and many of their top executives and scientists are getting very rich from patent protected seeds. This is not technology. This is not technology. (Sorry, had to repeat this in case any economists were reading.) This is the result of a government policy that hands out monopolies to certain companies and threatens to arrest competitors.
Patent monopolies are one way to finance research into developing new seeds. It is certainly not the only way. Much of the research into agriculture is paid by universities or government agencies. The government could increases this sort of funding to replace the research done by the private sector.
This would allow all seeds to be available at the free market price. This would likely eliminate many of the large fortunes earned by selling seeds. It would also eliminate the enormous distortions associated with patent protected prices. If the patent leads to a price that is 500 hundred or 1000 percent above the free market price it leads to the same amount of economic waste as if the government were to impose a tariff of 500 or 1000 percent on imports of the seed.
Publiclly funded research would also likely lead to more effective development of new seeds since making all research findings public could be a requirement for getting public funding. Under a system supported by patent monopolies companies only make available the information needed to get a patent. In fact, they have a strong financial incentive to misrepresent and conceal research findings in order to promote their product and inhibit competitors.
Since science advances much more rapidly in a context of open research it would have been worth including this point in the discussion. It also is important to point out that, insofar as patent protected products are a source of great wealth and a factor in inequality, it is the outcome of government policy, not technology.
Morning Edition had an interesting segment reporting on a new effort to promote open source seeds. These seeds could be freely reproduced and varied, as long as any resulting seeds were also freely available.
Unfortunately this piece did not fully flesh out the economic implications of this movement. While it included the comments of the representative of a seed company, saying that it would likely avoid open source seed in order to be able to continue to sell patent protected seed, it didn’t include any discussion of the larger implications of patents in seeds.
The seed companies and many of their top executives and scientists are getting very rich from patent protected seeds. This is not technology. This is not technology. (Sorry, had to repeat this in case any economists were reading.) This is the result of a government policy that hands out monopolies to certain companies and threatens to arrest competitors.
Patent monopolies are one way to finance research into developing new seeds. It is certainly not the only way. Much of the research into agriculture is paid by universities or government agencies. The government could increases this sort of funding to replace the research done by the private sector.
This would allow all seeds to be available at the free market price. This would likely eliminate many of the large fortunes earned by selling seeds. It would also eliminate the enormous distortions associated with patent protected prices. If the patent leads to a price that is 500 hundred or 1000 percent above the free market price it leads to the same amount of economic waste as if the government were to impose a tariff of 500 or 1000 percent on imports of the seed.
Publiclly funded research would also likely lead to more effective development of new seeds since making all research findings public could be a requirement for getting public funding. Under a system supported by patent monopolies companies only make available the information needed to get a patent. In fact, they have a strong financial incentive to misrepresent and conceal research findings in order to promote their product and inhibit competitors.
Since science advances much more rapidly in a context of open research it would have been worth including this point in the discussion. It also is important to point out that, insofar as patent protected products are a source of great wealth and a factor in inequality, it is the outcome of government policy, not technology.
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The NYT headlined a piece on the dismal state of Russia’s economy, “Russia economy worsens even before sanctions hit.” The piece goes on to describe an economy in decline telling readers about Russians moving abroad and storing cash in safe deposit boxes and foreign currencies. It reports:
“Russia’s $2 trillion economy was suffering from stagflation, that toxic mix of stagnant growth and high inflation typically accompanied by a spike in unemployment. In Russia, joblessness remains low, but only because years of population decline have produced a shrunken, inadequate labor force.”
The data from the I.M.F. tell a somewhat different picture. While growth has slowed in the last two years, per capita income has more than doubled in the country since Vladimir Putin took office in 1998. The NYT may not like Russia’s “shrunken inadequate labor force,” but members of this shrunken, inadequate labor force probably care more about the unemployment rate than the NYT’s condemnations.
The I.M.F. projects an inflation rate of 6.2 percent for both this year and next. This is high for members of the 2.0 percent inflation cult that occupies central banks in the west and top economics departments, but folks familiar with economic data know that many countries have had long stretches of healthy growth with higher inflation rates. While the piece did find people who were unhappy about this inflation rate, people with better memories would recall that Russia had double-digit inflation as recently as 2008.
While the private equity investor who is one of the main sources for the piece predicts that Russia will default on its debt, it’s difficult to see the basis for this assertion in the data. The I.M.F. reports that it has a deficit of less than 1.0 percent of GDP and its debt-to-GDP ratio have been on a downward course. It has a current account surplus. Furthermore, the I.M.F. shows that investment is almost 24 percent of GDP. This compares to less than 20 percent in the United States.
In short, the data for Russia reported by the I.M.F. would be consistent with the 80 percent approval rating for Putin that the article mentions, even if the economic picture painted by the NYT is not.
The NYT headlined a piece on the dismal state of Russia’s economy, “Russia economy worsens even before sanctions hit.” The piece goes on to describe an economy in decline telling readers about Russians moving abroad and storing cash in safe deposit boxes and foreign currencies. It reports:
“Russia’s $2 trillion economy was suffering from stagflation, that toxic mix of stagnant growth and high inflation typically accompanied by a spike in unemployment. In Russia, joblessness remains low, but only because years of population decline have produced a shrunken, inadequate labor force.”
The data from the I.M.F. tell a somewhat different picture. While growth has slowed in the last two years, per capita income has more than doubled in the country since Vladimir Putin took office in 1998. The NYT may not like Russia’s “shrunken inadequate labor force,” but members of this shrunken, inadequate labor force probably care more about the unemployment rate than the NYT’s condemnations.
The I.M.F. projects an inflation rate of 6.2 percent for both this year and next. This is high for members of the 2.0 percent inflation cult that occupies central banks in the west and top economics departments, but folks familiar with economic data know that many countries have had long stretches of healthy growth with higher inflation rates. While the piece did find people who were unhappy about this inflation rate, people with better memories would recall that Russia had double-digit inflation as recently as 2008.
While the private equity investor who is one of the main sources for the piece predicts that Russia will default on its debt, it’s difficult to see the basis for this assertion in the data. The I.M.F. reports that it has a deficit of less than 1.0 percent of GDP and its debt-to-GDP ratio have been on a downward course. It has a current account surplus. Furthermore, the I.M.F. shows that investment is almost 24 percent of GDP. This compares to less than 20 percent in the United States.
In short, the data for Russia reported by the I.M.F. would be consistent with the 80 percent approval rating for Putin that the article mentions, even if the economic picture painted by the NYT is not.
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