The Washington Post finds it impossible to write about trade agreements without calling them “free-trade” agreements. It used the term twice in an article on the Trans-Pacific Partnership (TPP).
Of course the TPP is not about free trade, in most cases the formal trade barriers between the countries negotiating the pact are relatively low. The main thrust of the negotiations is to impose a regulator structure in a wide range of areas — health, safety, environmental — which will override national and sub-national rules. This has little to do with trade and in some cases, such as the increased patent protection for prescription drugs being pushed as part of the deal (which is noted in the article), will actually involve increased barriers to trade.
The Washington Post finds it impossible to write about trade agreements without calling them “free-trade” agreements. It used the term twice in an article on the Trans-Pacific Partnership (TPP).
Of course the TPP is not about free trade, in most cases the formal trade barriers between the countries negotiating the pact are relatively low. The main thrust of the negotiations is to impose a regulator structure in a wide range of areas — health, safety, environmental — which will override national and sub-national rules. This has little to do with trade and in some cases, such as the increased patent protection for prescription drugs being pushed as part of the deal (which is noted in the article), will actually involve increased barriers to trade.
Read More Leer más Join the discussion Participa en la discusión
Okay, Politico only said the first part. However it would have been useful to remind readers of the second part since some may not realize that in the current economic environment cutting the budget will hurt the economy.
In an economy that is near full employment, budget cuts can free up resources for the private sector. However in an economy that is operating at close to $1 trillion below its potential, with extraordinary low interest rates, it is implausible that cutting the budget would lead to increased investment or consumption by the private sector. Therefore the effect of the Republican proposals for cutting the budget would be slower growth and higher unemployment.
If it was being responsible, Politico would remind readers of this fact.
Okay, Politico only said the first part. However it would have been useful to remind readers of the second part since some may not realize that in the current economic environment cutting the budget will hurt the economy.
In an economy that is near full employment, budget cuts can free up resources for the private sector. However in an economy that is operating at close to $1 trillion below its potential, with extraordinary low interest rates, it is implausible that cutting the budget would lead to increased investment or consumption by the private sector. Therefore the effect of the Republican proposals for cutting the budget would be slower growth and higher unemployment.
If it was being responsible, Politico would remind readers of this fact.
Read More Leer más Join the discussion Participa en la discusión
We know that the people who conduct and write about economic policy are not very good at economics, otherwise we would not still be mired in this downturn almost six years after the start of the recession. The Washington Post gave us another example of the incredible confusion that dominates Washington debates in its coverage of the budget and debt ceiling standoff.
The piece warns that a debt default could jeopardize the status of the United States as the world’s reserve currency. At one point it quotes Lloyd Blankfein, the CEO of one of the bailed out Wall Street banks, giving a stern warning on the topic.
The implication of course is that the United States benefits from being the world’s reserve currency. This is not obviously true.
The increased demand for dollars as a result of being a reserve currency raises the value of the dollar. Higher demand leads to higher prices. (Sorry for the repetition of simple concepts, but there could be some economists reading.) A higher valued dollar makes our exports more expensive to people living in other countries. This means that we will have fewer exports. A higher dollar means that imports will be cheaper for people living in the United States, which means that we will import more goods.
Fewer exports and more imports mean a larger trade deficit and less demand in the domestic economy. That in turn means lower GDP and higher unemployment. This increase in unemployment hits middle and lower income workers especially hard, since they will not be in a position to achieve wage gains during periods of high unemployment. On the other hand, high unemployment and the resulting low wages could be good for corporate profits and highly paid professionals like doctors and lawyers.
There is not only reason to believe that having the dollar as the major reserve currency is bad for the economy, it is also contrary to stated policy. Ostensibly the Obama administration has been pushing to have China raise the value of its currency against the dollar. (For the directionally challenged, that means a lower valued dollar.) The line coming from the administration is that we always press China to raise the value of its currency, but they are just stubborn and won’t do what we ask.
Of course if the dollar stopped being the world’s major reserve currency then we would likely get what we are ostensibly asking for in our negotiations with China. The dollar would fall in value against China’s currency and against the other currencies where many have suspected “manipulation.” In other words, ending the dollar’s status as the world’s major reserve currency would allow us to achieve a lower valued currency, which has supposedly been a major policy goal in negotiations with China as well as some other countries.
So ending the dollar’s status as the world’s reserve currency could boast growth and create jobs and would be consistent with longstanding goals of both the Obama administration and Bush administration for ending currency manipulation, but we are supposed to be scared that it could be an outcome from a debt default. Like I said, people doing economic policy are not very good at economics.
We know that the people who conduct and write about economic policy are not very good at economics, otherwise we would not still be mired in this downturn almost six years after the start of the recession. The Washington Post gave us another example of the incredible confusion that dominates Washington debates in its coverage of the budget and debt ceiling standoff.
The piece warns that a debt default could jeopardize the status of the United States as the world’s reserve currency. At one point it quotes Lloyd Blankfein, the CEO of one of the bailed out Wall Street banks, giving a stern warning on the topic.
The implication of course is that the United States benefits from being the world’s reserve currency. This is not obviously true.
The increased demand for dollars as a result of being a reserve currency raises the value of the dollar. Higher demand leads to higher prices. (Sorry for the repetition of simple concepts, but there could be some economists reading.) A higher valued dollar makes our exports more expensive to people living in other countries. This means that we will have fewer exports. A higher dollar means that imports will be cheaper for people living in the United States, which means that we will import more goods.
Fewer exports and more imports mean a larger trade deficit and less demand in the domestic economy. That in turn means lower GDP and higher unemployment. This increase in unemployment hits middle and lower income workers especially hard, since they will not be in a position to achieve wage gains during periods of high unemployment. On the other hand, high unemployment and the resulting low wages could be good for corporate profits and highly paid professionals like doctors and lawyers.
There is not only reason to believe that having the dollar as the major reserve currency is bad for the economy, it is also contrary to stated policy. Ostensibly the Obama administration has been pushing to have China raise the value of its currency against the dollar. (For the directionally challenged, that means a lower valued dollar.) The line coming from the administration is that we always press China to raise the value of its currency, but they are just stubborn and won’t do what we ask.
Of course if the dollar stopped being the world’s major reserve currency then we would likely get what we are ostensibly asking for in our negotiations with China. The dollar would fall in value against China’s currency and against the other currencies where many have suspected “manipulation.” In other words, ending the dollar’s status as the world’s major reserve currency would allow us to achieve a lower valued currency, which has supposedly been a major policy goal in negotiations with China as well as some other countries.
So ending the dollar’s status as the world’s reserve currency could boast growth and create jobs and would be consistent with longstanding goals of both the Obama administration and Bush administration for ending currency manipulation, but we are supposed to be scared that it could be an outcome from a debt default. Like I said, people doing economic policy are not very good at economics.
Read More Leer más Join the discussion Participa en la discusión
In a piece that told readers that the financial markets will force Congress and President Obama to resolve the debt ceiling dispute the NYT told readers that such market pressure had forced the passage of the TARP:
“There are precedents for such a denouement. After the House rejected initial legislation authorizing the bank bailout known as the Troubled Asset Relief Program during the financial crisis in late September 2008, the Dow Jones industrial average plunged more than 700 points in one trading session, prompting legislators to reverse course and approve a similar bill within days.”
While the market did plunge in response to the House’s rejection of the TARP, it soon recovered most of its loss with the S&P rising to over 1150. However as the financial crisis continued to send the economy plummeting, the S&P soon resumed its downward trek bottoming out at less than 700 in March of 2009. If the drop in the market following the rejection of the TARP forced the House to take action, then it is hard to see why the much sharper drop in the market over the next five months didn’t also force strong action to counteract the impact of the downturn.
The most obvious difference was that the media openly pushed for passage of the TARP as a measure necessary to prevent a second Great Depression in both its news and opinion sections. It made no comparable push for a major stimulus package.
It is misrepresenting the facts to claim that the markets forced the House to pass the TARP. It was the coverage by the major media outlets that pressured Congress to bail out the Wall Street banks.
In a piece that told readers that the financial markets will force Congress and President Obama to resolve the debt ceiling dispute the NYT told readers that such market pressure had forced the passage of the TARP:
“There are precedents for such a denouement. After the House rejected initial legislation authorizing the bank bailout known as the Troubled Asset Relief Program during the financial crisis in late September 2008, the Dow Jones industrial average plunged more than 700 points in one trading session, prompting legislators to reverse course and approve a similar bill within days.”
While the market did plunge in response to the House’s rejection of the TARP, it soon recovered most of its loss with the S&P rising to over 1150. However as the financial crisis continued to send the economy plummeting, the S&P soon resumed its downward trek bottoming out at less than 700 in March of 2009. If the drop in the market following the rejection of the TARP forced the House to take action, then it is hard to see why the much sharper drop in the market over the next five months didn’t also force strong action to counteract the impact of the downturn.
The most obvious difference was that the media openly pushed for passage of the TARP as a measure necessary to prevent a second Great Depression in both its news and opinion sections. It made no comparable push for a major stimulus package.
It is misrepresenting the facts to claim that the markets forced the House to pass the TARP. It was the coverage by the major media outlets that pressured Congress to bail out the Wall Street banks.
Read More Leer más Join the discussion Participa en la discusión
Macroeconomists knew too little about the macroeconomy to recognize the $8 trillion housing bubble whose collapse gave us the Great Recession. Trade and labor economists show little more understanding of their fields. This is why we routinely hear stories about how trade causes us to lose less-skilled manufacturing jobs to the developing world or that technology is leading to a hollowing out of the distribution of occupations, with middle wage jobs disappearing.
The logic behind these views is nicely challenged by this story about medical travel. Our health care system is incredibly inefficient. If the medical industry were subjected to international competition our doctors would have far less chance of holding their jobs than textile workers or steelworkers. Doctors in the United States can pocket a median wage of well over $200,000 a year not because they are smart and hardworking (which they might be), but because they have the government protect them from foreign competition, unlike textile workers and steelworkers.
In addition to directly providing savings to patients, as illustrated in this piece (the savings will be considerably larger for even more expensive procedures than the ones discussed here), medical travel also has important indirect effects. Insofar as more patients get care elsewhere it reduces demand for medical services in the United States, putting downward pressure on prices here. Also, by allowing people to see other countries that provide health care at a fraction of the cost in the United States, there will be a greater recognition of the inefficiency and corruption of the U.S. health care system, which could lead to more political pressure for reform.
The need to travel obviously limits the extent to which people can take advantage of other countries health care system (although protectionist restrictions on foreign doctors working in the United States are another barrier), but in the case of expensive medical procedures, the potential savings dwarf the cost of travel. If anyone in a policy-making position supported free trade then medical travel would be at the center of trade negotiations, since there are no other areas that offer such large potential gains. The negotiations would focus on setting up international standards and licensing rules to assure quality, liability rules to ensure compensation in the event of medical errors, and ideally a system of taxation to ensure that poorer countries redistribute some of the gain to building up their domestic health care system.
Unfortunately medical travel is likely to be left out of the so-called free trade agreements currently being negotiated. Doctors and other actors in the health care sector are powerful enough to sustain their protection. However anyone who knows more about trade and labor markets than trade and labor economists should be able to recognize that the reason doctors are not subject to international competition and are able to sustain their high pay has little to do with the market and everything to do with their political power. The same is true of most other highly paid professionals in the United States. Only an economist can be sufficiently confused to believe that high wages for such people are natural outcomes of the market.
Addendum:
Trade agreements over the last two decades have been primarily about writing rules and adjudication procedures that make U.S. firms comfortable shipping their operations overseas. That is exactly what is needed for insurers or medical providers who want to take advantage of medical trade in a big way. Our trade negotiators refuse to do this because they don’t want to lower the income of doctors and other powerful actors in the health care industry.
Macroeconomists knew too little about the macroeconomy to recognize the $8 trillion housing bubble whose collapse gave us the Great Recession. Trade and labor economists show little more understanding of their fields. This is why we routinely hear stories about how trade causes us to lose less-skilled manufacturing jobs to the developing world or that technology is leading to a hollowing out of the distribution of occupations, with middle wage jobs disappearing.
The logic behind these views is nicely challenged by this story about medical travel. Our health care system is incredibly inefficient. If the medical industry were subjected to international competition our doctors would have far less chance of holding their jobs than textile workers or steelworkers. Doctors in the United States can pocket a median wage of well over $200,000 a year not because they are smart and hardworking (which they might be), but because they have the government protect them from foreign competition, unlike textile workers and steelworkers.
In addition to directly providing savings to patients, as illustrated in this piece (the savings will be considerably larger for even more expensive procedures than the ones discussed here), medical travel also has important indirect effects. Insofar as more patients get care elsewhere it reduces demand for medical services in the United States, putting downward pressure on prices here. Also, by allowing people to see other countries that provide health care at a fraction of the cost in the United States, there will be a greater recognition of the inefficiency and corruption of the U.S. health care system, which could lead to more political pressure for reform.
The need to travel obviously limits the extent to which people can take advantage of other countries health care system (although protectionist restrictions on foreign doctors working in the United States are another barrier), but in the case of expensive medical procedures, the potential savings dwarf the cost of travel. If anyone in a policy-making position supported free trade then medical travel would be at the center of trade negotiations, since there are no other areas that offer such large potential gains. The negotiations would focus on setting up international standards and licensing rules to assure quality, liability rules to ensure compensation in the event of medical errors, and ideally a system of taxation to ensure that poorer countries redistribute some of the gain to building up their domestic health care system.
Unfortunately medical travel is likely to be left out of the so-called free trade agreements currently being negotiated. Doctors and other actors in the health care sector are powerful enough to sustain their protection. However anyone who knows more about trade and labor markets than trade and labor economists should be able to recognize that the reason doctors are not subject to international competition and are able to sustain their high pay has little to do with the market and everything to do with their political power. The same is true of most other highly paid professionals in the United States. Only an economist can be sufficiently confused to believe that high wages for such people are natural outcomes of the market.
Addendum:
Trade agreements over the last two decades have been primarily about writing rules and adjudication procedures that make U.S. firms comfortable shipping their operations overseas. That is exactly what is needed for insurers or medical providers who want to take advantage of medical trade in a big way. Our trade negotiators refuse to do this because they don’t want to lower the income of doctors and other powerful actors in the health care industry.
Read More Leer más Join the discussion Participa en la discusión
If the Hill had anyone on staff old enough to remember the 1995 budget standoff surely they would have pointed out to readers that Republican Senator Richard Burr was being misleading when he unfavorably compared President Obama’s conduct in the current crisis to President Clinton’s conduct in the earlier standoff.
The Hill piece told readers:
“Burr said Obama has been much less involved in resolving the shutdown than then-President Clinton was in 1996.
“‘The president is totally disengaged,’ Burr said. ‘The president in 1996 was engaged in an hour-by-hour basis.'”
If the Hill had anyone on staff old enough to remember the 1995 budget standoff surely they would have pointed out to readers that Republican Senator Richard Burr was being misleading when he unfavorably compared President Obama’s conduct in the current crisis to President Clinton’s conduct in the earlier standoff.
The Hill piece told readers:
“Burr said Obama has been much less involved in resolving the shutdown than then-President Clinton was in 1996.
“‘The president is totally disengaged,’ Burr said. ‘The president in 1996 was engaged in an hour-by-hour basis.'”
Read More Leer más Join the discussion Participa en la discusión
Yes, we all know that income inequality is due to the hollowing out of the middle. Technology is destroying the jobs that used to support the middle class. Somehow technology doesn’t destroy the jobs that pay people in the financial industry millions and tens of millions a year to do absolutely nothing useful as consultants to pension funds. It’s hard to believe that anyone would take this technology story seriously if it were not so appealing to the rich and powerful.
Yes, we all know that income inequality is due to the hollowing out of the middle. Technology is destroying the jobs that used to support the middle class. Somehow technology doesn’t destroy the jobs that pay people in the financial industry millions and tens of millions a year to do absolutely nothing useful as consultants to pension funds. It’s hard to believe that anyone would take this technology story seriously if it were not so appealing to the rich and powerful.
Read More Leer más Join the discussion Participa en la discusión
The national media continue to express their disdain for logic and arithmetic when they warn that we will face a debt ceiling, in addition to a government shutdown, on October 17th. That one doesn’t make sense.
The government shutdown means that much of the spending that would otherwise be going to support the $1.2 trillion discretionary portion of the federal budget is not being made. As a result, the government’s borrowing needs will be considerably lower over this period. Depending on how much spending goes out the door, it is possible that the government is not even borrowing at all during the period of shutdown.
This means that the shutdown will extend the date at which a debt ceiling will be reached. That would change if the standoff is settled and all the delayed payments are made retroactively. However, if the government remains shut for several weeks, the debt ceiling deadline will be pushed out past the October 17th deadline indicated by the Treasury Department.
The national media continue to express their disdain for logic and arithmetic when they warn that we will face a debt ceiling, in addition to a government shutdown, on October 17th. That one doesn’t make sense.
The government shutdown means that much of the spending that would otherwise be going to support the $1.2 trillion discretionary portion of the federal budget is not being made. As a result, the government’s borrowing needs will be considerably lower over this period. Depending on how much spending goes out the door, it is possible that the government is not even borrowing at all during the period of shutdown.
This means that the shutdown will extend the date at which a debt ceiling will be reached. That would change if the standoff is settled and all the delayed payments are made retroactively. However, if the government remains shut for several weeks, the debt ceiling deadline will be pushed out past the October 17th deadline indicated by the Treasury Department.
Read More Leer más Join the discussion Participa en la discusión
Annie Lowrey presents a scenario in which a partial debt default would lead to a full-fledged financial crisis. The basic story is that some government bonds will be in default. Defaulted bonds cannot be used as collateral in the huge repo market where hundreds of billions of dollars of money and bonds are traded every day and is the basis for the country’s systems of payments. Since there is no simple mechanism for marking defaulted bonds that distinguishes them from other bonds, there will be no way to ensure that collateral is valid, therefore the whole market will shut down and the system of payments will collapse.
This is an interesting scenario. On the other hand, it is interesting to look at the fundamentals here. The vast majority of bonds that might be used as collateral will not have defaulted. Even the ones that are technically in default will have only lost a small fraction of their value. Think it through. You have a government bond that was supposed to have a coupon payment on October 17th which was not made because of the debt ceiling standoff. How much less are you willing to sell this bond for on October 18th? (If you say 3 percent or more, send me a note.)
While this set of events could possibly undermine the system as it functions today, if the bankers could not develop a workaround pretty quickly, they are a lot dumber than people give them credit for. Remember, this situation is fundamentally different than what we saw in 2008. In 2008 there was trillions of dollars’ worth of genuinely bad collateral tied to defaulting mortgages, which were in turn tied to houses that had lost much of their value. This was a case where the music stopped and the money really wasn’t there. In the current situation, does anyone really doubt that at some point the government will make the interest and principle payments on its debt?
None of this is to dispute that Lowrey’s scenario of a financial crisis may not be right. The Wall Street boys really don’t seem to be very good with numbers. Put to the test, they may well fail.
Annie Lowrey presents a scenario in which a partial debt default would lead to a full-fledged financial crisis. The basic story is that some government bonds will be in default. Defaulted bonds cannot be used as collateral in the huge repo market where hundreds of billions of dollars of money and bonds are traded every day and is the basis for the country’s systems of payments. Since there is no simple mechanism for marking defaulted bonds that distinguishes them from other bonds, there will be no way to ensure that collateral is valid, therefore the whole market will shut down and the system of payments will collapse.
This is an interesting scenario. On the other hand, it is interesting to look at the fundamentals here. The vast majority of bonds that might be used as collateral will not have defaulted. Even the ones that are technically in default will have only lost a small fraction of their value. Think it through. You have a government bond that was supposed to have a coupon payment on October 17th which was not made because of the debt ceiling standoff. How much less are you willing to sell this bond for on October 18th? (If you say 3 percent or more, send me a note.)
While this set of events could possibly undermine the system as it functions today, if the bankers could not develop a workaround pretty quickly, they are a lot dumber than people give them credit for. Remember, this situation is fundamentally different than what we saw in 2008. In 2008 there was trillions of dollars’ worth of genuinely bad collateral tied to defaulting mortgages, which were in turn tied to houses that had lost much of their value. This was a case where the music stopped and the money really wasn’t there. In the current situation, does anyone really doubt that at some point the government will make the interest and principle payments on its debt?
None of this is to dispute that Lowrey’s scenario of a financial crisis may not be right. The Wall Street boys really don’t seem to be very good with numbers. Put to the test, they may well fail.
Read More Leer más Join the discussion Participa en la discusión
One of the most pernicious myths of the Fix the Debt Gang and other Peter Peterson type outfits is that Social Security redistributes money from the young to the old. This is bizarre because people pay for their benefits with the taxes they contribute during their working lifetimes. In fact, the average return current beneficiaries receive is not especially high (less than 2.0 percent real).
If workers contributed the same amount to a privately managed pension fund and then collected an annuity in their retirement no one would call it a redistribution from young to old. It hard to see how it becomes a generational redistribution because Social Security is run by the government. But that is what Robert Samuelson is telling readers in today’s column.
There is a bit more of a case of a redistribution with Medicare, but it is not from young to old. While the cost of Medicare benefits on average exceed what workers pay into the system this is not because of the generosity of the benefit but rather because the United States pays so much for its health care. If per person payments in the United States were comparable to those in other wealthy countries then the cost of Medicare benefits would not exceed the taxes paid in. Given the excessive cost of health care in the United States Medicare can be seen as a redistribution to drug companies, doctors, medical equipment manufacturers and other health care providers.
Samuelson also refers to economists who believe that productivity growth will fall off sharply in the years ahead. While there are some prominent economists who argue this case it is worth noting that this view is still far from being accepted in the mainstream of the profession. It is also important to point out that it is 180 degrees at odds with the robots will replace all the workers view.
Since this one seems complicated for Washington policy wonk types, let me repeat. If you believe that productivity growth is slowing then you absolutely do not think that we will have a problem with robots replacing workers. These views are completely opposite to each other. If you don’t understand this point, please refrain from discussing economic issues until you do.
Addendum:
I see the comment on Social Security and redistribution has prompted much response. Yes, Social Security is redistributive in the sense that the people who are collecting it are not working for the money in the year they collect it. In this sense, the items they consume must be produced by the working population at the time.
However a 401(k) account is redistributive in the same way. A retiree living off their 401(k) income must rely on the goods and services produced by the working population. In the latter case, we say that the worker’s purchase of assets held by the 401(k) gives them claim to the income in later years. The same logic applies to Social Security.
If people want to complain about 401(k)s being redistributive from young to old, then there is a claim against Social Security. The folks who don’t see a problem with 401(k)s should not see a problem with Social Security either.
One of the most pernicious myths of the Fix the Debt Gang and other Peter Peterson type outfits is that Social Security redistributes money from the young to the old. This is bizarre because people pay for their benefits with the taxes they contribute during their working lifetimes. In fact, the average return current beneficiaries receive is not especially high (less than 2.0 percent real).
If workers contributed the same amount to a privately managed pension fund and then collected an annuity in their retirement no one would call it a redistribution from young to old. It hard to see how it becomes a generational redistribution because Social Security is run by the government. But that is what Robert Samuelson is telling readers in today’s column.
There is a bit more of a case of a redistribution with Medicare, but it is not from young to old. While the cost of Medicare benefits on average exceed what workers pay into the system this is not because of the generosity of the benefit but rather because the United States pays so much for its health care. If per person payments in the United States were comparable to those in other wealthy countries then the cost of Medicare benefits would not exceed the taxes paid in. Given the excessive cost of health care in the United States Medicare can be seen as a redistribution to drug companies, doctors, medical equipment manufacturers and other health care providers.
Samuelson also refers to economists who believe that productivity growth will fall off sharply in the years ahead. While there are some prominent economists who argue this case it is worth noting that this view is still far from being accepted in the mainstream of the profession. It is also important to point out that it is 180 degrees at odds with the robots will replace all the workers view.
Since this one seems complicated for Washington policy wonk types, let me repeat. If you believe that productivity growth is slowing then you absolutely do not think that we will have a problem with robots replacing workers. These views are completely opposite to each other. If you don’t understand this point, please refrain from discussing economic issues until you do.
Addendum:
I see the comment on Social Security and redistribution has prompted much response. Yes, Social Security is redistributive in the sense that the people who are collecting it are not working for the money in the year they collect it. In this sense, the items they consume must be produced by the working population at the time.
However a 401(k) account is redistributive in the same way. A retiree living off their 401(k) income must rely on the goods and services produced by the working population. In the latter case, we say that the worker’s purchase of assets held by the 401(k) gives them claim to the income in later years. The same logic applies to Social Security.
If people want to complain about 401(k)s being redistributive from young to old, then there is a claim against Social Security. The folks who don’t see a problem with 401(k)s should not see a problem with Social Security either.
Read More Leer más Join the discussion Participa en la discusión
