Adam Davidson raised this possibility in his discussion of possible ramifications of the debt ceiling battle. He suggested that one possible outcome is that investors and foreign central banks cease to view the dollar as the world’s reserve currency. This would lead them to switch their dollar holdings to other currencies. The result would be a decline in the value of the dollar.
This is exactly what is needed to make U.S. goods more competitive in the world economy. If the dollar were to fall by 20 percent against the currencies of our trading partners it would have roughly the same effect on the trade deficit as if we would imposed a 20 percent tariff on imports and had a 20 percent subsidy on U.S. exports.
The trade deficit is now close to $500 billion a year or 3 percent of GDP. If we had balanced trade it would add roughly $750 billion a year to GDP (@ 4.6 percent of GDP), assuming a multiplier of 1.5 on traded items. This would lead to more than 7 million additional jobs bringing the economy close to full employment.
This sounds like very good news, especially since no economist has any good story as to how the U.S. economy can get back to full employment with a trade deficit of the size that we have seen over the last 15 years. We only managed to reach levels of output close to full employment during this period when the economy was being driven by bubbles (stock and housing).
If there is an alternative route to full employment, no one has bothered to write about it. From this perspective, a flight from the dollar as a result of a battle over the debt ceiling is probably the economy’s best hope for generating large numbers of jobs any time soon.
Adam Davidson raised this possibility in his discussion of possible ramifications of the debt ceiling battle. He suggested that one possible outcome is that investors and foreign central banks cease to view the dollar as the world’s reserve currency. This would lead them to switch their dollar holdings to other currencies. The result would be a decline in the value of the dollar.
This is exactly what is needed to make U.S. goods more competitive in the world economy. If the dollar were to fall by 20 percent against the currencies of our trading partners it would have roughly the same effect on the trade deficit as if we would imposed a 20 percent tariff on imports and had a 20 percent subsidy on U.S. exports.
The trade deficit is now close to $500 billion a year or 3 percent of GDP. If we had balanced trade it would add roughly $750 billion a year to GDP (@ 4.6 percent of GDP), assuming a multiplier of 1.5 on traded items. This would lead to more than 7 million additional jobs bringing the economy close to full employment.
This sounds like very good news, especially since no economist has any good story as to how the U.S. economy can get back to full employment with a trade deficit of the size that we have seen over the last 15 years. We only managed to reach levels of output close to full employment during this period when the economy was being driven by bubbles (stock and housing).
If there is an alternative route to full employment, no one has bothered to write about it. From this perspective, a flight from the dollar as a result of a battle over the debt ceiling is probably the economy’s best hope for generating large numbers of jobs any time soon.
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This is a fact that would have been worth mentioning in a piece discussing a plan to raise the minimum wage in California to $10 an hour by 2016. The federal minimum wage had risen in step with productivity growth over the years from 1938-1968. Since then it has not even kept pace with the rate of inflation. The unemployment rate in 1968 was less than 4.0 percent.
This is a fact that would have been worth mentioning in a piece discussing a plan to raise the minimum wage in California to $10 an hour by 2016. The federal minimum wage had risen in step with productivity growth over the years from 1938-1968. Since then it has not even kept pace with the rate of inflation. The unemployment rate in 1968 was less than 4.0 percent.
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There has been a huge drop in employment in this downturn with the employment to population ratio (EPOP) still only 0.4 percentage points above its low for the downturn. It is still more than four full percentage points below its pre-recession level. Clearly part of this is due to the weakness of the economy, but part can be due to people voluntarily opting out of the labor force.
One reason to think the latter could be important is the aging of the baby boomers. The oldest baby boomers are now 67 and more than 40 percent are over age 60. With an increasing portion of this group edging into retirement, it is reasonable to expect a decline in the employment to population ratio. However, it turns out that aging is not a major factor in the drop of the EPOP. According to the OECD the EPOP for prime age workers (ages 25-54) is also four full percentage points below its pre-recession level.
Gavyn Davies looked at these data and concluded that most of the drop-off in EPOPs can be explained by a long-term trend towards lower labor force participation rates for men. There are two problems with his story.
First, we don’t expect every trend to continue. The labor force participation rate for prime age men fell by more than 8 percentage points from the early 1970s to 2010. Do we really think it will fall by another 8 percentage points over the next 40 years? Davies indicates this decline may be in part attributable to a more even sharing of child care responsibilities and presumably more women in the paid labor force. However the latter trend has largely ended, so this cannot provide a basis for a further drop in men’s labor force participation.
However the more bizarre part of Davies story is that while he focuses on trends supporting his contention that labor force participation should drop, he ignores the obvious one pointing in the opposite direction. This would be the sharp rise in labor force participation among older workers. This has risen by more than 10 percentage points since 1990. Barring a major change in the financial situation of older workers (Obamacare could be one such change), it is likely that this ratio will continue to rise in the years ahead as many baby boomers continue to work rather than retire.
There has been a huge drop in employment in this downturn with the employment to population ratio (EPOP) still only 0.4 percentage points above its low for the downturn. It is still more than four full percentage points below its pre-recession level. Clearly part of this is due to the weakness of the economy, but part can be due to people voluntarily opting out of the labor force.
One reason to think the latter could be important is the aging of the baby boomers. The oldest baby boomers are now 67 and more than 40 percent are over age 60. With an increasing portion of this group edging into retirement, it is reasonable to expect a decline in the employment to population ratio. However, it turns out that aging is not a major factor in the drop of the EPOP. According to the OECD the EPOP for prime age workers (ages 25-54) is also four full percentage points below its pre-recession level.
Gavyn Davies looked at these data and concluded that most of the drop-off in EPOPs can be explained by a long-term trend towards lower labor force participation rates for men. There are two problems with his story.
First, we don’t expect every trend to continue. The labor force participation rate for prime age men fell by more than 8 percentage points from the early 1970s to 2010. Do we really think it will fall by another 8 percentage points over the next 40 years? Davies indicates this decline may be in part attributable to a more even sharing of child care responsibilities and presumably more women in the paid labor force. However the latter trend has largely ended, so this cannot provide a basis for a further drop in men’s labor force participation.
However the more bizarre part of Davies story is that while he focuses on trends supporting his contention that labor force participation should drop, he ignores the obvious one pointing in the opposite direction. This would be the sharp rise in labor force participation among older workers. This has risen by more than 10 percentage points since 1990. Barring a major change in the financial situation of older workers (Obamacare could be one such change), it is likely that this ratio will continue to rise in the years ahead as many baby boomers continue to work rather than retire.
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Arin Dube has an interesting post on how people with college educations are increasingly turning to fast food restaurants for employment. This is highly correlated with state unemployment rates.
The story is that after going long enough being unable to find better jobs, these workers turn to fast food restaurants as a last resort. This means the fast food industry is getting an unusually skilled workforce. These college educated workers are probably for the most part displacing less educated workers, but there are likely cases where fast food restaurants take advantage of the availability of better educated workers to hire more people than they would otherwise.
Arin Dube has an interesting post on how people with college educations are increasingly turning to fast food restaurants for employment. This is highly correlated with state unemployment rates.
The story is that after going long enough being unable to find better jobs, these workers turn to fast food restaurants as a last resort. This means the fast food industry is getting an unusually skilled workforce. These college educated workers are probably for the most part displacing less educated workers, but there are likely cases where fast food restaurants take advantage of the availability of better educated workers to hire more people than they would otherwise.
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Tom Edsall is usually a thoughtful commentator on politics and the economy, but his piece on inequality today really misses the mark. It repeatedly asserts that the huge rise in inequality over the last three decades is a market story. This is very hard to accept when you look at the big winners.
At the top of the list of winners are the Wall Street money boys. Does anyone think they would be as rich if the government taxed the financial sector the same way it taxes every other sector in the economy. Even the International Monetary Fund has called for additional taxes on the financial sector in the range of $40 billion a year to make its contribution to the Treasury comparable to that of other sectors. (My favorite here is a financial speculation tax like the one the U.K. has applied to stock trades for more than three centuries.)
Then we have the Silicon Valley boys. While many of them do produce great breakthroughs that enrich our lives, the skill that produces the big bucks is suckering folks who manage large pools of money. This allowed the folks at Groupon, who came up with the brilliant innovation of selling coupons on the web, to become billionaires. I suspect that if pension fund managers were required to write a 500 word essay justifying their investment decision before putting $100 million into a startup, there would be many fewer Silicon Valley billionaires. The issue here is competent management of public and private pension funds.
Doctors, lawyers, dentists and other professionals who comprise much of the one percent manage to sustain their income through protectionism. (The NYT had a good piece on how doctors beat back foreign competition last month.) If the protectionist crew that dominates trade policy today were replaced by free traders, we could use the forces of globalization to bring down the income of these high earners by 70-80 percent.
And, we have a totally corrupt system of corporate governance in which CEOs select and pay off directors to look the other way as they pilfer the company by taking outlandish pay packages. Governments write the rules of corporate governance, not markets. Our broken rules let CEOs earn compensation that is often an order of magnitude higher than that earned by top executives in companies in Europe and Japan. This is not the market, this is the government.
I could go on, for example markets don’t give us copyright and patent monopolies, government do. But the point should be clear (read my free book, if it isn’t), we did not get this massive increase in inequality simply by the natural workings of the market. The rise in inequality was driven by government policies that redistributed income upward.
That is why the question posed by Edsall, whether we can do anything about inequality, is silly on its face. Just reverse the policies that gave us inequality — that won’t give us full equality of income (not sure anyone wants that), but it would make the income distribution much more equal than it is today.
Tom Edsall is usually a thoughtful commentator on politics and the economy, but his piece on inequality today really misses the mark. It repeatedly asserts that the huge rise in inequality over the last three decades is a market story. This is very hard to accept when you look at the big winners.
At the top of the list of winners are the Wall Street money boys. Does anyone think they would be as rich if the government taxed the financial sector the same way it taxes every other sector in the economy. Even the International Monetary Fund has called for additional taxes on the financial sector in the range of $40 billion a year to make its contribution to the Treasury comparable to that of other sectors. (My favorite here is a financial speculation tax like the one the U.K. has applied to stock trades for more than three centuries.)
Then we have the Silicon Valley boys. While many of them do produce great breakthroughs that enrich our lives, the skill that produces the big bucks is suckering folks who manage large pools of money. This allowed the folks at Groupon, who came up with the brilliant innovation of selling coupons on the web, to become billionaires. I suspect that if pension fund managers were required to write a 500 word essay justifying their investment decision before putting $100 million into a startup, there would be many fewer Silicon Valley billionaires. The issue here is competent management of public and private pension funds.
Doctors, lawyers, dentists and other professionals who comprise much of the one percent manage to sustain their income through protectionism. (The NYT had a good piece on how doctors beat back foreign competition last month.) If the protectionist crew that dominates trade policy today were replaced by free traders, we could use the forces of globalization to bring down the income of these high earners by 70-80 percent.
And, we have a totally corrupt system of corporate governance in which CEOs select and pay off directors to look the other way as they pilfer the company by taking outlandish pay packages. Governments write the rules of corporate governance, not markets. Our broken rules let CEOs earn compensation that is often an order of magnitude higher than that earned by top executives in companies in Europe and Japan. This is not the market, this is the government.
I could go on, for example markets don’t give us copyright and patent monopolies, government do. But the point should be clear (read my free book, if it isn’t), we did not get this massive increase in inequality simply by the natural workings of the market. The rise in inequality was driven by government policies that redistributed income upward.
That is why the question posed by Edsall, whether we can do anything about inequality, is silly on its face. Just reverse the policies that gave us inequality — that won’t give us full equality of income (not sure anyone wants that), but it would make the income distribution much more equal than it is today.
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Andrew Ross Sorkin shows his range of thought goes from one 40 yard line to the other when he contemplates a world where the government decided to rescue Lehman rather than allow it to fail. He considers various bailout scenarios, all of which leave the welfare dependents on Wall Street intact.
There was an alternative. It was possible to allow the market to work its magic, which would have certainly destroyed the other three remaining independent investment banks (Goldman Sachs, Morgan Stanley, and Merrill Lynch). Two of the megabanks, Citigroup and Bank of America, which were on life support at the time, surely would have failed as well. It is possible that the other two megabanks, J.P. Morgan and Wells Fargo, also would have been dragged down as well.
In this world, we would have quickly eliminated much of the waste that has developed over the decades in a coddled financial sector that uses its political power to get hundreds of billions of dollars of implicit and explicit subsidies from the government. The economy would have taken a big hit, but those of us old enough to remember 2008 recall that the economy did take a big hit even with the bailouts.
It would have been necessary to have major stimulus to reboot the economy, but spending money is a political problem, not an economic one. (Most of us know how to spend money.) It is certainly plausible that serious stimulus would have been easier with the Wall Street gang put out on the street, dodging law suits and indictments, rather than advising President Obama.
Unfortunately, Andrew Ross Sorkin can’t even think of such possibilities.
Andrew Ross Sorkin shows his range of thought goes from one 40 yard line to the other when he contemplates a world where the government decided to rescue Lehman rather than allow it to fail. He considers various bailout scenarios, all of which leave the welfare dependents on Wall Street intact.
There was an alternative. It was possible to allow the market to work its magic, which would have certainly destroyed the other three remaining independent investment banks (Goldman Sachs, Morgan Stanley, and Merrill Lynch). Two of the megabanks, Citigroup and Bank of America, which were on life support at the time, surely would have failed as well. It is possible that the other two megabanks, J.P. Morgan and Wells Fargo, also would have been dragged down as well.
In this world, we would have quickly eliminated much of the waste that has developed over the decades in a coddled financial sector that uses its political power to get hundreds of billions of dollars of implicit and explicit subsidies from the government. The economy would have taken a big hit, but those of us old enough to remember 2008 recall that the economy did take a big hit even with the bailouts.
It would have been necessary to have major stimulus to reboot the economy, but spending money is a political problem, not an economic one. (Most of us know how to spend money.) It is certainly plausible that serious stimulus would have been easier with the Wall Street gang put out on the street, dodging law suits and indictments, rather than advising President Obama.
Unfortunately, Andrew Ross Sorkin can’t even think of such possibilities.
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Remember President Obama’s 2008 campaign where he promised to cut Social Security, Medicare, and Medicaid? Yeah, that was where he said, “yes we can.”
Okay you probably don’t remember it because if he ever said he wanted to cut Social Security, Medicare, and Medicaid, the media strangely did not bother to report it. But that does not stop Fred Hiatt from claiming in his Washington Post column:
“President Obama came into office five years ago promising to make hard decisions, not to kick the can down the road, not to let entitlement programs — primarily Medicare, Medicaid and Social Security — swallow the rest of the budget.”
This is the Washington Post so perhaps we should not expect much in the way of accuracy, but even for the Post this is pretty far out. After all, in the real world Obama never said anything remotely like this in the 2008 campaign. Hiatt is just putting his senior-bashing agenda in the mouth of President Obama, hoping he can fool some readers. That is really pathetic.
Addendum:
Those interested in what President Obama did actually say about Social Security during the 2008 campaign can get a sample here.
Remember President Obama’s 2008 campaign where he promised to cut Social Security, Medicare, and Medicaid? Yeah, that was where he said, “yes we can.”
Okay you probably don’t remember it because if he ever said he wanted to cut Social Security, Medicare, and Medicaid, the media strangely did not bother to report it. But that does not stop Fred Hiatt from claiming in his Washington Post column:
“President Obama came into office five years ago promising to make hard decisions, not to kick the can down the road, not to let entitlement programs — primarily Medicare, Medicaid and Social Security — swallow the rest of the budget.”
This is the Washington Post so perhaps we should not expect much in the way of accuracy, but even for the Post this is pretty far out. After all, in the real world Obama never said anything remotely like this in the 2008 campaign. Hiatt is just putting his senior-bashing agenda in the mouth of President Obama, hoping he can fool some readers. That is really pathetic.
Addendum:
Those interested in what President Obama did actually say about Social Security during the 2008 campaign can get a sample here.
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A NYT article discussing the possibility that Silvio Berlusconi may have his seat in the Italian Senate taken away following a criminal conviction for tax fraud, noted that this could lead to a collapse of the coalition government ruling Italy, which it tells readers could pose risks:
“to the tentative economic recovery under way in Europe.”
It is worth noting that Italy has not shared in this recovery having seen its economy contract for 8 consecutive quarters. In the most recent quarter it contracted at a 0.8 percent annual rate. This may make Italians less concerned about jeopardizing the recovery.
A NYT article discussing the possibility that Silvio Berlusconi may have his seat in the Italian Senate taken away following a criminal conviction for tax fraud, noted that this could lead to a collapse of the coalition government ruling Italy, which it tells readers could pose risks:
“to the tentative economic recovery under way in Europe.”
It is worth noting that Italy has not shared in this recovery having seen its economy contract for 8 consecutive quarters. In the most recent quarter it contracted at a 0.8 percent annual rate. This may make Italians less concerned about jeopardizing the recovery.
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Paul Krugman corrected my earlier comment to note that he in fact did say that the 1990-91 and 2001 recessions were qualitatively different than prior ones in that the recoveries did not have the same sort of strong bounce back that followed prior recessions. These recessions were also attributable at least in part to the collapse of asset bubbles. In this sense, the 2007-2009 downturn is not unique.
This is certainly fair, but at the risk of picking nits, there is another important point. Given the weakness of the current recovery, we all agree (I’m implicating Mike Konczal here as well) that stimulatory fiscal policy was and is appropriate to boost the economy out of the current downturn. However, are we in agreement that fiscal stimulus would have been useful following the 2001 downturn and perhaps the 1990-1991 recession also?
That seems to me the bigger issue. Maybe we are all in agreement and think that a fiscal response would have been appropriate for these prior two recessions as well, but I am not sure on this point.
(“Knit” corrected, thanks folks.)
Paul Krugman corrected my earlier comment to note that he in fact did say that the 1990-91 and 2001 recessions were qualitatively different than prior ones in that the recoveries did not have the same sort of strong bounce back that followed prior recessions. These recessions were also attributable at least in part to the collapse of asset bubbles. In this sense, the 2007-2009 downturn is not unique.
This is certainly fair, but at the risk of picking nits, there is another important point. Given the weakness of the current recovery, we all agree (I’m implicating Mike Konczal here as well) that stimulatory fiscal policy was and is appropriate to boost the economy out of the current downturn. However, are we in agreement that fiscal stimulus would have been useful following the 2001 downturn and perhaps the 1990-1991 recession also?
That seems to me the bigger issue. Maybe we are all in agreement and think that a fiscal response would have been appropriate for these prior two recessions as well, but I am not sure on this point.
(“Knit” corrected, thanks folks.)
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