The debate over Larry Summers’ potential appointment to Fed chair provides an excellent opportunity to explain the logic behind one of his biggest policy missteps. During the East Asian financial crisis he worked alongside Robert Rubin and Alan Greenspan to impose a solution that required the countries of the region to repay their debts in full. The quid pro quo was that they would have the opportunity to hugely increase their exports to the United States in order to get the dollars needed to make their payments.
This bailout put muscle behind Robert Rubin’s strong dollar policy. Robert Rubin’s predecessor as Treasury Secretary, Lloyd Bentsen, was happy to have the dollar fall. This was part of the textbook story of the deficit reduction being pursued by the Clinton administration. Lower deficits were supposed to mean lower interest rates.
One of the dividends of lower interest rates was supposed to be that investors would hold fewer dollars, causing its value to fall relative to other currencies. This would make U.S. exports cheaper to people in other countries, leading them to buy more of our exports. A lower valued dollar would also make imports more expensive for people in the United States, leading them to buy fewer imports.
More exports and less imports means an improved trade balance which would increase demand and growth. And to some extent this is the story we saw in the first years of the Clinton administration with the trade deficit falling to its lowest non-recession levels as a share of GDP since the Carter years.
However Robert Rubin’s high dollar policy reversed this story. The rise in the dollar led a predictable rise in the trade deficit. Because of the harsh terms imposed in the bailout from East Asian financial crisis developing countries began to accumulate foreign exchange (i.e. dollars) on a massive basis in order to avoid ever being in the same situation. This caused a huge run-up in the dollar, which pushed the trade deficit ever higher.
The deficit reached 4 percent of GDP ($640 billion a year in today’s economy) in 2000 before falling back somewhat in the 2001 recession. It eventually peaked at almost 6 percent of GDP in 2006.
The trade deficit creates a huge gap in demand that must be filled by some other source. This is income that people are spending overseas rather than in the United States. In the late 1990s this gap was filled by the stock bubble. The $10 trillion in wealth generated by the bubble led to a huge surge in consumption as the saving rate was pushed to then record lows. The bubble also led to an increase of investment, although much of it was in hare-brained start-ups like Pets.com.
After the stock bubble burst the economy needed some other source of demand to replace the money lost through the trade deficit. Contrary to conventional wisdom, the economy was very slow to emerge from the 2001 recession. It did not regain the jobs lost in the recession until 2005. At the time this was the longest period without job growth since the Great Depression.
When the economy did emerge from the 2001 downturn it was on the back of the housing bubble. The bubble generated huge amounts of demand both by pushing construction to record levels and through the wealth effect on consumption. Of course it was predictable that this bubble would also end badly, as it did.
While Summers did not hold the levers of power through the housing bubble years, he did set the process in motion in the 1990s with his high dollar policy. He was also a major cheerleader at the time, denouncing those who raised questions about the exotic financing that was supporting the run-up in house prices as “luddites.”
Furthermore, we still have the basic math problem that he left us from his years in the Clinton administration, how do we fill the gap in demand that resulted from his high dollar policy. While a subsequent fall in the dollar has reduced the trade deficit, it is still close to 4.0 percent of GDP ($640 billion). This can be filled by the government’s deficit spending, but Summers has repeatedly warned that this is only a short-term strategy.
So how does Summer want to solve the math problem? Is he going to push for another bubble to juice the economy again or perhaps he has changed his mind and decided that a strong dollar really wasn’t such a good idea after all.
Anyhow, there is no way around this math. You either want a lower dollar, you want to sustain high budget deficits, you want another bubble, or you want high unemployment. That is the math, what is Summers’ answer? We should know this before he gets appointed to the country’s most important economic post.
Note: Correction made on imports becoming more expensive when the dollar falls. Thanks to the people who called it to my attention.
The debate over Larry Summers’ potential appointment to Fed chair provides an excellent opportunity to explain the logic behind one of his biggest policy missteps. During the East Asian financial crisis he worked alongside Robert Rubin and Alan Greenspan to impose a solution that required the countries of the region to repay their debts in full. The quid pro quo was that they would have the opportunity to hugely increase their exports to the United States in order to get the dollars needed to make their payments.
This bailout put muscle behind Robert Rubin’s strong dollar policy. Robert Rubin’s predecessor as Treasury Secretary, Lloyd Bentsen, was happy to have the dollar fall. This was part of the textbook story of the deficit reduction being pursued by the Clinton administration. Lower deficits were supposed to mean lower interest rates.
One of the dividends of lower interest rates was supposed to be that investors would hold fewer dollars, causing its value to fall relative to other currencies. This would make U.S. exports cheaper to people in other countries, leading them to buy more of our exports. A lower valued dollar would also make imports more expensive for people in the United States, leading them to buy fewer imports.
More exports and less imports means an improved trade balance which would increase demand and growth. And to some extent this is the story we saw in the first years of the Clinton administration with the trade deficit falling to its lowest non-recession levels as a share of GDP since the Carter years.
However Robert Rubin’s high dollar policy reversed this story. The rise in the dollar led a predictable rise in the trade deficit. Because of the harsh terms imposed in the bailout from East Asian financial crisis developing countries began to accumulate foreign exchange (i.e. dollars) on a massive basis in order to avoid ever being in the same situation. This caused a huge run-up in the dollar, which pushed the trade deficit ever higher.
The deficit reached 4 percent of GDP ($640 billion a year in today’s economy) in 2000 before falling back somewhat in the 2001 recession. It eventually peaked at almost 6 percent of GDP in 2006.
The trade deficit creates a huge gap in demand that must be filled by some other source. This is income that people are spending overseas rather than in the United States. In the late 1990s this gap was filled by the stock bubble. The $10 trillion in wealth generated by the bubble led to a huge surge in consumption as the saving rate was pushed to then record lows. The bubble also led to an increase of investment, although much of it was in hare-brained start-ups like Pets.com.
After the stock bubble burst the economy needed some other source of demand to replace the money lost through the trade deficit. Contrary to conventional wisdom, the economy was very slow to emerge from the 2001 recession. It did not regain the jobs lost in the recession until 2005. At the time this was the longest period without job growth since the Great Depression.
When the economy did emerge from the 2001 downturn it was on the back of the housing bubble. The bubble generated huge amounts of demand both by pushing construction to record levels and through the wealth effect on consumption. Of course it was predictable that this bubble would also end badly, as it did.
While Summers did not hold the levers of power through the housing bubble years, he did set the process in motion in the 1990s with his high dollar policy. He was also a major cheerleader at the time, denouncing those who raised questions about the exotic financing that was supporting the run-up in house prices as “luddites.”
Furthermore, we still have the basic math problem that he left us from his years in the Clinton administration, how do we fill the gap in demand that resulted from his high dollar policy. While a subsequent fall in the dollar has reduced the trade deficit, it is still close to 4.0 percent of GDP ($640 billion). This can be filled by the government’s deficit spending, but Summers has repeatedly warned that this is only a short-term strategy.
So how does Summer want to solve the math problem? Is he going to push for another bubble to juice the economy again or perhaps he has changed his mind and decided that a strong dollar really wasn’t such a good idea after all.
Anyhow, there is no way around this math. You either want a lower dollar, you want to sustain high budget deficits, you want another bubble, or you want high unemployment. That is the math, what is Summers’ answer? We should know this before he gets appointed to the country’s most important economic post.
Note: Correction made on imports becoming more expensive when the dollar falls. Thanks to the people who called it to my attention.
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Dylan Matthews takes President Obama to task over at Wonkblog for saying in his speech on Wednesday that the typical family’s income has barely budged over the last three decades. As Dylan points out, median family income increased by 17.7 percent from 1979 to 2007. That’s not great, it had increased by 113.2 percent in the prior three decades (State of Working American 2012-2013 [SWA], Table 2.1), but it’s not zero.
So we can say that Obama was not exactly right on this front. But there is one other important item to throw into the mix. The typical family was putting in many more hours of work in 2007 than in 1979. This was primarily a story of women entering the paid labor force. The average number of hours worked for families in the middle quintile increased by 10.3 percent between 1997-2007 (SWA, Table 2.17).
So families did have a bit more money in 2007 than they did in 1979, but they had increased their work hours by almost as much. And of course there are work related expenses (e.g. child care, transportation, clothing) that likely ate up a very large share of the increase in money income for these families. Obama’s claim may not have been exactly right, but if we look at the larger picture, it was not far from the mark.
Dylan Matthews takes President Obama to task over at Wonkblog for saying in his speech on Wednesday that the typical family’s income has barely budged over the last three decades. As Dylan points out, median family income increased by 17.7 percent from 1979 to 2007. That’s not great, it had increased by 113.2 percent in the prior three decades (State of Working American 2012-2013 [SWA], Table 2.1), but it’s not zero.
So we can say that Obama was not exactly right on this front. But there is one other important item to throw into the mix. The typical family was putting in many more hours of work in 2007 than in 1979. This was primarily a story of women entering the paid labor force. The average number of hours worked for families in the middle quintile increased by 10.3 percent between 1997-2007 (SWA, Table 2.17).
So families did have a bit more money in 2007 than they did in 1979, but they had increased their work hours by almost as much. And of course there are work related expenses (e.g. child care, transportation, clothing) that likely ate up a very large share of the increase in money income for these families. Obama’s claim may not have been exactly right, but if we look at the larger picture, it was not far from the mark.
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Harold Meyerson has a good column noting Goldman Sachs role in manipulating prices in the aluminum market and arguing for a new Glass-Steagall Act prohibiting banks from getting into other lines of business. The points are well taken but the description of Goldman’s ability to manipulate prices in the aluminum market go beyond just bank abuses. The allegations against Goldman Sachs raise basic anti-trust issues.
If any firm is able to manipulate prices in a major market in the way Goldman appears to be doing, then the firm clearly has too much control over the market. This should prompt action on anti-trust grounds regardless of whether or not the firm is in the financial sector, as is obviously the case with Goldman. In other words, if the description of Goldman’s conduct in the aluminum market is accurate, not only does it imply the need for new Glass-Steagall legislation, it implies the need for an anti-trust division at the Justice Department that works for its paychecks.
Harold Meyerson has a good column noting Goldman Sachs role in manipulating prices in the aluminum market and arguing for a new Glass-Steagall Act prohibiting banks from getting into other lines of business. The points are well taken but the description of Goldman’s ability to manipulate prices in the aluminum market go beyond just bank abuses. The allegations against Goldman Sachs raise basic anti-trust issues.
If any firm is able to manipulate prices in a major market in the way Goldman appears to be doing, then the firm clearly has too much control over the market. This should prompt action on anti-trust grounds regardless of whether or not the firm is in the financial sector, as is obviously the case with Goldman. In other words, if the description of Goldman’s conduct in the aluminum market is accurate, not only does it imply the need for new Glass-Steagall legislation, it implies the need for an anti-trust division at the Justice Department that works for its paychecks.
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That’s what readers of this Post tidbit would like to know. The item tells readers that Teva will be granted exclusive marketing rights for three years. This means that it can sell the drug for considerably more than its free market price. That implies a transfer of tens or hundreds of millions of dollars to the executives and shareholders in Teva from the rest of us. It’s not clear why we should tax the public as a whole, or women who buy the drug to make these people richer. The Post should at least have given us a hint as to the reason.
That’s what readers of this Post tidbit would like to know. The item tells readers that Teva will be granted exclusive marketing rights for three years. This means that it can sell the drug for considerably more than its free market price. That implies a transfer of tens or hundreds of millions of dollars to the executives and shareholders in Teva from the rest of us. It’s not clear why we should tax the public as a whole, or women who buy the drug to make these people richer. The Post should at least have given us a hint as to the reason.
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Today we are going to use CEPR’s patented new budget calculator to improve a NYT budget article so that it is more meaningful to people who read it. The focus of the piece is efforts by House Republicans to sharply reduce spending from current levels.
One paragraph tells readers:
“For the fiscal year that begins Oct. 1, Mr. Obama requested nearly $3 billion for renewable energy and energy efficiency programs — a mainstay of his economic agenda since he was first elected. The House approved $826 million. Senate Democrats want to give $380 million to ARPA-E, an advanced research program for energy. The House allocated $70 million.”
Here’s how that would read after using the new CEPR budget calculator:
“For the fiscal year that begins Oct. 1, Mr. Obama requested nearly $3 billion (0.08 percent of the budget) for renewable energy and energy efficiency programs — a mainstay of his economic agenda since he was first elected. The House approved $826 million (0.02 percent of federal spending). Senate Democrats want to give $380 million (0.01 percent of spending) to ARPA-E, an advanced research program for energy. The House allocated $70 million (0.002 percent of federal spending).
The piece then told readers:
“A House bill to finance labor and health programs, expected to be unveiled Wednesday, makes good on Republican threats to eliminate the Corporation for Public Broadcasting.”
After using the CEPR budget calculator it would say:
“A House bill to finance labor and health programs, expected to be unveiled Wednesday, makes good on Republican threats to eliminate the Corporation for Public Broadcasting, which currently receives less than 0.01 percent of federal spending.”
Later the article reports:
“Republicans are open about their intentions to target the president’s priorities. The House transportation and housing bill for fiscal 2014 cuts from $3.3 billion to $1.7 billion the financing for Community Development Block Grants, which go mainly to large cities and urban counties for housing and social programs, largely for the poor. That level is below the number secured by President Gerald R. Ford when he created the program — without adjusting for inflation.”
After using the CEPR budget calculator it would say:
“Republicans are open about their intentions to target the president’s priorities. The House transportation and housing bill for fiscal 2014 cuts from $3.3 billion to $1.7 billion (0.09 percent of spending to 0.05 percent) the financing for Community Development Block Grants, which go mainly to large cities and urban counties for housing and social programs, largely for the poor. That level is below the number secured by President Gerald R. Ford when he created the program — without adjusting for inflation.
The next sentence tells readers:
“The Securities and Exchange Commission, which has been flexing its muscle against hedge fund managers and insider trading schemes, would see financing cut 18 percent from the current level.”
After using the CEPR budget calculator it would say:
“The Securities and Exchange Commission, which has been flexing its muscle against hedge fund managers and insider trading schemes, would see financing cut 18 percent from the current level, which is 0.037 percent of federal spending.”
See, with the CEPR budget calculator and just a few minutes work the NYT could do a far better job informing readers about the budget.
Today we are going to use CEPR’s patented new budget calculator to improve a NYT budget article so that it is more meaningful to people who read it. The focus of the piece is efforts by House Republicans to sharply reduce spending from current levels.
One paragraph tells readers:
“For the fiscal year that begins Oct. 1, Mr. Obama requested nearly $3 billion for renewable energy and energy efficiency programs — a mainstay of his economic agenda since he was first elected. The House approved $826 million. Senate Democrats want to give $380 million to ARPA-E, an advanced research program for energy. The House allocated $70 million.”
Here’s how that would read after using the new CEPR budget calculator:
“For the fiscal year that begins Oct. 1, Mr. Obama requested nearly $3 billion (0.08 percent of the budget) for renewable energy and energy efficiency programs — a mainstay of his economic agenda since he was first elected. The House approved $826 million (0.02 percent of federal spending). Senate Democrats want to give $380 million (0.01 percent of spending) to ARPA-E, an advanced research program for energy. The House allocated $70 million (0.002 percent of federal spending).
The piece then told readers:
“A House bill to finance labor and health programs, expected to be unveiled Wednesday, makes good on Republican threats to eliminate the Corporation for Public Broadcasting.”
After using the CEPR budget calculator it would say:
“A House bill to finance labor and health programs, expected to be unveiled Wednesday, makes good on Republican threats to eliminate the Corporation for Public Broadcasting, which currently receives less than 0.01 percent of federal spending.”
Later the article reports:
“Republicans are open about their intentions to target the president’s priorities. The House transportation and housing bill for fiscal 2014 cuts from $3.3 billion to $1.7 billion the financing for Community Development Block Grants, which go mainly to large cities and urban counties for housing and social programs, largely for the poor. That level is below the number secured by President Gerald R. Ford when he created the program — without adjusting for inflation.”
After using the CEPR budget calculator it would say:
“Republicans are open about their intentions to target the president’s priorities. The House transportation and housing bill for fiscal 2014 cuts from $3.3 billion to $1.7 billion (0.09 percent of spending to 0.05 percent) the financing for Community Development Block Grants, which go mainly to large cities and urban counties for housing and social programs, largely for the poor. That level is below the number secured by President Gerald R. Ford when he created the program — without adjusting for inflation.
The next sentence tells readers:
“The Securities and Exchange Commission, which has been flexing its muscle against hedge fund managers and insider trading schemes, would see financing cut 18 percent from the current level.”
After using the CEPR budget calculator it would say:
“The Securities and Exchange Commission, which has been flexing its muscle against hedge fund managers and insider trading schemes, would see financing cut 18 percent from the current level, which is 0.037 percent of federal spending.”
See, with the CEPR budget calculator and just a few minutes work the NYT could do a far better job informing readers about the budget.
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A Washington Post article reporting on Neil Wolin’s departure from a top Treasury Department job discussed his work on the Dodd-Frank, then noted the controversy around the bill:
“with conservatives saying it is holding back economic growth and liberals complaining it falls short of what’s needed to rein in Wall Street.”
Actually, the liberal position would also be that the bill would slow growth. By allowing Wall Street to continue in its current practices, the government is effectively subsidizing too big to fail banks by tens of billions of dollars a year.
This is money that is effectively being diverted from the productive economy into the hands of the large Wall Street banks. It has the same effect on growth as if the government taxed people this amount to send large checks to the big banks. The fact that the government also did nothing to restrain the speculative practices of large banks, such as Goldman Sachs foray into the aluminum market, also will impede growth by leading to higher prices for consumers and less money for producers.
A Washington Post article reporting on Neil Wolin’s departure from a top Treasury Department job discussed his work on the Dodd-Frank, then noted the controversy around the bill:
“with conservatives saying it is holding back economic growth and liberals complaining it falls short of what’s needed to rein in Wall Street.”
Actually, the liberal position would also be that the bill would slow growth. By allowing Wall Street to continue in its current practices, the government is effectively subsidizing too big to fail banks by tens of billions of dollars a year.
This is money that is effectively being diverted from the productive economy into the hands of the large Wall Street banks. It has the same effect on growth as if the government taxed people this amount to send large checks to the big banks. The fact that the government also did nothing to restrain the speculative practices of large banks, such as Goldman Sachs foray into the aluminum market, also will impede growth by leading to higher prices for consumers and less money for producers.
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Imagine that, interference in the market that raises prices to hundreds or thousands of times the free market price leads to corruption in the research process in China. Interesting piece in NYT.
Imagine that, interference in the market that raises prices to hundreds or thousands of times the free market price leads to corruption in the research process in China. Interesting piece in NYT.
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A NYT article on the fate of Detroit’s retired workers following its bankruptcy made reference to the pension funds’ assumption of an 8 percent return following its bankruptcy. There are two points worth making on this issue. First, it was an error to assume an 8 percent return in 2007 given the ratio of stock prices to trend earnings. At the time, that was over 20, which meant that stock could be expected to provide a real return of less than 5 percent going forward. Adding in an inflation premium of 3 percent would have meant that share of the fund invested in stock could have been expected to give an 8 percent nominal return.
If stock accounted for 70 percent of the fund, this would provide a return of 5.6 percentage points to the funds. If the remaining 30 percent of the fund had an average yield of 5 percent, then it would have provided a yield of 1.5 percentage points for a total yield of 7.1 percent. (It would have also been reasonable to include an adjustment for the expectation that stock prices would revert to their mean price-to-earnings ratio of 15.) Anyhow, the point is that an 8.0 percent return assumption would have been too high in 2007, it would not be today since the ratio of stock prices to trend earnings is close to its historic average of 15 to 1, meaning that stocks can be expected to provide their historic nominal rate of return which is close to 10 percent. (This is discussed at more length here and here.)
The second point is that implied preference in this piece for using the municipal bond interest rate for assessing liabilities would have mattered relatively little in this last decade. This rate, which averaged around 4.5 percent, also substantially exceeded pension fund returns in the economic crisis. In other words, whatever shortfall exists today in Detroit’s pension funds was not caused primarily by overly-optimistic return assumptions.
A NYT article on the fate of Detroit’s retired workers following its bankruptcy made reference to the pension funds’ assumption of an 8 percent return following its bankruptcy. There are two points worth making on this issue. First, it was an error to assume an 8 percent return in 2007 given the ratio of stock prices to trend earnings. At the time, that was over 20, which meant that stock could be expected to provide a real return of less than 5 percent going forward. Adding in an inflation premium of 3 percent would have meant that share of the fund invested in stock could have been expected to give an 8 percent nominal return.
If stock accounted for 70 percent of the fund, this would provide a return of 5.6 percentage points to the funds. If the remaining 30 percent of the fund had an average yield of 5 percent, then it would have provided a yield of 1.5 percentage points for a total yield of 7.1 percent. (It would have also been reasonable to include an adjustment for the expectation that stock prices would revert to their mean price-to-earnings ratio of 15.) Anyhow, the point is that an 8.0 percent return assumption would have been too high in 2007, it would not be today since the ratio of stock prices to trend earnings is close to its historic average of 15 to 1, meaning that stocks can be expected to provide their historic nominal rate of return which is close to 10 percent. (This is discussed at more length here and here.)
The second point is that implied preference in this piece for using the municipal bond interest rate for assessing liabilities would have mattered relatively little in this last decade. This rate, which averaged around 4.5 percent, also substantially exceeded pension fund returns in the economic crisis. In other words, whatever shortfall exists today in Detroit’s pension funds was not caused primarily by overly-optimistic return assumptions.
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I’m not kidding, but of course he gives us the economic equivalent telling readers:
“For most Americans, the economy is performing adequately, though obviously not spectacularly. Despite a woeful 7.6 percent unemployment rate, it remains true that 92.4 percent of workers have jobs (counting discouraged workers who’ve left the workforce would reduce this to about 90 percent). We have two distinct economies: one that inflicts acute pain on a minority of Americans but inspires mass political and media criticism; and another that creates huge wealth for the majority but is virtually ignored. Though distress is concentrated, unhappiness is widespread.”
Apart from the fact that the share of the population that is involuntary unemployed or underemployed would be at least 14 percent, this argument ignores the influence of unemployment on the wages of those who are working. High unemployment undercuts the bargaining power of workers, especially in the bottom half of the wage distribution. As a result, workers have gotten none of the benefits of productivity growth in the last five years. This might explain part of their unhappiness.
Samuelson does note growing insecurity, but seems to think it is a psychological problem rather than a rational response to the circumstances faced by most workers;
“Our Martian visitors would discover that America’s mass abundance is mixed with mass anxiety. There’s a broadly shared sense of vulnerability, which helps explain why discontent is not confined to the distressed. It also accounts for the view that the Great Recession and its aftershocks, unlike previous post-World War II slumps, constitute ‘an assault on the middle class.’ Perhaps continued recovery and more jobs will erase present doubts, though I suspect that any reversal will, at best, be partial because the recession’s psychological effects are pervasive.”
He then warns that we shouldn’t want the government to do anything about either growth (because he has decided it can’t despite all the evidence to the contrary) or insecurity, because that would only make things worse. He makes this point by warning about Europe:
“The experience in Europe, with more public protections and a darker economic outlook, teaches a similar lesson.”
Actually most of the countries in Europe with more public protections than the United States are doing just fine. The employment rate in Denmark, Sweden, Germany, Austria, and the Netherlands are all higher than in the United States. In fact, both Germany and Austria have higher employment rates today than they did before the downturn. The European countries that are in especially bad shape, Greece, Spain. Portugal and Ireland, had the least developed welfare states among the original 15 European Union countries.
Many EU countries did severely damage their economies by turning over the running of their central banks to the loon tunes at the European Central Bank, but that does not speak to the merits of their underlying system. This would be like saying a person had made a poor financial decision in becoming a doctor because she allowed Bernie Madoff to manage her money. The problem in both cases was who is managing the money.
Note: Typos corrected, thanks to Robert Salzberg.
I’m not kidding, but of course he gives us the economic equivalent telling readers:
“For most Americans, the economy is performing adequately, though obviously not spectacularly. Despite a woeful 7.6 percent unemployment rate, it remains true that 92.4 percent of workers have jobs (counting discouraged workers who’ve left the workforce would reduce this to about 90 percent). We have two distinct economies: one that inflicts acute pain on a minority of Americans but inspires mass political and media criticism; and another that creates huge wealth for the majority but is virtually ignored. Though distress is concentrated, unhappiness is widespread.”
Apart from the fact that the share of the population that is involuntary unemployed or underemployed would be at least 14 percent, this argument ignores the influence of unemployment on the wages of those who are working. High unemployment undercuts the bargaining power of workers, especially in the bottom half of the wage distribution. As a result, workers have gotten none of the benefits of productivity growth in the last five years. This might explain part of their unhappiness.
Samuelson does note growing insecurity, but seems to think it is a psychological problem rather than a rational response to the circumstances faced by most workers;
“Our Martian visitors would discover that America’s mass abundance is mixed with mass anxiety. There’s a broadly shared sense of vulnerability, which helps explain why discontent is not confined to the distressed. It also accounts for the view that the Great Recession and its aftershocks, unlike previous post-World War II slumps, constitute ‘an assault on the middle class.’ Perhaps continued recovery and more jobs will erase present doubts, though I suspect that any reversal will, at best, be partial because the recession’s psychological effects are pervasive.”
He then warns that we shouldn’t want the government to do anything about either growth (because he has decided it can’t despite all the evidence to the contrary) or insecurity, because that would only make things worse. He makes this point by warning about Europe:
“The experience in Europe, with more public protections and a darker economic outlook, teaches a similar lesson.”
Actually most of the countries in Europe with more public protections than the United States are doing just fine. The employment rate in Denmark, Sweden, Germany, Austria, and the Netherlands are all higher than in the United States. In fact, both Germany and Austria have higher employment rates today than they did before the downturn. The European countries that are in especially bad shape, Greece, Spain. Portugal and Ireland, had the least developed welfare states among the original 15 European Union countries.
Many EU countries did severely damage their economies by turning over the running of their central banks to the loon tunes at the European Central Bank, but that does not speak to the merits of their underlying system. This would be like saying a person had made a poor financial decision in becoming a doctor because she allowed Bernie Madoff to manage her money. The problem in both cases was who is managing the money.
Note: Typos corrected, thanks to Robert Salzberg.
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Tyler Cowan told NYT readers that he is concerned that one response to growing inequality might be a renewed push for wealth taxes. I have some sympathy for his position, not because I am concerned so much about the inefficiencies created in taxing wealth (those are not good), but you tend not to get the money.
Wealth can be pretty easy to hide. (Ever see a Picasso painting?) If we give people a large incentive to hide their wealth, it is reasonable to assume that they will. This means that we will get much less from a tax on the wealth of the rich than a simple arithmetic calculation would imply.
However there are other ways of getting wealth from the rich to everyone else, most importantly by reversing the policies that redistributed wealth upward. The patents held by Pfizer and other drug companies would be worth much less money if we had publicly financed drug research so that most, if not all, new drugs were sold at generic prices. If we didn’t allow monopoly prices by cable companies then people like Al Gore would not be able to pocket hundreds of millions of dollars from selling cable TV slots. And if we adopted policies to promote rather than obstruct full employment then ordinary workers would be able to get their share of productivity gains instead of having it all go to profits.
These, and other policies would reduce the income of the rich and therefore also their wealth. In fact, if we are bothered by wealth, a rise in interest rates would go far toward reducing the wealth of the rich, as well as the market value of national debts, since the value of government bonds held by the rich would plunge. (This is especially true in the case of Japan where many long-term bonds have been issued at interest rates of less than 1.0 percent. If the interest rate on 10-year bonds were to rise to 3.0 percent, the price of these bonds would be cut by close to 50 percent.
So, we need not worry about taxing wealth if we reverse the policies that have redistributed so much income upward over the last three decades.
Tyler Cowan told NYT readers that he is concerned that one response to growing inequality might be a renewed push for wealth taxes. I have some sympathy for his position, not because I am concerned so much about the inefficiencies created in taxing wealth (those are not good), but you tend not to get the money.
Wealth can be pretty easy to hide. (Ever see a Picasso painting?) If we give people a large incentive to hide their wealth, it is reasonable to assume that they will. This means that we will get much less from a tax on the wealth of the rich than a simple arithmetic calculation would imply.
However there are other ways of getting wealth from the rich to everyone else, most importantly by reversing the policies that redistributed wealth upward. The patents held by Pfizer and other drug companies would be worth much less money if we had publicly financed drug research so that most, if not all, new drugs were sold at generic prices. If we didn’t allow monopoly prices by cable companies then people like Al Gore would not be able to pocket hundreds of millions of dollars from selling cable TV slots. And if we adopted policies to promote rather than obstruct full employment then ordinary workers would be able to get their share of productivity gains instead of having it all go to profits.
These, and other policies would reduce the income of the rich and therefore also their wealth. In fact, if we are bothered by wealth, a rise in interest rates would go far toward reducing the wealth of the rich, as well as the market value of national debts, since the value of government bonds held by the rich would plunge. (This is especially true in the case of Japan where many long-term bonds have been issued at interest rates of less than 1.0 percent. If the interest rate on 10-year bonds were to rise to 3.0 percent, the price of these bonds would be cut by close to 50 percent.
So, we need not worry about taxing wealth if we reverse the policies that have redistributed so much income upward over the last three decades.
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