One of my frequent complaints here at BTP is the tendency of the media to ignore the trade deficit. As an accounting identity, the trade deficit must be equal to the sum of the budget deficit and the deficit in private saving. This means that if we have a large trade deficit, then we must have either a large budget deficit and/or a large deficit in private savings.
For whatever reason people don’t like budget deficits. We get large deficits in private savings when we have wonderful developments like housing bubbles depressing household savings (i.e. spurring consumption) and fostering construction booms. Those who don’t like crashes, don’t like bubbles. In other words, there are good reasons to be concerned about the trade deficit because a large one implies economic developments that many consider bad.
Therefore I was happy to see that Morning Edition had a segment highlighting the reported drop in the June trade deficit with the usually astute Ryan Avent. Unfortunately, the segment may have misled listeners on the meaning of the data.
The highlight was a sharp drop in the size of the reported deficit, which fell from $44.1 billion in May to $34.2 billion in June, a decline of almost $10 billion. While this is good news, it is not uncommon to see large one-month jumps in the deficit. Most often they are reversed in subsequent months’ data. For example, the reported trade deficit fell from $51.4 billion in January to $43.8 billion in February. It rose to $47.8 billion in March. It fell from $46.3 billion in November of 2012 to $36.3 billion in December. It then rose to $42.7 billion in January.
This erratic pattern in monthly data should have been noted. In fact, the reported deficit had risen by $4.0 billion in May, so much of the reported June decline was simply a reversal of large jump in May.
The piece went on to place the trade numbers in a context of other good news, including low unemployment insurance claims and a positive reading on the Institute for Supply Management’s service index. These reports are good news, but again need context.
Unemployment insurance claims had been trending downward all year, even as job growth has remained weak. One possible explanation is that many of the people who are now getting laid off don’t have enough work experience to qualify for benefits. People who have been intermittently employed in low wage and part-time jobs over the last two years will often not qualify for benefits. With a prolonged period of economic weakness like what we have seen since 2008, many workers (especially those prone to be laid off) will be in this situation.
Among the releases that give a less positive picture is the Bureau of Labor Statistics Job Openings and Labor Turnover Survey. The June report did show a modest uptick in job openings, but not in the manufacturing sector that was highlighted in the Morning Edition discussion. Openings in manufacturing have been trending down all year and are now 30 percent below their year ago level.
The other item that is worth mentioning in this context is the July employment report released last week. This is much more recent data on the state of manufacturing than June trade numbers. (Remember the trade data reports when goods enter or leave the country. The latter can be several months after they left factory.) The July employment report showed manufacturing adding a modest 8,000 jobs after being flat the prior month. Perhaps more importantly, it showed a decline in the length of the average workweek and the amount of weekly overtime of 0.2 hours, implying a substantial drop in the demand for labor. In other words, anyone looking for evidence of rising employment in manufacturing will not find it in the July employment report.
In short, it’s good to see some attention paid to the trade deficit. It would have been useful if the data were placed in a larger context.
Note: Typos corrected 3:30, thanks to Robert Salzberg.
One of my frequent complaints here at BTP is the tendency of the media to ignore the trade deficit. As an accounting identity, the trade deficit must be equal to the sum of the budget deficit and the deficit in private saving. This means that if we have a large trade deficit, then we must have either a large budget deficit and/or a large deficit in private savings.
For whatever reason people don’t like budget deficits. We get large deficits in private savings when we have wonderful developments like housing bubbles depressing household savings (i.e. spurring consumption) and fostering construction booms. Those who don’t like crashes, don’t like bubbles. In other words, there are good reasons to be concerned about the trade deficit because a large one implies economic developments that many consider bad.
Therefore I was happy to see that Morning Edition had a segment highlighting the reported drop in the June trade deficit with the usually astute Ryan Avent. Unfortunately, the segment may have misled listeners on the meaning of the data.
The highlight was a sharp drop in the size of the reported deficit, which fell from $44.1 billion in May to $34.2 billion in June, a decline of almost $10 billion. While this is good news, it is not uncommon to see large one-month jumps in the deficit. Most often they are reversed in subsequent months’ data. For example, the reported trade deficit fell from $51.4 billion in January to $43.8 billion in February. It rose to $47.8 billion in March. It fell from $46.3 billion in November of 2012 to $36.3 billion in December. It then rose to $42.7 billion in January.
This erratic pattern in monthly data should have been noted. In fact, the reported deficit had risen by $4.0 billion in May, so much of the reported June decline was simply a reversal of large jump in May.
The piece went on to place the trade numbers in a context of other good news, including low unemployment insurance claims and a positive reading on the Institute for Supply Management’s service index. These reports are good news, but again need context.
Unemployment insurance claims had been trending downward all year, even as job growth has remained weak. One possible explanation is that many of the people who are now getting laid off don’t have enough work experience to qualify for benefits. People who have been intermittently employed in low wage and part-time jobs over the last two years will often not qualify for benefits. With a prolonged period of economic weakness like what we have seen since 2008, many workers (especially those prone to be laid off) will be in this situation.
Among the releases that give a less positive picture is the Bureau of Labor Statistics Job Openings and Labor Turnover Survey. The June report did show a modest uptick in job openings, but not in the manufacturing sector that was highlighted in the Morning Edition discussion. Openings in manufacturing have been trending down all year and are now 30 percent below their year ago level.
The other item that is worth mentioning in this context is the July employment report released last week. This is much more recent data on the state of manufacturing than June trade numbers. (Remember the trade data reports when goods enter or leave the country. The latter can be several months after they left factory.) The July employment report showed manufacturing adding a modest 8,000 jobs after being flat the prior month. Perhaps more importantly, it showed a decline in the length of the average workweek and the amount of weekly overtime of 0.2 hours, implying a substantial drop in the demand for labor. In other words, anyone looking for evidence of rising employment in manufacturing will not find it in the July employment report.
In short, it’s good to see some attention paid to the trade deficit. It would have been useful if the data were placed in a larger context.
Note: Typos corrected 3:30, thanks to Robert Salzberg.
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Michael Gerson used his column today to warn of the bad effects of quantitative easing, telling readers that it is concealing structural problems. To make his case, he completely misrepresented statements from Federal Reserve Board Chairman Ben Bernanke.
After referring to comments from Mario Draghi, the President of the European Central Bank, urging governments take steps to increase potential growth, Gerson tells readers:
“Outgoing Fed Chairman Ben Bernanke has been gently suggesting there are limits to what the Fed can accomplish and warning against counterproductive fiscal policies and confidence-shaking political confrontations. Jeffrey Lacker, president of the Richmond Federal Reserve, argues that economic growth is limited ‘in large part, by structural factors that monetary policy is not capable of offsetting.'”
In this context readers would naturally believe that Bernanke was also warning about structural obstacles to growth, which is the theme pushed in the rest of Gerson’s column. This is not true.
Bernanke was very clearly warning about the negative effects of the sequester and ending of the payroll tax cut, both of which reduced demand. Gerson is being dishonest when he is trying to enlist Bernanke as an ally in his assertion that the obstacles to economic growth at the moment are primarily structural. He quite clearly believes the opposite, which is what he told Congress in arguing for expansionary fiscal policy and also the reason why he would pursue his quantitative easing policy.
It is also ironic that Gerson cites Germany as a success story that has effectively dealt with its structural problems. Germany’s growth since 2007 has been no better than growth in the United States. (Part of this is explained by its lower population growth, which means that it has lower potential growth.)
The main reason why Germany has an unemployment rate of just 5.4 percent, compared to 7.5 percent at the start of the downturn, is measures such as work sharing which encourage employers to keep workers on the job but with fewer hours. The average work year in Germany is almost 20 percent shorter than in the United States. This is a huge factor in explaining its high employment levels. Unfortunately Gerson neglected to mention this fact.
Michael Gerson used his column today to warn of the bad effects of quantitative easing, telling readers that it is concealing structural problems. To make his case, he completely misrepresented statements from Federal Reserve Board Chairman Ben Bernanke.
After referring to comments from Mario Draghi, the President of the European Central Bank, urging governments take steps to increase potential growth, Gerson tells readers:
“Outgoing Fed Chairman Ben Bernanke has been gently suggesting there are limits to what the Fed can accomplish and warning against counterproductive fiscal policies and confidence-shaking political confrontations. Jeffrey Lacker, president of the Richmond Federal Reserve, argues that economic growth is limited ‘in large part, by structural factors that monetary policy is not capable of offsetting.'”
In this context readers would naturally believe that Bernanke was also warning about structural obstacles to growth, which is the theme pushed in the rest of Gerson’s column. This is not true.
Bernanke was very clearly warning about the negative effects of the sequester and ending of the payroll tax cut, both of which reduced demand. Gerson is being dishonest when he is trying to enlist Bernanke as an ally in his assertion that the obstacles to economic growth at the moment are primarily structural. He quite clearly believes the opposite, which is what he told Congress in arguing for expansionary fiscal policy and also the reason why he would pursue his quantitative easing policy.
It is also ironic that Gerson cites Germany as a success story that has effectively dealt with its structural problems. Germany’s growth since 2007 has been no better than growth in the United States. (Part of this is explained by its lower population growth, which means that it has lower potential growth.)
The main reason why Germany has an unemployment rate of just 5.4 percent, compared to 7.5 percent at the start of the downturn, is measures such as work sharing which encourage employers to keep workers on the job but with fewer hours. The average work year in Germany is almost 20 percent shorter than in the United States. This is a huge factor in explaining its high employment levels. Unfortunately Gerson neglected to mention this fact.
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The Washington Post had yet another news article with cheerleading for cuts to Social Security and Medicare. The piece told readers about the bad news that a number of experienced Republican congressional staffers were leaving their jobs, telling readers:
“Moreover, many observers worry that the exodus is an ominous sign that Republicans see low odds for significant progress toward taming the debt.”
Of course many observers who are more concerned about promoting economic growth and reducing unemployment than arbitrary debt and deficit numbers would see this exodus as good news. Also, people who recognize that most seniors have little extra spending money will be pleased to see that the prospect of cuts to Social Security and Medicare may be fading. (The article seems to bemoan the fact that much of the decline in projected deficits is due to better growth and slower projected growth in health care costs rather than budget cuts.)
Perhaps the Post will have more balanced budget reporting once Bezos begins to restructure the paper.
The Washington Post had yet another news article with cheerleading for cuts to Social Security and Medicare. The piece told readers about the bad news that a number of experienced Republican congressional staffers were leaving their jobs, telling readers:
“Moreover, many observers worry that the exodus is an ominous sign that Republicans see low odds for significant progress toward taming the debt.”
Of course many observers who are more concerned about promoting economic growth and reducing unemployment than arbitrary debt and deficit numbers would see this exodus as good news. Also, people who recognize that most seniors have little extra spending money will be pleased to see that the prospect of cuts to Social Security and Medicare may be fading. (The article seems to bemoan the fact that much of the decline in projected deficits is due to better growth and slower projected growth in health care costs rather than budget cuts.)
Perhaps the Post will have more balanced budget reporting once Bezos begins to restructure the paper.
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The NYT had an article on French President Francois Hollande’s efforts to lower the unemployment rate. The article neglected to mention the role of the policy of the European Central Bank and European Union in raising unemployment in France.
The EU/ECB have forced the countries of southern Europe to have large cuts in government spending and tax increases. This has pushed the countries into a severe recession, thereby sharply reducing demand for imports from countries like France.
This would be analogous to a situation in which the NYT was discussing the economic situation of Indiana without ever mentioning that the economies of Illinois and Ohio were in severe recessions. It will be very difficult for France to recover as long as the EU/ECB are insisting on policies that keep Spain, Portugal, Greece, and Italy in recession.
The NYT had an article on French President Francois Hollande’s efforts to lower the unemployment rate. The article neglected to mention the role of the policy of the European Central Bank and European Union in raising unemployment in France.
The EU/ECB have forced the countries of southern Europe to have large cuts in government spending and tax increases. This has pushed the countries into a severe recession, thereby sharply reducing demand for imports from countries like France.
This would be analogous to a situation in which the NYT was discussing the economic situation of Indiana without ever mentioning that the economies of Illinois and Ohio were in severe recessions. It will be very difficult for France to recover as long as the EU/ECB are insisting on policies that keep Spain, Portugal, Greece, and Italy in recession.
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Robert Samuelson’s column today notes the sharp slowdown in health care cost growth over the last 5 years and discusses the extent to which it can be attributed to the Affordable Care Act (ACA). He is rightly skeptical of claims that the ACA has been a major factor in the slowdown since it preceded the passage of the Act and we still have not seen most of its provisions put into effect.
However, at the end of the piece Samuelson gives three reasons why costs are likely to increase going forward. One of the reasons, that Obamacare will increase insurance coverage and therefore demand for services, is plausible. The other two are considerably less so.
He argues that economic recovery is likely to increase the demand for services and therefore push up costs. This would be true if there were reason to believe that the pace of recovery is about to accelerate sharply. While most forecasts project that growth will be somewhat more rapid in 2014 and 2015 than in the last three years, it is unlikely that this difference would have very much effect on prices.
The third reason is that the population is aging. Samuelson tells readers:
“average health costs for those 65 and over are more than triple those for people ages 25 to 44.”
While this is true, people do not jump from being 44 to age 65. Furthermore, the average for the older group includes many people in their 80s and 90s with very high costs. It takes a long time for someone age 44 to become 80. In reality the impact of aging on health care costs is gradual and we are seeing it now as the baby boomers move into their 50s and 60s, periods in which they have higher costs than when they were in their 40s.
This process has been imposing upward pressure on health care costs for the last decade or more. The impact over the next 5 years will not be much different than it was over the last 5 years.
It is worth noting that there are huge potential savings from increased trade in medical services. However this is almost never mentioned in policy debates because American politics is dominated by hardcore protectionists.
Robert Samuelson’s column today notes the sharp slowdown in health care cost growth over the last 5 years and discusses the extent to which it can be attributed to the Affordable Care Act (ACA). He is rightly skeptical of claims that the ACA has been a major factor in the slowdown since it preceded the passage of the Act and we still have not seen most of its provisions put into effect.
However, at the end of the piece Samuelson gives three reasons why costs are likely to increase going forward. One of the reasons, that Obamacare will increase insurance coverage and therefore demand for services, is plausible. The other two are considerably less so.
He argues that economic recovery is likely to increase the demand for services and therefore push up costs. This would be true if there were reason to believe that the pace of recovery is about to accelerate sharply. While most forecasts project that growth will be somewhat more rapid in 2014 and 2015 than in the last three years, it is unlikely that this difference would have very much effect on prices.
The third reason is that the population is aging. Samuelson tells readers:
“average health costs for those 65 and over are more than triple those for people ages 25 to 44.”
While this is true, people do not jump from being 44 to age 65. Furthermore, the average for the older group includes many people in their 80s and 90s with very high costs. It takes a long time for someone age 44 to become 80. In reality the impact of aging on health care costs is gradual and we are seeing it now as the baby boomers move into their 50s and 60s, periods in which they have higher costs than when they were in their 40s.
This process has been imposing upward pressure on health care costs for the last decade or more. The impact over the next 5 years will not be much different than it was over the last 5 years.
It is worth noting that there are huge potential savings from increased trade in medical services. However this is almost never mentioned in policy debates because American politics is dominated by hardcore protectionists.
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Greg Sargent catches PolitiFact being out to lunch big time. On one of the Sunday talk shows House Majority Leader Eric Cantor said the deficit is growing. Politifact examined the claim and rated it “half true.” Its logic was that even though the deficit has been falling sharply over the last 4 years, and is projected to fall more over the next two years, it is projected to rise later in the decade.
This one is a real mind bender. After all, the rapid pace of deficit reduction has been a big factor in slowing GDP and job growth according to the Congressional Budget Office and other independent analysts. That is a very important fact in understanding the economy today. It is seriously misleading to turn this reality on its head because of projections that the deficit will start rising in 3 years.
This would be like saying that people coping with sub-zero temperatures in the middle of January, without heat in their homes, should be worried about dealing with high temperatures because forecasters project that April and May will be warmer. The immediate and near future problem is obviously the sub-zero temperatures, no sane person would worry about the comfortably cool temperatures three months in the future.
Greg Sargent catches PolitiFact being out to lunch big time. On one of the Sunday talk shows House Majority Leader Eric Cantor said the deficit is growing. Politifact examined the claim and rated it “half true.” Its logic was that even though the deficit has been falling sharply over the last 4 years, and is projected to fall more over the next two years, it is projected to rise later in the decade.
This one is a real mind bender. After all, the rapid pace of deficit reduction has been a big factor in slowing GDP and job growth according to the Congressional Budget Office and other independent analysts. That is a very important fact in understanding the economy today. It is seriously misleading to turn this reality on its head because of projections that the deficit will start rising in 3 years.
This would be like saying that people coping with sub-zero temperatures in the middle of January, without heat in their homes, should be worried about dealing with high temperatures because forecasters project that April and May will be warmer. The immediate and near future problem is obviously the sub-zero temperatures, no sane person would worry about the comfortably cool temperatures three months in the future.
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That little tidbit would have been useful information to include in an article on Chicago Mayor Rahm Emanuel’s plans to cut public employee pensions. The piece reports that retired workers receive:
“average annual benefits ranging from about $34,000 for a general-services retiree to $78,000 for a former teacher with 30 years of service.”
These payments will in most cases be the vast majority of retirees’ income since workers who spent their entire careers working for the city will not be receiving Social Security benefits. It also would have been worth noting that the actual payments (rather than schedules for long-term employees) average just over $37,000 a year under the city’s main retirement fund.
That little tidbit would have been useful information to include in an article on Chicago Mayor Rahm Emanuel’s plans to cut public employee pensions. The piece reports that retired workers receive:
“average annual benefits ranging from about $34,000 for a general-services retiree to $78,000 for a former teacher with 30 years of service.”
These payments will in most cases be the vast majority of retirees’ income since workers who spent their entire careers working for the city will not be receiving Social Security benefits. It also would have been worth noting that the actual payments (rather than schedules for long-term employees) average just over $37,000 a year under the city’s main retirement fund.
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President Obama is going to announce a plan whose main goal appears to be subsidizing mortgage backed securities. Unfortunately the readers of the Washington Post article on the piece probably would not realize this fact.
The article simply repeats the Obama administration’s assertion that government backing is needed for 30-year mortgages to exist, which it asserted are the backbone of home ownership.
“Traveling to Phoenix on Tuesday, Obama is planning to call for a new system, built in part on government backing, that will enable wide access to 30-year mortgages, which are a rarity in other countries. That will require, officials said, some form of government guarantee that means lenders will be reimbursed by taxpayers in the event of a housing catastrophe like the one that occurred several years ago.”
In fact, government backing is not necessary for 30-year mortgages, as is shown by the existence of the 30-year jumbo mortgages which are too large to be eligible for government guarantees. The interest rate on these mortgages is typically 0.25-0.50 percentage points higher than the interest rate on conforming loans that can be purchased by Fannie Mae and Freddie Mac.
So the story here is not really about the existence of 30-year mortgages, but rather the price. The program being pushed by President Obama effectively subsidizes mortgage interest rates by subsidizing mortgage backed securities. If the goal to make homeownership more affordable for moderate income people, this is an extremely inefficient way of doing so.
Under the Obama administration’s proposal the vast majority of the subsidy would go to higher income homeowners since there will be a bigger subsidy for people who take out bigger mortgages. It is also not clear that a 30-year mortgage is always the best financing instrument.
Alan Greenspan famously noted that many homeowners lose money by taking a 30-year mortgage when a shorter-term mortgage would often involve lower fees. (Unfortunately he did this at a time when the housing bubble was taking off and homeowners were increasingly diving into adjustment rate mortgages, often with teaser rates.) This is especially likely to be the case for lower income homebuyers who move more frequently. In such cases, the government will be costing homeowners money by encouraging them to take out a 30-year mortgage.
It would have been appropriate to include the views of an expert who could have made these points to readers.
President Obama is going to announce a plan whose main goal appears to be subsidizing mortgage backed securities. Unfortunately the readers of the Washington Post article on the piece probably would not realize this fact.
The article simply repeats the Obama administration’s assertion that government backing is needed for 30-year mortgages to exist, which it asserted are the backbone of home ownership.
“Traveling to Phoenix on Tuesday, Obama is planning to call for a new system, built in part on government backing, that will enable wide access to 30-year mortgages, which are a rarity in other countries. That will require, officials said, some form of government guarantee that means lenders will be reimbursed by taxpayers in the event of a housing catastrophe like the one that occurred several years ago.”
In fact, government backing is not necessary for 30-year mortgages, as is shown by the existence of the 30-year jumbo mortgages which are too large to be eligible for government guarantees. The interest rate on these mortgages is typically 0.25-0.50 percentage points higher than the interest rate on conforming loans that can be purchased by Fannie Mae and Freddie Mac.
So the story here is not really about the existence of 30-year mortgages, but rather the price. The program being pushed by President Obama effectively subsidizes mortgage interest rates by subsidizing mortgage backed securities. If the goal to make homeownership more affordable for moderate income people, this is an extremely inefficient way of doing so.
Under the Obama administration’s proposal the vast majority of the subsidy would go to higher income homeowners since there will be a bigger subsidy for people who take out bigger mortgages. It is also not clear that a 30-year mortgage is always the best financing instrument.
Alan Greenspan famously noted that many homeowners lose money by taking a 30-year mortgage when a shorter-term mortgage would often involve lower fees. (Unfortunately he did this at a time when the housing bubble was taking off and homeowners were increasingly diving into adjustment rate mortgages, often with teaser rates.) This is especially likely to be the case for lower income homebuyers who move more frequently. In such cases, the government will be costing homeowners money by encouraging them to take out a 30-year mortgage.
It would have been appropriate to include the views of an expert who could have made these points to readers.
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Sorry, I misread the piece, it was “schools vs. nursing homes.” In a 35-year period in which we have seen the most massive upward redistribution of income in the history of the world, Robert Samuelson tells us that the only way that we can pay for our kids’ education is by breaking contractual obligations to public sector workers and cutting Social Security and Medicare. Yeah, where else could we possibly find money?
The starting point here is the bankruptcy of Detroit, which Samuelson tells us is an omen of things to come. In the case of Detroit, Samuelson wants the government to renege on its pension obligations to workers. This is striking because pension payments are a contractual obligation; they are part of workers’ wages. Samuelson tells readers that the government has little choice in this situation, it is either cutting schools or breaking contracts with workers.
There are in fact many other contracts that the government could break if it is going to follow this path. It could not pay contractors for work they done for the government, it could retake patent or copyrights it had granted (imagine the benefits from taking back some of the patents issued to Apple), it could even retake land which might have been sold off for a small fraction of its current value.
Economists generally consider it bad policy to break contractual obligations, not just as a moral issue, but because it undermines incentives. If people cannot count on contracts being respected, then they will not value them in the same way and a contractual commitment will not provide as much motivation as in a society in which contracts are honored.
Samuelson doesn’t seem to take this effect into account. He apparently assumes that breaking contracts with workers has little consequence, both in the sense that it will still be possible to find workers even if they cannot count on receiving the pay for which they contracted, and also that breaking contracts with workers will not have any spillover effect in making it more likely that other contracts will also be broken.
The other parts of Samuelson’s piece are even more bizarre. Rather than seeing a future in which budgets look increasingly constrained, the recent slowing of health care costs suggests the opposite. In fact, the sharp slowdown in projected health care cost growth has reduced CBO projections of Medicare and Medicaid spending in 2023 from 7.7 percent of GDP (Table 1) to just 5.7 percent of GDP in the most recent Budget and Economic Outlook. This reduction in spending would be roughly $320 billion a year in the current economy or nearly $4 trillion over the 10-year budget window.
Of course there are many ways that the government could raise revenue without cutting Social Security and Medicare benefits. For example, a financial speculation tax on trades of stock, derivatives and other assets could raise close to $2 trillion over the next decade with most of the burden born by Goldman Sachs, Citigroup and other financial firms. There are enormous potential savings to the government and the economy as a whole from opening up the health care industry to free trade. The revised GDP data show that after-tax corporate profits in the last three years have been far higher than at any point in the post-war era, suggesting that the government could also raise revenue with a well-designed corporate tax reform. In fact, recent polling data from the National Academy of Social Insurance indicated that most people would be willing to pay higher payroll taxes rather than seeing Social Security cut.
In short, the trade-off between meeting obligations to seniors and ensuring that our children receive a decent education is entirely an invention of Robert Samuelson. There is no economic reason that both cannot be easily met. The only problem is the political opposition of special interests, like Wall Street banks, health insurance companies and highly paid medical specialists, and high level corporate executives who rip off both their companies and taxpayers.
Samuelson’s trade-off story is especially ironic since it comes at a time when the Congressional Budget Office estimates that the economy’s output is roughly 6 percent (@ $1 trillion a year) below its potential. This means that if the demand were there (i.e. we spent the money necessary to support both our seniors and our children) then output and employment will increase. While CBO projects that this demand gap will gradually be eliminated over the course of the decade, at the moment our problem is too little spending, not too much.
The squeeze that cities like Detroit now face is entirely the result of political decisions to deny them resources. It is also the result of really bad economic policy over the last decades in which we allowed an over-valued dollar to create large trade deficits and then filled the gap in demand, first with a stock bubble in the 1990s and then with a housing bubble in the last decade. The moral of that story is that we probably need economic policy that is designed by people who may not be as smart as Larry Summers, but who have a better understanding of the economy.
Sorry, I misread the piece, it was “schools vs. nursing homes.” In a 35-year period in which we have seen the most massive upward redistribution of income in the history of the world, Robert Samuelson tells us that the only way that we can pay for our kids’ education is by breaking contractual obligations to public sector workers and cutting Social Security and Medicare. Yeah, where else could we possibly find money?
The starting point here is the bankruptcy of Detroit, which Samuelson tells us is an omen of things to come. In the case of Detroit, Samuelson wants the government to renege on its pension obligations to workers. This is striking because pension payments are a contractual obligation; they are part of workers’ wages. Samuelson tells readers that the government has little choice in this situation, it is either cutting schools or breaking contracts with workers.
There are in fact many other contracts that the government could break if it is going to follow this path. It could not pay contractors for work they done for the government, it could retake patent or copyrights it had granted (imagine the benefits from taking back some of the patents issued to Apple), it could even retake land which might have been sold off for a small fraction of its current value.
Economists generally consider it bad policy to break contractual obligations, not just as a moral issue, but because it undermines incentives. If people cannot count on contracts being respected, then they will not value them in the same way and a contractual commitment will not provide as much motivation as in a society in which contracts are honored.
Samuelson doesn’t seem to take this effect into account. He apparently assumes that breaking contracts with workers has little consequence, both in the sense that it will still be possible to find workers even if they cannot count on receiving the pay for which they contracted, and also that breaking contracts with workers will not have any spillover effect in making it more likely that other contracts will also be broken.
The other parts of Samuelson’s piece are even more bizarre. Rather than seeing a future in which budgets look increasingly constrained, the recent slowing of health care costs suggests the opposite. In fact, the sharp slowdown in projected health care cost growth has reduced CBO projections of Medicare and Medicaid spending in 2023 from 7.7 percent of GDP (Table 1) to just 5.7 percent of GDP in the most recent Budget and Economic Outlook. This reduction in spending would be roughly $320 billion a year in the current economy or nearly $4 trillion over the 10-year budget window.
Of course there are many ways that the government could raise revenue without cutting Social Security and Medicare benefits. For example, a financial speculation tax on trades of stock, derivatives and other assets could raise close to $2 trillion over the next decade with most of the burden born by Goldman Sachs, Citigroup and other financial firms. There are enormous potential savings to the government and the economy as a whole from opening up the health care industry to free trade. The revised GDP data show that after-tax corporate profits in the last three years have been far higher than at any point in the post-war era, suggesting that the government could also raise revenue with a well-designed corporate tax reform. In fact, recent polling data from the National Academy of Social Insurance indicated that most people would be willing to pay higher payroll taxes rather than seeing Social Security cut.
In short, the trade-off between meeting obligations to seniors and ensuring that our children receive a decent education is entirely an invention of Robert Samuelson. There is no economic reason that both cannot be easily met. The only problem is the political opposition of special interests, like Wall Street banks, health insurance companies and highly paid medical specialists, and high level corporate executives who rip off both their companies and taxpayers.
Samuelson’s trade-off story is especially ironic since it comes at a time when the Congressional Budget Office estimates that the economy’s output is roughly 6 percent (@ $1 trillion a year) below its potential. This means that if the demand were there (i.e. we spent the money necessary to support both our seniors and our children) then output and employment will increase. While CBO projects that this demand gap will gradually be eliminated over the course of the decade, at the moment our problem is too little spending, not too much.
The squeeze that cities like Detroit now face is entirely the result of political decisions to deny them resources. It is also the result of really bad economic policy over the last decades in which we allowed an over-valued dollar to create large trade deficits and then filled the gap in demand, first with a stock bubble in the 1990s and then with a housing bubble in the last decade. The moral of that story is that we probably need economic policy that is designed by people who may not be as smart as Larry Summers, but who have a better understanding of the economy.
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