How concerned are you that the House farm bill would spend $195 billion on farm subsidies over the next decade? How about the baseline of $740 billion for spending on food stamps. Would you be more or less concerned if the numbers were $19.5 billion and $74 billion? Would you have any idea what these numbers mean?
The government is projected to spend $47.2 trillion over the next decade. This makes the farm subsidies equal to 0.4 percent of projected spending. The $740 billion figure for food stamps would be less than 1.6 percent of projected spending. The Post article on the bill would have provided much more information to readers if it had expressed the spending figures as a share of the budget rather than as dollar amounts that have almost no meaning to anyone.
How concerned are you that the House farm bill would spend $195 billion on farm subsidies over the next decade? How about the baseline of $740 billion for spending on food stamps. Would you be more or less concerned if the numbers were $19.5 billion and $74 billion? Would you have any idea what these numbers mean?
The government is projected to spend $47.2 trillion over the next decade. This makes the farm subsidies equal to 0.4 percent of projected spending. The $740 billion figure for food stamps would be less than 1.6 percent of projected spending. The Post article on the bill would have provided much more information to readers if it had expressed the spending figures as a share of the budget rather than as dollar amounts that have almost no meaning to anyone.
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That is what readers of his column on the state of the world economy will conclude. He told readers:
“Europe, the United States and Japan also face unsavory choices. All wrestle with what the IMF calls “fiscal consolidation” — reducing budget deficits. The underlying problem: costly welfare states with aging populations.”
Actually this is completely wrong. The United States and most other wealthy countries had relatively modest deficits until the collapse of the housing bubbles threw their economies into recessions. It’s amazing that Samuelson somehow missed the crisis.
In the United States, the pre-recession deficit was around 1.5 percent of GDP and projected to stay in this range for a decade. The collapse of the economy was what led to large deficits. Even now with the economy still badly depressed, debt-to-GDP ratios have nearly stabilized.
There is a similar story in most other wealthy countries. Contrary to what Samuelson asserts about “costly welfare states,” the extent of budget difficulties is almost inversely related to the extent of their welfare state. Countries with expensive welfare states like Denmark, Sweden, Germany and the Netherlands have few fiscal concerns. The large budget deficits are in the European countries with the least developed welfare states, Ireland, Portugal, and Spain.
Samuelson also implies that there is some great harm in the trade deficits that India is running. India has had trade deficits in recent years of around 5 percent of GDP. This is quite sustainable for a country experiencing the sort of growth that India has been seeing and in fact exactly what standard economic theory would predict. By contrast, trade deficits of this size in a relatively slow growing country like the United States is a more serious issue.
That is what readers of his column on the state of the world economy will conclude. He told readers:
“Europe, the United States and Japan also face unsavory choices. All wrestle with what the IMF calls “fiscal consolidation” — reducing budget deficits. The underlying problem: costly welfare states with aging populations.”
Actually this is completely wrong. The United States and most other wealthy countries had relatively modest deficits until the collapse of the housing bubbles threw their economies into recessions. It’s amazing that Samuelson somehow missed the crisis.
In the United States, the pre-recession deficit was around 1.5 percent of GDP and projected to stay in this range for a decade. The collapse of the economy was what led to large deficits. Even now with the economy still badly depressed, debt-to-GDP ratios have nearly stabilized.
There is a similar story in most other wealthy countries. Contrary to what Samuelson asserts about “costly welfare states,” the extent of budget difficulties is almost inversely related to the extent of their welfare state. Countries with expensive welfare states like Denmark, Sweden, Germany and the Netherlands have few fiscal concerns. The large budget deficits are in the European countries with the least developed welfare states, Ireland, Portugal, and Spain.
Samuelson also implies that there is some great harm in the trade deficits that India is running. India has had trade deficits in recent years of around 5 percent of GDP. This is quite sustainable for a country experiencing the sort of growth that India has been seeing and in fact exactly what standard economic theory would predict. By contrast, trade deficits of this size in a relatively slow growing country like the United States is a more serious issue.
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The folks in Italy must be pretty happy. After years of being forced to worry about deficits the NYT told readers:
“Faced with record unemployment and a public debt of more than €2 billion, or $2.6 billion, the grand coalition was already under pressure for the slow pace of its reforms.”
That would be great news since the NYT’s numbers imply that Italy’s debt is just over 0.1 percent of GDP. According to the IMF, Italy’s debt is more than 2.0 trillion euros, more than 130 percent of GDP.
Of course the numbers in the NYT are a mistake. It wrote “billions” when it meant “trillions.” This sort of thing can happen, but it does raise the question of why the NYT thought it was clever to write “trillions” rather than write 130 percent of GDP. While a reporter or editor should have recognized the typo in writing billions, it is almost inconceivable that someone would not have recognized the typo if the paper had written that Italy had a debt of 0.1 percent of GDP.
It is worth noting that this is not the first time that a mistake like this has made its way into print or at least cyberspace in the NYT. Just a few weeks ago a NYT article told readers that food stamps are a $760 billion program. That might have surprised the small group of readers familiar with actual spending on the program, since the correct number is $76 billion for 2013. (The NYT did subsequently correct this mistake.)
The point is not just to mock the NYT for what are in fact egregious errors. (Sorry, missing the size of Italy’s debt by three orders of magnitude is pretty bad.) The point is why on earth is it a standard in budget reporting to express budget figures in numbers that are apparently meaningless even to the people who write them, when they could very easily be expressed as percentages that would be meaningful to the vast majority of readers.
Almost all NYT readers would understand that the food stamp program in 2013 is roughly 1.8 percent of the budget. Almost none know what it means to spend $76 billion on the program. If the point is to inform readers, then the paper would express the number in percentage terms, end of story. The only reason to express numbers as dollar (or euro) amounts is to mindlessly follow a fraternity ritual. (This is what budget reporters do.)
It is understandable that people who want to promote confusion about the budget — for example convincing people that all their tax dollars went to food stamps — would support the current method of budget reporting. It is impossible to understand why people who want a well-informed public would not push for changing this archaic and absurd practice.
Addendum:
The NYT corrected the number around 10:00 P.M. on the 11th.
The folks in Italy must be pretty happy. After years of being forced to worry about deficits the NYT told readers:
“Faced with record unemployment and a public debt of more than €2 billion, or $2.6 billion, the grand coalition was already under pressure for the slow pace of its reforms.”
That would be great news since the NYT’s numbers imply that Italy’s debt is just over 0.1 percent of GDP. According to the IMF, Italy’s debt is more than 2.0 trillion euros, more than 130 percent of GDP.
Of course the numbers in the NYT are a mistake. It wrote “billions” when it meant “trillions.” This sort of thing can happen, but it does raise the question of why the NYT thought it was clever to write “trillions” rather than write 130 percent of GDP. While a reporter or editor should have recognized the typo in writing billions, it is almost inconceivable that someone would not have recognized the typo if the paper had written that Italy had a debt of 0.1 percent of GDP.
It is worth noting that this is not the first time that a mistake like this has made its way into print or at least cyberspace in the NYT. Just a few weeks ago a NYT article told readers that food stamps are a $760 billion program. That might have surprised the small group of readers familiar with actual spending on the program, since the correct number is $76 billion for 2013. (The NYT did subsequently correct this mistake.)
The point is not just to mock the NYT for what are in fact egregious errors. (Sorry, missing the size of Italy’s debt by three orders of magnitude is pretty bad.) The point is why on earth is it a standard in budget reporting to express budget figures in numbers that are apparently meaningless even to the people who write them, when they could very easily be expressed as percentages that would be meaningful to the vast majority of readers.
Almost all NYT readers would understand that the food stamp program in 2013 is roughly 1.8 percent of the budget. Almost none know what it means to spend $76 billion on the program. If the point is to inform readers, then the paper would express the number in percentage terms, end of story. The only reason to express numbers as dollar (or euro) amounts is to mindlessly follow a fraternity ritual. (This is what budget reporters do.)
It is understandable that people who want to promote confusion about the budget — for example convincing people that all their tax dollars went to food stamps — would support the current method of budget reporting. It is impossible to understand why people who want a well-informed public would not push for changing this archaic and absurd practice.
Addendum:
The NYT corrected the number around 10:00 P.M. on the 11th.
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It might have been worth reminding readers of this fact since it seemed that Speaker John Boehner had forgotten it. A NYT article on the Obama administration’s decision to rely largely on individual’s self-reporting of their eligibility for employer provided insurance when awarding subsidies through the health care exchanges includes a quote from Boehner:
“The president’s decision to use the honor system to hand out subsidies, I think, exposes taxpayers to massive fraud and abuse.”
The government relies on small business owners to truthfully report their income for tax purposes. There is vastly more money at stake in the taxes owed by small businesses than the subsidies for people who lack insurance. If Speaker Boehner believes that many people would lie to get an insurance subsidy then he must believe that small businesses cheat the government out of hundreds of billions of dollars a year in taxes.
It might have been worth reminding readers of this fact since it seemed that Speaker John Boehner had forgotten it. A NYT article on the Obama administration’s decision to rely largely on individual’s self-reporting of their eligibility for employer provided insurance when awarding subsidies through the health care exchanges includes a quote from Boehner:
“The president’s decision to use the honor system to hand out subsidies, I think, exposes taxpayers to massive fraud and abuse.”
The government relies on small business owners to truthfully report their income for tax purposes. There is vastly more money at stake in the taxes owed by small businesses than the subsidies for people who lack insurance. If Speaker Boehner believes that many people would lie to get an insurance subsidy then he must believe that small businesses cheat the government out of hundreds of billions of dollars a year in taxes.
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Everyone knows that the Wall Street Journal has a strong pro-rich perspective in its opinion pages. Its guiding philosophy is a dollar in a pocket of a poor or a middle class person is a dollar that could be in the pockets of the rich. But its news section is mostly reasonably fair.
That may no longer be the case. The financial industry is on the warpath against a financial transaction tax in Europe. The proposed tax would be 0.1 percent on stock trades (one fifth the size of the tax that has been in place for centuries in the United Kingdom) and 0.01 percent on transfers on most of options, futures, and most other derivatives.
Since the price of trading has plummeted over the last four decades due to developments in computer technology, this tax would just raise trading costs back to where they were ten or twenty years ago. That would not seem to be too horrible on its face, since Europe certainly had a well-developed and active capital market in 2000 or even 1990.
But the financial industry needs to scare people in order to discourage Europe from going the route of the tax. So it put out a study that calculated the cost of the tax to some active traders on the assumption that no one changes their behavior in response to the tax. This is of course absurd since part of the point of the tax is to reduce trading by raising the cost. The frequent flipping of assets provides no net gain to the economy, even if it can provide some individuals and corporations with large profits.
In reality, frequent traders would cut back their trading a huge amount if the cost were to rise as a result of this tax. There is considerable research on the response of trading to changes in costs or elasticity. Most find that trading is relatively elastic. In fact some research, such as this analysis published by CATO, found that the elasticity of trading for many types of assets is greater than 1. This means that the percentage reduction in the volume of trading is larger than the percentage increase in costs.
In that case when the cost of trading goes up, as a result of a financial transactions tax or for any other reason, people will on average actually spend less on trading. They will cut back their trading by enough so that even though they pay more on each trade, they spend less in total on trading. This is a simple story. If the cost per trade doubles, but people reduce their trading by 60 percent, then they will spend less money on trading.
The financial industry’s study completely ignored both the most basic principle in economics (demand responds to changes in price) and the extensive research on the elasticity of trading. It assumed that no one reduces their trading in response to the tax. This would be like calculating the cost of a tax on e-mails, under the assumption that the volume of e-mail messages would not change.
It is understandable that the financial industry would try to push out a study like this. After all, a financial transactions tax is money right out of their pockets. They will spend a fortune lobbying, buying politicians or doing whatever is necessary to keep such taxes from going into effect.
But the key question is why would the Wall Street Journal write up such an obvious joke as a serious study in its news section? That’s the question millions are asking.
Everyone knows that the Wall Street Journal has a strong pro-rich perspective in its opinion pages. Its guiding philosophy is a dollar in a pocket of a poor or a middle class person is a dollar that could be in the pockets of the rich. But its news section is mostly reasonably fair.
That may no longer be the case. The financial industry is on the warpath against a financial transaction tax in Europe. The proposed tax would be 0.1 percent on stock trades (one fifth the size of the tax that has been in place for centuries in the United Kingdom) and 0.01 percent on transfers on most of options, futures, and most other derivatives.
Since the price of trading has plummeted over the last four decades due to developments in computer technology, this tax would just raise trading costs back to where they were ten or twenty years ago. That would not seem to be too horrible on its face, since Europe certainly had a well-developed and active capital market in 2000 or even 1990.
But the financial industry needs to scare people in order to discourage Europe from going the route of the tax. So it put out a study that calculated the cost of the tax to some active traders on the assumption that no one changes their behavior in response to the tax. This is of course absurd since part of the point of the tax is to reduce trading by raising the cost. The frequent flipping of assets provides no net gain to the economy, even if it can provide some individuals and corporations with large profits.
In reality, frequent traders would cut back their trading a huge amount if the cost were to rise as a result of this tax. There is considerable research on the response of trading to changes in costs or elasticity. Most find that trading is relatively elastic. In fact some research, such as this analysis published by CATO, found that the elasticity of trading for many types of assets is greater than 1. This means that the percentage reduction in the volume of trading is larger than the percentage increase in costs.
In that case when the cost of trading goes up, as a result of a financial transactions tax or for any other reason, people will on average actually spend less on trading. They will cut back their trading by enough so that even though they pay more on each trade, they spend less in total on trading. This is a simple story. If the cost per trade doubles, but people reduce their trading by 60 percent, then they will spend less money on trading.
The financial industry’s study completely ignored both the most basic principle in economics (demand responds to changes in price) and the extensive research on the elasticity of trading. It assumed that no one reduces their trading in response to the tax. This would be like calculating the cost of a tax on e-mails, under the assumption that the volume of e-mail messages would not change.
It is understandable that the financial industry would try to push out a study like this. After all, a financial transactions tax is money right out of their pockets. They will spend a fortune lobbying, buying politicians or doing whatever is necessary to keep such taxes from going into effect.
But the key question is why would the Wall Street Journal write up such an obvious joke as a serious study in its news section? That’s the question millions are asking.
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A NYT blog post repeatedly referred to lower projections of a deficit as “improvements.” The reductions in the deficit imply slower growth and fewer jobs. That may lead many to question the extent to which this development can be termed an “improvement.”
While the piece did include statements from an Obama administration official boasting about the economy’s growth it would have been appropriate to include the views of an analyst who would have reminded readers that the economy is not even growing at its trend pace. This means that the size of the annual output gap of almost $1 trillion (the amount of wasted potential output) is growing rather than shrinking.
A NYT blog post repeatedly referred to lower projections of a deficit as “improvements.” The reductions in the deficit imply slower growth and fewer jobs. That may lead many to question the extent to which this development can be termed an “improvement.”
While the piece did include statements from an Obama administration official boasting about the economy’s growth it would have been appropriate to include the views of an analyst who would have reminded readers that the economy is not even growing at its trend pace. This means that the size of the annual output gap of almost $1 trillion (the amount of wasted potential output) is growing rather than shrinking.
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No, I am not kidding. The NYT reported that Hatch is introducing a bill that would allow states to turn over the management and responsibility for pension plans to insurance companies. The NYT presented this sort of switch as good news for both workers and taxpayers, noting regulatory requirements for insurers:
“Perhaps more important, state insurance regulators provide a kind of oversight unknown in the world of public pensions. They require insurance companies to meet capital requirements, taking into account the riskiness of their investments. Insurers are also required to hold more assets than they estimate they will need, and if they burn through their surpluses, state regulators can close them down.’
It would have been helpful to include the views of someone old enough to remember AIG’s collapse. The pattern of regulation of insurance varies hugely across states. In many cases the quality of regulation would not provide taxpayers and workers with much confidence. Furthermore, in the event of a systemic crisis that sank insurers responsible for public pensions, like what we saw in 2008, it is virtually inconceivable that governments would not feel the need to step in and back up their workers’ pensions.
It is also worth noting that, contrary to the position implied in this article, the vast majority of state and local pensions are well-funded and will be able to pay full benefits with few changes going forward. The main reason for reported shortfalls was the sharp downturn in the stock market at the start of the crisis. Since most pensions use averaging in assessing their asset positions, the depressed market of the crisis years is still reflected in their current reporting, but that will change in the next couple of years if the market stays near current levels. At that point, their funding situation will be appear considerably stronger.
Note: Orrin Hatch’s name has been corrected in the title.
No, I am not kidding. The NYT reported that Hatch is introducing a bill that would allow states to turn over the management and responsibility for pension plans to insurance companies. The NYT presented this sort of switch as good news for both workers and taxpayers, noting regulatory requirements for insurers:
“Perhaps more important, state insurance regulators provide a kind of oversight unknown in the world of public pensions. They require insurance companies to meet capital requirements, taking into account the riskiness of their investments. Insurers are also required to hold more assets than they estimate they will need, and if they burn through their surpluses, state regulators can close them down.’
It would have been helpful to include the views of someone old enough to remember AIG’s collapse. The pattern of regulation of insurance varies hugely across states. In many cases the quality of regulation would not provide taxpayers and workers with much confidence. Furthermore, in the event of a systemic crisis that sank insurers responsible for public pensions, like what we saw in 2008, it is virtually inconceivable that governments would not feel the need to step in and back up their workers’ pensions.
It is also worth noting that, contrary to the position implied in this article, the vast majority of state and local pensions are well-funded and will be able to pay full benefits with few changes going forward. The main reason for reported shortfalls was the sharp downturn in the stock market at the start of the crisis. Since most pensions use averaging in assessing their asset positions, the depressed market of the crisis years is still reflected in their current reporting, but that will change in the next couple of years if the market stays near current levels. At that point, their funding situation will be appear considerably stronger.
Note: Orrin Hatch’s name has been corrected in the title.
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Nope, that is not a typo. According to a study (Table 16) cited in an NYT article on a possible trade deal between the United States and the European Union, GDP in the United States could be 0.39 percentage points higher in 2027 as a result of a trade deal. Of course this is their optimistic scenario in which most of the barriers they do not like are eliminated. In their less optimistic case, the gains would be just 0.21 percentage points by 2027, implying an increase in the annual growth rate over this period of 0.015 percentage points. The total gain in this case would be approximately equal to one month of normal growth.
Even these gains depend on the model’s assumption that both the EU and U.S. sustain full employment, or at least that the level of employment is not negatively affected by jobs displaced as a result of increased trade. The model also does not include any negative impacts from increasing protectionist barriers like patents and copyrights. If the final deal ends up including stronger protections in these areas, then the resulting increase in costs to consumers can easily offset whatever gains result from reduced barriers in other sectors.
It is unlikely that many readers will understand the limited potential benefits of a trade deal. The NYT told readers:
“a comprehensive trade and investment deal could increase the European economy by about 119 billion euros, or $150 billion a year, and the American economy by an annual $122 billion.
“Households are expected to benefit, too. An average family of four in the European Union might see an additional 545 euros in disposable income, the study found. An American family might benefit by about $841.”
It did not mention that this was the study’s most optimistic scenario, nor that this referred to 2027 incomes. It is unlikely that many readers have a clear expectation of income levels in 2027. Readers were also probably misled by the next line:
“‘This is a once-in-a-generation prize, and we are determined to seize it, ‘David Cameron, the British prime minister, said last month at a meeting with President Obama and other leaders at the Group of 8 summit meeting in Northern Ireland.”
Few readers probably realized that Cameron was speaking of an increment to growth that would be too small for anyone to recognize.
Nope, that is not a typo. According to a study (Table 16) cited in an NYT article on a possible trade deal between the United States and the European Union, GDP in the United States could be 0.39 percentage points higher in 2027 as a result of a trade deal. Of course this is their optimistic scenario in which most of the barriers they do not like are eliminated. In their less optimistic case, the gains would be just 0.21 percentage points by 2027, implying an increase in the annual growth rate over this period of 0.015 percentage points. The total gain in this case would be approximately equal to one month of normal growth.
Even these gains depend on the model’s assumption that both the EU and U.S. sustain full employment, or at least that the level of employment is not negatively affected by jobs displaced as a result of increased trade. The model also does not include any negative impacts from increasing protectionist barriers like patents and copyrights. If the final deal ends up including stronger protections in these areas, then the resulting increase in costs to consumers can easily offset whatever gains result from reduced barriers in other sectors.
It is unlikely that many readers will understand the limited potential benefits of a trade deal. The NYT told readers:
“a comprehensive trade and investment deal could increase the European economy by about 119 billion euros, or $150 billion a year, and the American economy by an annual $122 billion.
“Households are expected to benefit, too. An average family of four in the European Union might see an additional 545 euros in disposable income, the study found. An American family might benefit by about $841.”
It did not mention that this was the study’s most optimistic scenario, nor that this referred to 2027 incomes. It is unlikely that many readers have a clear expectation of income levels in 2027. Readers were also probably misled by the next line:
“‘This is a once-in-a-generation prize, and we are determined to seize it, ‘David Cameron, the British prime minister, said last month at a meeting with President Obama and other leaders at the Group of 8 summit meeting in Northern Ireland.”
Few readers probably realized that Cameron was speaking of an increment to growth that would be too small for anyone to recognize.
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Paul Krugman, among many others, has been denouncing the decision by Federal Reserve Board Chairman Ben Bernanke to discuss plans for backing away from the current pace of quantitative easing. While I agree completely with his logic, I am bit less concerned about the downside than he seems to be.
Krugman is certainly right that there is no reason to be talking of tapering right now. We are close to 9 million jobs below the trend level of employment. By the Congressional Budget Office’s estimate we are still 6 percentage points below potential GDP, which corresponds to $1 trillion a year in lost output. Furthermore, inflation is low and falling. We would better off if it were somewhat higher since this would lower the real interest rate and reduce debt burdens. In this context, it is difficult to see any upside to talk of tapering.
And Krugman is also right about the market’s strong reaction. The interest rate on both 10-year Treasury bonds and 30-year mortgages is up by more than a percentage point from the pre-taper talk levels. That is not helpful for the economy right now.
However, I am also not convinced that it is all that harmful. To my mind, the greatest benefit of low interest rates was the refinancing boom that it allowed. This freed up tens of billions of dollars for consumption. The refinancing process itself also generates economic activity in the form of legal fees, payments for appraisals and other costs (i.e. waste) associated with the refinancing process. Refinancing will quickly slow to a trickle with mortgage rates now over 4.5 percent.
But refinancing was always a self-limiting process. At some point everyone who could profitably refinance a mortgage at 3.5 percent will have done so. We surely must have been reaching this point so that refinancing would have slowed in the second half of 2013 and 2014 with or without the Fed taper.
Higher interest rates will also dampen the rise in housing prices. That is not a bad thing in my view. House prices are back at their trend levels in most parts of the country. In many areas they were growing at ridiculous rates (30-50 percent annually). If that had continued, we would have seen many local bubbles develop. If the rise in rates slows these price increases, that is good news in my book. A new bubble in Las Vegas or Phoenix would not move the national economy, but no one in their right mind could want to see another group of homeowners in these cities caught up again in a bubble, paying 20-30 percent above the trend price for their home.
Perhaps the biggest negative effect of the Fed taper will be its impact on the value of the dollar. The dollar has risen around 5 percent from pre-taper levels against other major currencies. That will make U.S. goods less competitive and increase the trade deficit. Since trade is the fundamental imbalance in the U.S. economy right now, this is exactly the wrong way to go.
Long and short, this was a bad move by the Fed and pushes the economy in the wrong direction, but the impact will probably be limited. Consider the taper a mistake by Bernanke, but I wouldn’t suggest he jump off a bridge over this one.
Paul Krugman, among many others, has been denouncing the decision by Federal Reserve Board Chairman Ben Bernanke to discuss plans for backing away from the current pace of quantitative easing. While I agree completely with his logic, I am bit less concerned about the downside than he seems to be.
Krugman is certainly right that there is no reason to be talking of tapering right now. We are close to 9 million jobs below the trend level of employment. By the Congressional Budget Office’s estimate we are still 6 percentage points below potential GDP, which corresponds to $1 trillion a year in lost output. Furthermore, inflation is low and falling. We would better off if it were somewhat higher since this would lower the real interest rate and reduce debt burdens. In this context, it is difficult to see any upside to talk of tapering.
And Krugman is also right about the market’s strong reaction. The interest rate on both 10-year Treasury bonds and 30-year mortgages is up by more than a percentage point from the pre-taper talk levels. That is not helpful for the economy right now.
However, I am also not convinced that it is all that harmful. To my mind, the greatest benefit of low interest rates was the refinancing boom that it allowed. This freed up tens of billions of dollars for consumption. The refinancing process itself also generates economic activity in the form of legal fees, payments for appraisals and other costs (i.e. waste) associated with the refinancing process. Refinancing will quickly slow to a trickle with mortgage rates now over 4.5 percent.
But refinancing was always a self-limiting process. At some point everyone who could profitably refinance a mortgage at 3.5 percent will have done so. We surely must have been reaching this point so that refinancing would have slowed in the second half of 2013 and 2014 with or without the Fed taper.
Higher interest rates will also dampen the rise in housing prices. That is not a bad thing in my view. House prices are back at their trend levels in most parts of the country. In many areas they were growing at ridiculous rates (30-50 percent annually). If that had continued, we would have seen many local bubbles develop. If the rise in rates slows these price increases, that is good news in my book. A new bubble in Las Vegas or Phoenix would not move the national economy, but no one in their right mind could want to see another group of homeowners in these cities caught up again in a bubble, paying 20-30 percent above the trend price for their home.
Perhaps the biggest negative effect of the Fed taper will be its impact on the value of the dollar. The dollar has risen around 5 percent from pre-taper levels against other major currencies. That will make U.S. goods less competitive and increase the trade deficit. Since trade is the fundamental imbalance in the U.S. economy right now, this is exactly the wrong way to go.
Long and short, this was a bad move by the Fed and pushes the economy in the wrong direction, but the impact will probably be limited. Consider the taper a mistake by Bernanke, but I wouldn’t suggest he jump off a bridge over this one.
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I should be happy. Robert Samuelson has a good column that centers on the “No Vacation Nation Revisited” report that CEPR published a couple of months ago.
Samuelson picks up the report’s main points. There has been a huge divergence in work hours between the United States and other wealthy countries over the last three decades. In other wealthy countries all workers are guaranteed 4 or more weeks a year of paid vacation. In the United States there are no legal guarantees of paid vacation or leave. Better paid workers typically have paid vacation and holidays, but part-time and lower paid workers often have no paid leave. The result is that Americans work on average about 20 percent more hours a year than do workers in several other wealthy countries.
It was very nice to see Samuelson pick up on these points. But then he concluded:
“We could follow other advanced societies and legislate minimum vacations. This is a debate worth having — sometime in the future but not now. We need to remember the obvious: Paid leaves mean compensating people for doing nothing. There are consequences. The most likely are less hiring (because higher labor costs deter employers from adding workers) or eroding wages (because employers offset the extra costs by squeezing wages). It’s doubtful that mandated vacations would create many, if any, extra jobs. Europe has longer vacations — and higher unemployment. One is not the solution for the other.”
Samuelson is exactly right that there is trade-off in the sense that we can’t think that paid time off doesn’t come largely at the expense of lower wages. However, it does not follow that now is a bad time to be debating such policies.
If we remember the economy’s basic problem right now is a lack of demand, then this would be an excellent time to consider such policies. This is exactly the time when reduced hours actually are likely to translate fairly directly into more employment. It is when the economy is fully employed that reduced hours are likely to create issues with inflation.
And the idea of raising employer costs should hardly be a major matter of concern when profit margins are at record levels. We absolutely want to raise employer costs — shifting income from corporate profits to wage earners. We can debate how much impact paid leave would have in increasing workers’ compensation, but insofar as it does, that’s a positive and not a negative.
The comparison of unemployment rates with Europe is silly. The United States actually did not have a lower unemployment rate going into the downturn. And it certainly does not have a lower unemployment rate now than several of the slackard countries like Germany and Austria, which have unemployment rates of 5.3 percent 4.7 percent, respectively.
The main reason that Europe as a whole has a higher unemployment rate than the United States is because the prices in the peripheral European countries are hugely out of line with prices in the core countries. As long as these countries stay in the euro, this price gap can only be corrected by higher inflation in the core countries or massive unemployment squeezing down wages in the peripheral countries. The European Central Bank (ECB) has opted for the latter route.
It is ridiculous to blame the high unemployment caused by the ECB on Europe’s policies on paid leave. It is especially odd that Samuelson would attempt to do so since he has written on exactly this topic.
So great to see Samuelson picking up a CEPR paper and a very important issue, but his take on implications could use a bit more work when he’s back from vacation.
I should be happy. Robert Samuelson has a good column that centers on the “No Vacation Nation Revisited” report that CEPR published a couple of months ago.
Samuelson picks up the report’s main points. There has been a huge divergence in work hours between the United States and other wealthy countries over the last three decades. In other wealthy countries all workers are guaranteed 4 or more weeks a year of paid vacation. In the United States there are no legal guarantees of paid vacation or leave. Better paid workers typically have paid vacation and holidays, but part-time and lower paid workers often have no paid leave. The result is that Americans work on average about 20 percent more hours a year than do workers in several other wealthy countries.
It was very nice to see Samuelson pick up on these points. But then he concluded:
“We could follow other advanced societies and legislate minimum vacations. This is a debate worth having — sometime in the future but not now. We need to remember the obvious: Paid leaves mean compensating people for doing nothing. There are consequences. The most likely are less hiring (because higher labor costs deter employers from adding workers) or eroding wages (because employers offset the extra costs by squeezing wages). It’s doubtful that mandated vacations would create many, if any, extra jobs. Europe has longer vacations — and higher unemployment. One is not the solution for the other.”
Samuelson is exactly right that there is trade-off in the sense that we can’t think that paid time off doesn’t come largely at the expense of lower wages. However, it does not follow that now is a bad time to be debating such policies.
If we remember the economy’s basic problem right now is a lack of demand, then this would be an excellent time to consider such policies. This is exactly the time when reduced hours actually are likely to translate fairly directly into more employment. It is when the economy is fully employed that reduced hours are likely to create issues with inflation.
And the idea of raising employer costs should hardly be a major matter of concern when profit margins are at record levels. We absolutely want to raise employer costs — shifting income from corporate profits to wage earners. We can debate how much impact paid leave would have in increasing workers’ compensation, but insofar as it does, that’s a positive and not a negative.
The comparison of unemployment rates with Europe is silly. The United States actually did not have a lower unemployment rate going into the downturn. And it certainly does not have a lower unemployment rate now than several of the slackard countries like Germany and Austria, which have unemployment rates of 5.3 percent 4.7 percent, respectively.
The main reason that Europe as a whole has a higher unemployment rate than the United States is because the prices in the peripheral European countries are hugely out of line with prices in the core countries. As long as these countries stay in the euro, this price gap can only be corrected by higher inflation in the core countries or massive unemployment squeezing down wages in the peripheral countries. The European Central Bank (ECB) has opted for the latter route.
It is ridiculous to blame the high unemployment caused by the ECB on Europe’s policies on paid leave. It is especially odd that Samuelson would attempt to do so since he has written on exactly this topic.
So great to see Samuelson picking up a CEPR paper and a very important issue, but his take on implications could use a bit more work when he’s back from vacation.
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