The NYT perpetuated nonsense about the magic of zero in a piece discussing recent measures of inflation and unemployment in the euro zone. It told readers;
“Deflation is considered even worse than runaway inflation, because consumers delay purchases in anticipation of ever lower prices, undercutting corporate profits and causing companies to stop investing in new plants and equipment. The result is rising unemployment and further downward pressure on prices.
“Economists at the advisory firm Oxford Economics calculate that, if the euro zone suffered deflation, unemployment would rise to 16.5 percent of the work force by 2018, or 25 million people. At the same time, countries like Greece would have even more trouble paying back debts, because economic output would shrink and tax receipts would dwindle.”
There is no link to the Oxford Economics analysis cited here, but on its face the idea that the inflation rate falling from 0.5 percent to -0.5 percent would have a devastating impact on employment and output is absurd. The inflation rate is an amalgamation of the prices of hundreds of thousands of different goods and services. At any point in time some prices are rising and some are falling. When the inflation rate goes from a small positive to a small negative it means that the percentage of items with falling prices has increased relative to the percentage of items of rising prices. The notion that this leads to economic disaster is more than a bit far-fetched. (Imagine the shift is from 45 percent of items having falling prices to 55 percent having falling prices.)
Furthermore, since the inflation indices measure quality adjusted prices we could get a shift from a modest rate of inflation to a modest rate of deflation simply because the quality of goods like computers and cell phones is increasing more rapidly. Does that sound like the basis for economic disaster?
The idea that consumers will delay purchases in any notable way due to a shift to deflation is absurd on its face. Computer and cell phone prices have been falling sharply for the last two decades yet people seem to be buying plenty of both. If we just applied an aggregate deflation rate of 0.5 percent to an item like an $800 television set, it would mean that a person could save $4 by waiting a year to buy a television set. Does that have you scared about the impact on consumption?
The point about investment is right, but the crossing of zero, from a small positive inflation rate to a small negative inflation rate is of no real consequences. Businesses invest in the present to sell more goods and/or services in the future. If those goods and services are expected to sell for higher prices then it makes investment more profitable. If they sell for lower prices then it makes investment less profitable.
However there is no particular importance to crossing zero in this story. If the inflation rate falls from 1.5 percent to 0.5 percent, this will make investment look less profitable. The same is true if it falls from 0.5 percent to -0.5 percent. The problem faced by euro zone countries (as well as Japan and the United States) is that it would be desirable to have a higher inflation rate to make investment more profitable. This is just as true when the inflation rate is a very low positive number as when it is a negative number and countries face deflation. The problem is simply too low a rate of inflation.
The NYT perpetuated nonsense about the magic of zero in a piece discussing recent measures of inflation and unemployment in the euro zone. It told readers;
“Deflation is considered even worse than runaway inflation, because consumers delay purchases in anticipation of ever lower prices, undercutting corporate profits and causing companies to stop investing in new plants and equipment. The result is rising unemployment and further downward pressure on prices.
“Economists at the advisory firm Oxford Economics calculate that, if the euro zone suffered deflation, unemployment would rise to 16.5 percent of the work force by 2018, or 25 million people. At the same time, countries like Greece would have even more trouble paying back debts, because economic output would shrink and tax receipts would dwindle.”
There is no link to the Oxford Economics analysis cited here, but on its face the idea that the inflation rate falling from 0.5 percent to -0.5 percent would have a devastating impact on employment and output is absurd. The inflation rate is an amalgamation of the prices of hundreds of thousands of different goods and services. At any point in time some prices are rising and some are falling. When the inflation rate goes from a small positive to a small negative it means that the percentage of items with falling prices has increased relative to the percentage of items of rising prices. The notion that this leads to economic disaster is more than a bit far-fetched. (Imagine the shift is from 45 percent of items having falling prices to 55 percent having falling prices.)
Furthermore, since the inflation indices measure quality adjusted prices we could get a shift from a modest rate of inflation to a modest rate of deflation simply because the quality of goods like computers and cell phones is increasing more rapidly. Does that sound like the basis for economic disaster?
The idea that consumers will delay purchases in any notable way due to a shift to deflation is absurd on its face. Computer and cell phone prices have been falling sharply for the last two decades yet people seem to be buying plenty of both. If we just applied an aggregate deflation rate of 0.5 percent to an item like an $800 television set, it would mean that a person could save $4 by waiting a year to buy a television set. Does that have you scared about the impact on consumption?
The point about investment is right, but the crossing of zero, from a small positive inflation rate to a small negative inflation rate is of no real consequences. Businesses invest in the present to sell more goods and/or services in the future. If those goods and services are expected to sell for higher prices then it makes investment more profitable. If they sell for lower prices then it makes investment less profitable.
However there is no particular importance to crossing zero in this story. If the inflation rate falls from 1.5 percent to 0.5 percent, this will make investment look less profitable. The same is true if it falls from 0.5 percent to -0.5 percent. The problem faced by euro zone countries (as well as Japan and the United States) is that it would be desirable to have a higher inflation rate to make investment more profitable. This is just as true when the inflation rate is a very low positive number as when it is a negative number and countries face deflation. The problem is simply too low a rate of inflation.
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Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.
As Floyd Norris explains in his column this morning, the Dodd-Frank financial reform has a provision requiring investment banks to retain a 5 percent stake in less secure mortgages placed in the MBS they issue. This gives them an incentive to ensure that the mortgages they put into an MBS are good mortgages. However the definition of a secure mortgage has been gradually weakened over time. Originally many considered the cutoff to be a 20 percent down payment, which is the traditional standard for a prime mortgage. This was lowered to 10 percent and then 5 percent, even though mortgages with just 5 percent down default at four times the rate of mortgages with 20 percent down.
Norris tells us that the latest proposed rules would allow mortgages with zero down payment to be placed into pools with no requirement that banks maintain a stake. This change would mean that banks would have the same incentive as in the housing bubble years to put junk mortgages in MBS. If this rule is coupled with the Corker-Warner proposal for having a government guarantee for MBS, it will mean that banks will likely find it far easier to pass on junk and fraudulent mortgages going forward than they did in the years of the housing bubble.
Further facilitating this process is the gutting of the Franken amendment. This amendment (which passed the Senate with 65 votes) would have required investment banks to call the Securities and Exchange Commission (SEC) to pick a bond rating agency for a new MBS. This removed the conflict of interest where bond rating agencies would have an incentive to give a positive rating in order to get more business. In the conference committee, the amendment was replaced by a requirement that the SEC study the issue. After two and a half years the SEC issued its study and essentially concluded that picking bond rating agencies exceeded its competence. This left the conflict of interest in place.
If Congress wants to set up the conditions for another housing bubble fueled by fraudulent mortgages it is doing a very good job.
Way back in the last decade we had a huge housing bubble which was propelled in large part by junk loans that were packaged into mortgage backed securities (MBS) by Wall Street investment banks and sold all around the world. Unfortunately few people in policy positions are old enough to remember back to the this era, which is why they are now in the process of altering rules so that investment banks will be able to put almost any loan into a MBS without retaining a stake.
As Floyd Norris explains in his column this morning, the Dodd-Frank financial reform has a provision requiring investment banks to retain a 5 percent stake in less secure mortgages placed in the MBS they issue. This gives them an incentive to ensure that the mortgages they put into an MBS are good mortgages. However the definition of a secure mortgage has been gradually weakened over time. Originally many considered the cutoff to be a 20 percent down payment, which is the traditional standard for a prime mortgage. This was lowered to 10 percent and then 5 percent, even though mortgages with just 5 percent down default at four times the rate of mortgages with 20 percent down.
Norris tells us that the latest proposed rules would allow mortgages with zero down payment to be placed into pools with no requirement that banks maintain a stake. This change would mean that banks would have the same incentive as in the housing bubble years to put junk mortgages in MBS. If this rule is coupled with the Corker-Warner proposal for having a government guarantee for MBS, it will mean that banks will likely find it far easier to pass on junk and fraudulent mortgages going forward than they did in the years of the housing bubble.
Further facilitating this process is the gutting of the Franken amendment. This amendment (which passed the Senate with 65 votes) would have required investment banks to call the Securities and Exchange Commission (SEC) to pick a bond rating agency for a new MBS. This removed the conflict of interest where bond rating agencies would have an incentive to give a positive rating in order to get more business. In the conference committee, the amendment was replaced by a requirement that the SEC study the issue. After two and a half years the SEC issued its study and essentially concluded that picking bond rating agencies exceeded its competence. This left the conflict of interest in place.
If Congress wants to set up the conditions for another housing bubble fueled by fraudulent mortgages it is doing a very good job.
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Floyd Norris ends an interesting discussion on the increase in the rate of long-term unemployment by telling readers that many of the long-term unemployed lack the skills to take the jobs that are available. However, there is research that suggests this is not the case.
Rand Ghayad, a researcher affiliated with the Boston Federal Reserve Bank sent out matched resumes to employers with difference being that some reported being unemployed for more than 26 weeks (the definition of long-term unemployed) and some did not. While many of the applicants who reported being short-term unemployed or currently working were called in for interviews, almost none of the applicants who reported being long-term unemployed were called back. This suggests that the main problem faced by the long-term unemployed is discrimination, not a lack of skills.
Note: “tern” was changed to “term” out of respect for birds everywhere.
Floyd Norris ends an interesting discussion on the increase in the rate of long-term unemployment by telling readers that many of the long-term unemployed lack the skills to take the jobs that are available. However, there is research that suggests this is not the case.
Rand Ghayad, a researcher affiliated with the Boston Federal Reserve Bank sent out matched resumes to employers with difference being that some reported being unemployed for more than 26 weeks (the definition of long-term unemployed) and some did not. While many of the applicants who reported being short-term unemployed or currently working were called in for interviews, almost none of the applicants who reported being long-term unemployed were called back. This suggests that the main problem faced by the long-term unemployed is discrimination, not a lack of skills.
Note: “tern” was changed to “term” out of respect for birds everywhere.
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Neil Irwin hit on one of my pet peeves last week, the meaninglessness of the consumer confidence indices. Big upswings or drops in these indices often make headlines, however they bear almost no relationship to actual movements in consumption.
The story, or at least my story, is that people are largely answering based on what they hear in the news. If the papers are filled with stories of doom and gloom based on a budget standoff, looming debt default or some other bad story, people give negative responses in the survey. On the other hand, if the papers are filled with glowing accounts of a booming stock market, people give positive answers, even though the vast majority of people own little or no stock. Of course these events don’t influence how much people actually spend, so the sharp movements in the index don’t correspond to changes in consumption patterns.
There is a minor qualification worth making. The indices are primarily moved by the future expectations components. These are highly volatile. By contrast, the current conditions indexes tend not to move very much month to month. These do track more closely with consumption. This means that the current conditions indices can be seen as providing us some information on consumption, even if the future expectations indices give us nothing.
Neil Irwin hit on one of my pet peeves last week, the meaninglessness of the consumer confidence indices. Big upswings or drops in these indices often make headlines, however they bear almost no relationship to actual movements in consumption.
The story, or at least my story, is that people are largely answering based on what they hear in the news. If the papers are filled with stories of doom and gloom based on a budget standoff, looming debt default or some other bad story, people give negative responses in the survey. On the other hand, if the papers are filled with glowing accounts of a booming stock market, people give positive answers, even though the vast majority of people own little or no stock. Of course these events don’t influence how much people actually spend, so the sharp movements in the index don’t correspond to changes in consumption patterns.
There is a minor qualification worth making. The indices are primarily moved by the future expectations components. These are highly volatile. By contrast, the current conditions indexes tend not to move very much month to month. These do track more closely with consumption. This means that the current conditions indices can be seen as providing us some information on consumption, even if the future expectations indices give us nothing.
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Neil Irwin gave us a list of five economic trends to be thankful for this Thanksgiving. Two of the items do not belong there, or at least not without serious qualification.
First, Irwin lists lower gas prices. This is good news in the sense that it means more money in consumers’ pockets. However it is not good news insofar as it encourages more gasoline consumption and therefore more greenhouse gas emissions. This will mean more loss of life and damage to property from rising ocean levels, desertification, and extreme weather events like the typhoon that hit the Philippines earlier this month.
Ideally the price of gasoline and other uses of fossil fuels would be taxed in a way that discouraged their use and provided revenue for developing green technologies and conservation measures. However this does not seem like a politically realistic prospect any time soon. Nonetheless, the prospect of much more global warming related damage does not seem the sort of thing that we should be thankful for.
The other item wrongly placed on the list is rising house prices. Even in normal times this would be an ambiguous story. Higher home prices is good news for homeowners, however it is bad news for anyone who hopes to own a home in the future. In this sense it is sort of a generational transfer from young to old. (The old are disproportionately homeowners, while the young are disproportionately people who would like to own homes.) In fact, if the Peter Peterson-Fix the Debt types actually did care about resources being transferred from the young to the old, they would be actively lobbying for policies that would lower house prices. But hey, no one ever accused them of being consistent.
Anyhow, the rise in house prices is clearly bad news in the current context since we are getting back into bubble territory. Real house prices are now more than 20 percent above their trend level and only about 8 percent lower than when people who understand the housing market first began warning of a bubble in 2002. If house prices continue to rise into bubble territory, this raises the prospect of another collapse with millions of people again losing their life’s savings as their homes go underwater.
Ideally the Fed would be taking steps to ensure that another bubble does not develop. The rise in mortgage interest rates following Bernanke’s taper talk in June may have accomplished this purpose. However, if house prices do continue their upward path then the Fed should be prepared to use regulatory measures and explicit warnings (i.e. having Bernanke/Yellen tell people that they are likely to lose lots of money buying into this market, with the research to back up the warning). The prospect of millions of new homebuyers losing their life’s savings in another housing crash is not something to be thankful for this Thanksgiving.
Neil Irwin gave us a list of five economic trends to be thankful for this Thanksgiving. Two of the items do not belong there, or at least not without serious qualification.
First, Irwin lists lower gas prices. This is good news in the sense that it means more money in consumers’ pockets. However it is not good news insofar as it encourages more gasoline consumption and therefore more greenhouse gas emissions. This will mean more loss of life and damage to property from rising ocean levels, desertification, and extreme weather events like the typhoon that hit the Philippines earlier this month.
Ideally the price of gasoline and other uses of fossil fuels would be taxed in a way that discouraged their use and provided revenue for developing green technologies and conservation measures. However this does not seem like a politically realistic prospect any time soon. Nonetheless, the prospect of much more global warming related damage does not seem the sort of thing that we should be thankful for.
The other item wrongly placed on the list is rising house prices. Even in normal times this would be an ambiguous story. Higher home prices is good news for homeowners, however it is bad news for anyone who hopes to own a home in the future. In this sense it is sort of a generational transfer from young to old. (The old are disproportionately homeowners, while the young are disproportionately people who would like to own homes.) In fact, if the Peter Peterson-Fix the Debt types actually did care about resources being transferred from the young to the old, they would be actively lobbying for policies that would lower house prices. But hey, no one ever accused them of being consistent.
Anyhow, the rise in house prices is clearly bad news in the current context since we are getting back into bubble territory. Real house prices are now more than 20 percent above their trend level and only about 8 percent lower than when people who understand the housing market first began warning of a bubble in 2002. If house prices continue to rise into bubble territory, this raises the prospect of another collapse with millions of people again losing their life’s savings as their homes go underwater.
Ideally the Fed would be taking steps to ensure that another bubble does not develop. The rise in mortgage interest rates following Bernanke’s taper talk in June may have accomplished this purpose. However, if house prices do continue their upward path then the Fed should be prepared to use regulatory measures and explicit warnings (i.e. having Bernanke/Yellen tell people that they are likely to lose lots of money buying into this market, with the research to back up the warning). The prospect of millions of new homebuyers losing their life’s savings in another housing crash is not something to be thankful for this Thanksgiving.
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Roughly one third of all doctors are in the top one percent of the income distribution and the vast majority are in the top two percent. This likely explains both the reason as to why the government is not looking for ways to bring more doctors into the country and the reason the NYT is not raising the question in an article discussing a shortage of doctors willing to accept Medicaid reimbursement rates.
We have deliberately changed immigration rules and standards to make it easier for foreign computer engineers, nurses, and even teachers to enter the country and meet demand in these occupations. There is no economic reason why we would not do the same for doctors. The potential savings to consumers and the government and gains to economy would be several times larger for each qualified doctor that we brought into the country than for every nurse or teacher.
If the government were not actively engaged in efforts to redistribute income upward, regularizing a flow of doctors, with foreign students trained to U.S. standards, would be a major focus of trade agreements like the Trans-Pacific Partnership. (We could design a mechanism to ensure that earnings of foreign doctors are taxed and repatriated to home countries so that developing countries could train 2-3 doctors for every one that comes to the United States. Even an economist could figure out how to design such a mechanism.)
Anyhow, it is remarkable how trade is so selectively defined that enormous potential gains that would disadvantage the wealthy never even get mentioned. While the protectionist barriers that cause doctors in the U.S. to get twice the pay as doctors in other wealthy countries never get mentioned, we get endless hysterics over a couple thousand dollars a year going to families receiving food stamps.
Try to swallow that one with your turkey.
Addendum:
The vast majority of the items on the agenda at NAFTA, CAFTA, the TPP and other recent trade agreements are not formal trade barriers. There are investment rules and various restrictions that made it difficult to for U.S. firms to establish operations in Mexico and other countries. These trade agreements focused on eliminating these barriers so that it would be easy. That is what we should be doing with doctors. (Here’s a partial list.) We don’t because the doctors are too powerful, and the promoters of free trade in the economics profession and the media don’t talk about it because ???
As far as the folks saying that I don’t care about people in the developing world, try answering my argument. Is it impossible to train more doctors in the developing world? If so, please tell us why. It is a hell of a lot cheaper to train doctors (to U.S. standards) anywhere other than the United States. If there is some reason why we should not take advantage of this fact, please let me and others know. If you just want to which righteously, maybe we can create a special section, for that.
Roughly one third of all doctors are in the top one percent of the income distribution and the vast majority are in the top two percent. This likely explains both the reason as to why the government is not looking for ways to bring more doctors into the country and the reason the NYT is not raising the question in an article discussing a shortage of doctors willing to accept Medicaid reimbursement rates.
We have deliberately changed immigration rules and standards to make it easier for foreign computer engineers, nurses, and even teachers to enter the country and meet demand in these occupations. There is no economic reason why we would not do the same for doctors. The potential savings to consumers and the government and gains to economy would be several times larger for each qualified doctor that we brought into the country than for every nurse or teacher.
If the government were not actively engaged in efforts to redistribute income upward, regularizing a flow of doctors, with foreign students trained to U.S. standards, would be a major focus of trade agreements like the Trans-Pacific Partnership. (We could design a mechanism to ensure that earnings of foreign doctors are taxed and repatriated to home countries so that developing countries could train 2-3 doctors for every one that comes to the United States. Even an economist could figure out how to design such a mechanism.)
Anyhow, it is remarkable how trade is so selectively defined that enormous potential gains that would disadvantage the wealthy never even get mentioned. While the protectionist barriers that cause doctors in the U.S. to get twice the pay as doctors in other wealthy countries never get mentioned, we get endless hysterics over a couple thousand dollars a year going to families receiving food stamps.
Try to swallow that one with your turkey.
Addendum:
The vast majority of the items on the agenda at NAFTA, CAFTA, the TPP and other recent trade agreements are not formal trade barriers. There are investment rules and various restrictions that made it difficult to for U.S. firms to establish operations in Mexico and other countries. These trade agreements focused on eliminating these barriers so that it would be easy. That is what we should be doing with doctors. (Here’s a partial list.) We don’t because the doctors are too powerful, and the promoters of free trade in the economics profession and the media don’t talk about it because ???
As far as the folks saying that I don’t care about people in the developing world, try answering my argument. Is it impossible to train more doctors in the developing world? If so, please tell us why. It is a hell of a lot cheaper to train doctors (to U.S. standards) anywhere other than the United States. If there is some reason why we should not take advantage of this fact, please let me and others know. If you just want to which righteously, maybe we can create a special section, for that.
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Stephen Roach managed to get the basic economics 180 degrees backwards in his discussion of China’s turn to a more consumption based economy and its implications for the United States. After commenting that China will likely export less to the United States as it produces more for its domestic economy, he tells readers;
“The coming transition to a rebalanced China changes the rules of engagement in this co-dependent relationship. America seems unprepared for this possibility. Long dependent on China as the world’s ultimate producer, the United States may have a hard time waking up to the reality of a China that is less focused on enabling America’s excess consumption and more interested in spending money on social services rather than buying Treasuries and helping to keep United States interest rates down.
“The United States needs to liberate itself from the mind-set that it cannot afford to change its economic strategy. It must shift the fixation on consumption for today’s generation to greater focus on saving and investing for future generations. The sluggish recovery and unacceptably high unemployment make this shift difficult, but not impossible.”
Contrary to what Roach asserts the sluggish recovery and high unemployment make the shift to fewer imports easier not harder. This means that we have excess workers and capacity that can be diverted to producing items that we used to import. If the opposite were the case and we were near full employment then the loss of imports from China would mean a decline in the standard of living. In the current situation, increased net exports (i.e. fewer imports) could mean more employment and output, in other words a rise in the U.S. standard of living.
Stephen Roach managed to get the basic economics 180 degrees backwards in his discussion of China’s turn to a more consumption based economy and its implications for the United States. After commenting that China will likely export less to the United States as it produces more for its domestic economy, he tells readers;
“The coming transition to a rebalanced China changes the rules of engagement in this co-dependent relationship. America seems unprepared for this possibility. Long dependent on China as the world’s ultimate producer, the United States may have a hard time waking up to the reality of a China that is less focused on enabling America’s excess consumption and more interested in spending money on social services rather than buying Treasuries and helping to keep United States interest rates down.
“The United States needs to liberate itself from the mind-set that it cannot afford to change its economic strategy. It must shift the fixation on consumption for today’s generation to greater focus on saving and investing for future generations. The sluggish recovery and unacceptably high unemployment make this shift difficult, but not impossible.”
Contrary to what Roach asserts the sluggish recovery and high unemployment make the shift to fewer imports easier not harder. This means that we have excess workers and capacity that can be diverted to producing items that we used to import. If the opposite were the case and we were near full employment then the loss of imports from China would mean a decline in the standard of living. In the current situation, increased net exports (i.e. fewer imports) could mean more employment and output, in other words a rise in the U.S. standard of living.
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I can’t quite understand the persistence of the ageist nonsense about how the health care exchanges need young and healthy people to sign up for them to work. There is a real issue about adverse selection.
If the only people who sign up are unhealthy and therefore have high expenses, then insurers will have to raise their prices. This will make plans less attractive to all but the very sick, which will force further rises in prices, leading to a further narrowing of the market.
But the key issue is whether healthy people sign up in large numbers. It doesn’t matter where they are young or old, the exchanges need healthy people to effectively subsidize the care given to the less healthy.
In this respect a healthy 60-year-old is every bit as valuable as a healthy 25-year-old. In fact, the healthy 60-year-old is far more valuable to the system since their premiums will be three times as high as the premiums paid by the 25-year-old.
All of this should be pretty straightforward. The exchanges need healthy people to sign up to be viable, it doesn’t matter how old they are.
I can’t quite understand the persistence of the ageist nonsense about how the health care exchanges need young and healthy people to sign up for them to work. There is a real issue about adverse selection.
If the only people who sign up are unhealthy and therefore have high expenses, then insurers will have to raise their prices. This will make plans less attractive to all but the very sick, which will force further rises in prices, leading to a further narrowing of the market.
But the key issue is whether healthy people sign up in large numbers. It doesn’t matter where they are young or old, the exchanges need healthy people to effectively subsidize the care given to the less healthy.
In this respect a healthy 60-year-old is every bit as valuable as a healthy 25-year-old. In fact, the healthy 60-year-old is far more valuable to the system since their premiums will be three times as high as the premiums paid by the 25-year-old.
All of this should be pretty straightforward. The exchanges need healthy people to sign up to be viable, it doesn’t matter how old they are.
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That’s why the NYT didn’t feel any need to put the number in context for its readers when it told readers of a deal between the Christian Democrats and Social Democrats to form a coalition government. According to the article the agreement calls for spending up to 2.0 billion euros a year on infrastructure above current spending levels.
Since many readers may not have a good idea of the size of Germany’s economy it might have been helpful to tell readers that this spending is equivalent to 0.07 percent of GDP. It would be comparable to the United States increasing spending roughly $11 billion more a year on infrastructure.
That’s why the NYT didn’t feel any need to put the number in context for its readers when it told readers of a deal between the Christian Democrats and Social Democrats to form a coalition government. According to the article the agreement calls for spending up to 2.0 billion euros a year on infrastructure above current spending levels.
Since many readers may not have a good idea of the size of Germany’s economy it might have been helpful to tell readers that this spending is equivalent to 0.07 percent of GDP. It would be comparable to the United States increasing spending roughly $11 billion more a year on infrastructure.
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This is effectively what the NYT told readers in an article discussing the reaction to a proposal by the IMF to require bondholders to accept losses when a government gets an IMF bailout. At one point the piece presented the comment of a Treasury Department spokesperson:
“It is important that efforts to increase the orderliness and predictability of the sovereign-debt restructuring process be undertaken on the basis of a consensual, market-based contractual framework.”
It then added:
“Translation: We don’t like plans that mess around with the rights of bond investors. We didn’t like them 10 years ago, and we don’t like them now.”
This is actually somewhat of a mistranslation. There is not an issue of “rights” here. The question is one of the rules that would apply when the IMF, a multinational institution, puts money into a bailout. In the absence of IMF money, it is extremely unlikely that bond investors would get back their full investment. The United States position is effectively that the IMF should intervene to ensure that bondholders get paid back even though they were not smart enough to assess credit risk when they bought the bonds. (Actually, many investors may buy bonds at sharp discounts when a country is in trouble, with the expectation that the IMF will intervene to ensure that the bonds are paid in full.)
There is no issue of rights here, since countries that go to the IMF for a bailout would generally not have the ability to pay their debt in any case. The NYT seriously misrepresented what is at stake to its readers.
The piece is also somewhat misleading in implying that Europe has a large amount of money at stake if the peripheral countries are allowed to partially default on their debt. Most of the debt is money from the European Central Bank (ECB). If the countries were to default, the ECB could simply print more with very little consequence for the real economy.
This is effectively what the NYT told readers in an article discussing the reaction to a proposal by the IMF to require bondholders to accept losses when a government gets an IMF bailout. At one point the piece presented the comment of a Treasury Department spokesperson:
“It is important that efforts to increase the orderliness and predictability of the sovereign-debt restructuring process be undertaken on the basis of a consensual, market-based contractual framework.”
It then added:
“Translation: We don’t like plans that mess around with the rights of bond investors. We didn’t like them 10 years ago, and we don’t like them now.”
This is actually somewhat of a mistranslation. There is not an issue of “rights” here. The question is one of the rules that would apply when the IMF, a multinational institution, puts money into a bailout. In the absence of IMF money, it is extremely unlikely that bond investors would get back their full investment. The United States position is effectively that the IMF should intervene to ensure that bondholders get paid back even though they were not smart enough to assess credit risk when they bought the bonds. (Actually, many investors may buy bonds at sharp discounts when a country is in trouble, with the expectation that the IMF will intervene to ensure that the bonds are paid in full.)
There is no issue of rights here, since countries that go to the IMF for a bailout would generally not have the ability to pay their debt in any case. The NYT seriously misrepresented what is at stake to its readers.
The piece is also somewhat misleading in implying that Europe has a large amount of money at stake if the peripheral countries are allowed to partially default on their debt. Most of the debt is money from the European Central Bank (ECB). If the countries were to default, the ECB could simply print more with very little consequence for the real economy.
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