Harold Meyerson has an interesting column warning of conditions that are likely to be in the Trans-Pacific Partnership. However it is misleading in one important respect.
At one point the article notes efforts by Senator Sherrod Brown to require rules that will the United States to retaliate against currency “manipulators,” countries that deliberately prop up the value of the dollar against their own currency in order to increase their trade surplus. This is misleading because the United States already has this authority (see this piece, for example) and under almost any conceivable set of circumstances will possess ample means to force down the value of the dollar relative to other currencies.
The reason that the United States runs an over-valued currency, placing U.S. goods and services at a competitive disadvantage, is that powerful interest groups profit from having an over-valued currency. Retailers like Walmart have spent large amounts of money setting up low-cost supply chains in China and other developing countries. This is an important source of their advantage over smaller competitors. They are not anxious to see this advantage eroded by a fall in the value of the dollar.
Similarly, large manufacturers like GE have much of their production overseas. These companies also do not want to see their profits eroded by a fall in the value of the dollar. Major financial companies like Goldman Sachs and JP Morgan also tend to favor a high dollar since it means that their money goes further elsewhere in the world and it minimizes the risk of inflation in the United States.
These and other powerful domestic interests are the main reason that the United States does not take steps to reduce the value of the dollar and bring the trade deficit closer to balance. It is misleading to imply that the problem is trade agreements that prevent the Obama administration from acting.
Note — “rise” was changed to “fall” in 3rd paragraph, thanks David H.
Harold Meyerson has an interesting column warning of conditions that are likely to be in the Trans-Pacific Partnership. However it is misleading in one important respect.
At one point the article notes efforts by Senator Sherrod Brown to require rules that will the United States to retaliate against currency “manipulators,” countries that deliberately prop up the value of the dollar against their own currency in order to increase their trade surplus. This is misleading because the United States already has this authority (see this piece, for example) and under almost any conceivable set of circumstances will possess ample means to force down the value of the dollar relative to other currencies.
The reason that the United States runs an over-valued currency, placing U.S. goods and services at a competitive disadvantage, is that powerful interest groups profit from having an over-valued currency. Retailers like Walmart have spent large amounts of money setting up low-cost supply chains in China and other developing countries. This is an important source of their advantage over smaller competitors. They are not anxious to see this advantage eroded by a fall in the value of the dollar.
Similarly, large manufacturers like GE have much of their production overseas. These companies also do not want to see their profits eroded by a fall in the value of the dollar. Major financial companies like Goldman Sachs and JP Morgan also tend to favor a high dollar since it means that their money goes further elsewhere in the world and it minimizes the risk of inflation in the United States.
These and other powerful domestic interests are the main reason that the United States does not take steps to reduce the value of the dollar and bring the trade deficit closer to balance. It is misleading to imply that the problem is trade agreements that prevent the Obama administration from acting.
Note — “rise” was changed to “fall” in 3rd paragraph, thanks David H.
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Clive Crook told readers in a Bloomberg column that:
“It’s silly to ask whether high public debt causes lower growth or vice versa as though it must be one or the other. Almost certainly, both are true. This reinforces the case for fiscal consolidation as the recovery strengthens — not just to restore fiscal room for maneuver but also to support longer-term growth.”
Both parts of this statement are close to ridiculous. How do we know that higher debt everywhere and always leads to slower growth; because Clive Crook asserts it? What is the logic? In the prior paragraph Crook gave the traditional crowding out story, with high interest rates crowding out investment and other spending, but in the sort of severe slump that we are now seeing crowding out is not an issue. So how do we know that higher debt will slow growth?
Furthermore, Crook apparently has never heard of a balance sheet. If there is a curse of debt, then all countries (the United States in particular) have an enormous amount of assets (e.g. land, fishing rights, carbon emission permits) that can be sold to reduce debt. Since he claims that debt has a negative impact on growth it would be possible to avoid this negative impact through a sale of assets that would reduce the debt.
But the real absurdity is Crook’s blanket assertion that “it is silly to ask.” Let’s go a step further, it is unbelievably silly not just to ask, but to try to quantify. Suppose that debt does indeed have a negative impact on growth and for some bizarre reason we can never sell assets. In order for this to be relevant to policy we have to know how much.
The original Excel spreadsheet error cliff implied a growth penalty of more than 1.0 percentage point for having debt-to-GDP ratios in excess of 90 percent. That would be a powerful argument against allowing our debt to rise above this level. But now that the Reinhart-Rogoff debt cliff has been destroyed by accurate arithmetic, we don’t know the size of the growth penalty from high debt, even assuming that it is not zero.
Suppose that the penalty is 0.01 percentage point. Would this be a strong argument against policies that might quickly employ millions of workers? Probably not in most people’s books, but hey, serious people like Clive Crook says it’s silly to even ask such questions.
Note: “Crook” is now correctly spelled.
Clive Crook told readers in a Bloomberg column that:
“It’s silly to ask whether high public debt causes lower growth or vice versa as though it must be one or the other. Almost certainly, both are true. This reinforces the case for fiscal consolidation as the recovery strengthens — not just to restore fiscal room for maneuver but also to support longer-term growth.”
Both parts of this statement are close to ridiculous. How do we know that higher debt everywhere and always leads to slower growth; because Clive Crook asserts it? What is the logic? In the prior paragraph Crook gave the traditional crowding out story, with high interest rates crowding out investment and other spending, but in the sort of severe slump that we are now seeing crowding out is not an issue. So how do we know that higher debt will slow growth?
Furthermore, Crook apparently has never heard of a balance sheet. If there is a curse of debt, then all countries (the United States in particular) have an enormous amount of assets (e.g. land, fishing rights, carbon emission permits) that can be sold to reduce debt. Since he claims that debt has a negative impact on growth it would be possible to avoid this negative impact through a sale of assets that would reduce the debt.
But the real absurdity is Crook’s blanket assertion that “it is silly to ask.” Let’s go a step further, it is unbelievably silly not just to ask, but to try to quantify. Suppose that debt does indeed have a negative impact on growth and for some bizarre reason we can never sell assets. In order for this to be relevant to policy we have to know how much.
The original Excel spreadsheet error cliff implied a growth penalty of more than 1.0 percentage point for having debt-to-GDP ratios in excess of 90 percent. That would be a powerful argument against allowing our debt to rise above this level. But now that the Reinhart-Rogoff debt cliff has been destroyed by accurate arithmetic, we don’t know the size of the growth penalty from high debt, even assuming that it is not zero.
Suppose that the penalty is 0.01 percentage point. Would this be a strong argument against policies that might quickly employ millions of workers? Probably not in most people’s books, but hey, serious people like Clive Crook says it’s silly to even ask such questions.
Note: “Crook” is now correctly spelled.
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Come on folks, know what you are reporting. A NYT headline telling readers, “U.S. manufacturing gauge falls to June 2009 level,” makes no sense. The index, the Institute for Supply Management index of manufacturing activity, shows changes in manufacturing, not levels. This means that the comparison to June 2009 is at best misleading.
The June measure came after many months of severe contraction that was gradually coming to an end. The April reading follows more than three years where the index was generally showing rising levels of output. This hardly puts the manufacturing sector in the same position as it was in June of 2009, as many readers might be led to believe.
Come on folks, know what you are reporting. A NYT headline telling readers, “U.S. manufacturing gauge falls to June 2009 level,” makes no sense. The index, the Institute for Supply Management index of manufacturing activity, shows changes in manufacturing, not levels. This means that the comparison to June 2009 is at best misleading.
The June measure came after many months of severe contraction that was gradually coming to an end. The April reading follows more than three years where the index was generally showing rising levels of output. This hardly puts the manufacturing sector in the same position as it was in June of 2009, as many readers might be led to believe.
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Congress is debating whether to cut the Food Stamp program, the government’s main nutrition program for low-income families. The coverage of this debate is a great example of “fraternity reporting,” that is reporting that shows you are a member of reporters fraternity but has nothing to do with informing the audience.
We see this by the convention of referring to the $80 billion annual budget for the program (here for example). It is standard practice to refer to the dollar amount being spent on the program, pretending that this is actually providing information to readers.
As a practical matter, almost no one has a clear sense of how much much $80 billion a year is. They don’t have their heads in budget documents. (Yes, I know the Post has a well-educated readership, but it doesn’t matter.) It would mean pretty much the same thing to the vast majority of readers if the number was $8 billion or $800 billion. Often budget numbers appear without even telling the readers the number of years being covered.
If the standard practice was to write the numbers as a percent of total spending it would be providing actual information to a large percentage of its readers. In this case, current spending on Food Stamps is a bit over 2.2 percent of total spending. This figure is bloated by the downturn, since people qualify for benefits based on their income and many of the unemployed or underemployed qualify. (Contrary to Republican claims, President Obama did not ease the eligibility rules for food stamps.) The projections show that spending on food stamps will fall to 1.2 percent of the budget over the next decade as unemployment falls back to more normal levels.
It would be useful if we had a debate based on an informed public, with the country actually having a sense of how much food stamps and other programs cost. However, as long as fraternity reporting is the norm, large segments of the public will continue to believe that half of the budget is going to pay for food stamps.
Congress is debating whether to cut the Food Stamp program, the government’s main nutrition program for low-income families. The coverage of this debate is a great example of “fraternity reporting,” that is reporting that shows you are a member of reporters fraternity but has nothing to do with informing the audience.
We see this by the convention of referring to the $80 billion annual budget for the program (here for example). It is standard practice to refer to the dollar amount being spent on the program, pretending that this is actually providing information to readers.
As a practical matter, almost no one has a clear sense of how much much $80 billion a year is. They don’t have their heads in budget documents. (Yes, I know the Post has a well-educated readership, but it doesn’t matter.) It would mean pretty much the same thing to the vast majority of readers if the number was $8 billion or $800 billion. Often budget numbers appear without even telling the readers the number of years being covered.
If the standard practice was to write the numbers as a percent of total spending it would be providing actual information to a large percentage of its readers. In this case, current spending on Food Stamps is a bit over 2.2 percent of total spending. This figure is bloated by the downturn, since people qualify for benefits based on their income and many of the unemployed or underemployed qualify. (Contrary to Republican claims, President Obama did not ease the eligibility rules for food stamps.) The projections show that spending on food stamps will fall to 1.2 percent of the budget over the next decade as unemployment falls back to more normal levels.
It would be useful if we had a debate based on an informed public, with the country actually having a sense of how much food stamps and other programs cost. However, as long as fraternity reporting is the norm, large segments of the public will continue to believe that half of the budget is going to pay for food stamps.
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Great story in the Washington Post (in the sense of very good news) about the successful trial in India of a cheap vinegar test for cervical cancer. According to the article this cheap and easy to administer test can substantially increase the early detection of this cancer. This test can save the lives of tens of thousands of women in India and elsewhere in the developing world who do not have access to more expensive tests.
An interesting and important sidebar is that it seems that this test was developed with support from the National Institutes of Health and an Indian non-profit. This perhaps should not be surprising, but many advocates of patent supported research insist that people become stupid when they get public funding. The success of this test, which holds the promise of enormous gains in public health, shows again that it is possible to have innovations that do not depend on patent support.
Great story in the Washington Post (in the sense of very good news) about the successful trial in India of a cheap vinegar test for cervical cancer. According to the article this cheap and easy to administer test can substantially increase the early detection of this cancer. This test can save the lives of tens of thousands of women in India and elsewhere in the developing world who do not have access to more expensive tests.
An interesting and important sidebar is that it seems that this test was developed with support from the National Institutes of Health and an Indian non-profit. This perhaps should not be surprising, but many advocates of patent supported research insist that people become stupid when they get public funding. The success of this test, which holds the promise of enormous gains in public health, shows again that it is possible to have innovations that do not depend on patent support.
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Actually he made the claim about the government, telling readers:
“Since World War II, American government has assumed more responsibilities than can reasonably be met. Some are unattainable; others are in conflict. Government is, among other things, supposed to: control the business cycle, combat poverty, cleanse the environment, provide health care, protect the elderly, subsidize college students, aid states and localities. There are more. Most are essentially postwar commitments. As I’ve written before, government becomes almost “suicidal” by pervasively generating unrealistic expectations. The more people depend on it, the more they may be disappointed by it.”
It’s not clear which items on this list are unattainable — cleanse the environment, protect the elderly, aid state and local governments — we’ve done all of these things with a fair amount of success over the last five decades. Other countries provide health care and have done a much better job of combating poverty and supporting colleges students. Samuelson doesn’t present any evidence that people in the United States are less competent than people in Germany, Netherlands, or the Nordic countries. Why should we think we can’t follow their examples?
As far as controlling the business cycle, some of us have been (following Keynes) calling the shots pretty well in terms of the severity of the downturn from the collapse of the bubble, the difficulty of the recovery, and the impact of cuts in government spending. If Samuelson’t point is that Keynesians have been kept from controlling policy, he’s right, but that’s just saying that people who share his view of the economy may not be able to control the business cycle, but they have enough control of the political situation to keep Keynesians from setting policy.
In short, there is not much here. Samuelson has zero evidence that the government can’t carry through the responsibilities people have come to expect from it. Other governments do quite successfully. In fact, Samuelson’s whole framing of the issue is deceptive since we don’t have much choice about government involvement in many areas. What would health insurance look like without the government regulation? Would insurers pick up six figure annual bills for cancer victims if they need not fear the heavy hand of the state?
Just as Apple has been able to expand from being a computer manufacturer to being a cell phone company, and a provider of on-line music and books, there is no obvious reason that the government can’t take on additional responsibilities through time. The serious question is how best to set the role of government in various sectors, not to repeat a line, like something your parents told you, that “government is too big.”
One other point, Samuelson again expresses his admiration for Volcker’s use of a recession to attack inflation. He tells readers:
“The subduing of double-digit inflation triggered a 25-year economic boom. As important, it demonstrated that government could govern. Seemingly intractable problems (in 1980 runaway inflation was the country’s No. 1 problem) could be mastered. Optimism revived.”
There are two data points that make Volcker’s accomplishment look less impressive. Inflation fell everywhere in the world in the early 1980s, including in countries that did not have as severe a downturn as the United States. A major factor was the collapse of world oil prices, which presumably would have happened with or without Volcker’s recession, although the reduction in demand certainly hastened the fall.
The other data point is that the “25-year economic boom” was not quite as impressive as Samuelson might have us believe. Economies generally grow, the issue is the rate of growth. In the years from 1981 to 2007 growth averaged 3.1 percent a year. In the prior 25 years it averaged 3.5 percent. (I took 1981, the prior business cycle peak because it doesn’t make sense to measure growth from a trough which measures the severity of the downturn. That approach would make Volcker’s boom look better if he had engineered a more severe downturn.)
Actually he made the claim about the government, telling readers:
“Since World War II, American government has assumed more responsibilities than can reasonably be met. Some are unattainable; others are in conflict. Government is, among other things, supposed to: control the business cycle, combat poverty, cleanse the environment, provide health care, protect the elderly, subsidize college students, aid states and localities. There are more. Most are essentially postwar commitments. As I’ve written before, government becomes almost “suicidal” by pervasively generating unrealistic expectations. The more people depend on it, the more they may be disappointed by it.”
It’s not clear which items on this list are unattainable — cleanse the environment, protect the elderly, aid state and local governments — we’ve done all of these things with a fair amount of success over the last five decades. Other countries provide health care and have done a much better job of combating poverty and supporting colleges students. Samuelson doesn’t present any evidence that people in the United States are less competent than people in Germany, Netherlands, or the Nordic countries. Why should we think we can’t follow their examples?
As far as controlling the business cycle, some of us have been (following Keynes) calling the shots pretty well in terms of the severity of the downturn from the collapse of the bubble, the difficulty of the recovery, and the impact of cuts in government spending. If Samuelson’t point is that Keynesians have been kept from controlling policy, he’s right, but that’s just saying that people who share his view of the economy may not be able to control the business cycle, but they have enough control of the political situation to keep Keynesians from setting policy.
In short, there is not much here. Samuelson has zero evidence that the government can’t carry through the responsibilities people have come to expect from it. Other governments do quite successfully. In fact, Samuelson’s whole framing of the issue is deceptive since we don’t have much choice about government involvement in many areas. What would health insurance look like without the government regulation? Would insurers pick up six figure annual bills for cancer victims if they need not fear the heavy hand of the state?
Just as Apple has been able to expand from being a computer manufacturer to being a cell phone company, and a provider of on-line music and books, there is no obvious reason that the government can’t take on additional responsibilities through time. The serious question is how best to set the role of government in various sectors, not to repeat a line, like something your parents told you, that “government is too big.”
One other point, Samuelson again expresses his admiration for Volcker’s use of a recession to attack inflation. He tells readers:
“The subduing of double-digit inflation triggered a 25-year economic boom. As important, it demonstrated that government could govern. Seemingly intractable problems (in 1980 runaway inflation was the country’s No. 1 problem) could be mastered. Optimism revived.”
There are two data points that make Volcker’s accomplishment look less impressive. Inflation fell everywhere in the world in the early 1980s, including in countries that did not have as severe a downturn as the United States. A major factor was the collapse of world oil prices, which presumably would have happened with or without Volcker’s recession, although the reduction in demand certainly hastened the fall.
The other data point is that the “25-year economic boom” was not quite as impressive as Samuelson might have us believe. Economies generally grow, the issue is the rate of growth. In the years from 1981 to 2007 growth averaged 3.1 percent a year. In the prior 25 years it averaged 3.5 percent. (I took 1981, the prior business cycle peak because it doesn’t make sense to measure growth from a trough which measures the severity of the downturn. That approach would make Volcker’s boom look better if he had engineered a more severe downturn.)
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It looks like more trouble with Harvard economists (e.g. Reinhart-Rogoff). It seems Larry Summers, who was Treasury Secretary in the last two years of the Clinton administration, is still unaware of the stock bubble that propelled growth in those years.
In a Post column today he tells readers:
“As a consequence of policy steps in 1990, 1993 and 1997 [deficit reduction measures], it was possible by 2000 for the Treasury to retire federal debt. Deficit reduction and the associated reduction in capital costs and increase in investment were important contributors to the nation’s strong economic performance during the 1990s, when productivity growth soared and unemployment fell below 4 percent. We enjoyed a virtuous circle in which reduced deficits led to lower capital costs and increased confidence, which led to more rapid growth, which further reduced deficits.”
Of course the reason that the country was repaying debt was that a $10 trillion stock bubble led to an investment boom (much of it in junk dot.com investment) and a much larger consumption boom through the stock wealth effect. This bubble fueled the strong growth at the end of the 1990s.
While the growth and resulting low unemployment rate were great news, bubbles are inherently unsustainable. This bubble burst beginning in 2000 and led to the recession of 2001. It is difficult to recover from a recession caused by a bursting bubble. The economy did not begin to create jobs following the 2001 recession until September of 2003. It did not make up the jobs lost in the downturn until January of 2005. Until the current downturn this was the longest period without job growth since the Great Depression.
The demand from the stock bubble was necessary to support the economy as a result of large trade deficit the country was running at the time. Robert Rubin, Larry Summers’ predecessor as Treasury Secretary, pushed a strong dollar policy. He put force behind this policy with his control of the IMF’s bailout from the East Asian financial crisis. The sharp run-up in the value of the dollar over these years made U.S. goods uncompetitive in the world economy leading to a sharp rise in the trade deficit. The deficit eventually peaked at 6.0 percent of GDP in 2005. The demand from the stock bubble and later the housing bubble were needed to offset the demand lost due to the trade deficit.
It is remarkable that Summers does not seem to be aware of this history, but I guess economics at Harvard is different from economics elsewhere in the world.
It looks like more trouble with Harvard economists (e.g. Reinhart-Rogoff). It seems Larry Summers, who was Treasury Secretary in the last two years of the Clinton administration, is still unaware of the stock bubble that propelled growth in those years.
In a Post column today he tells readers:
“As a consequence of policy steps in 1990, 1993 and 1997 [deficit reduction measures], it was possible by 2000 for the Treasury to retire federal debt. Deficit reduction and the associated reduction in capital costs and increase in investment were important contributors to the nation’s strong economic performance during the 1990s, when productivity growth soared and unemployment fell below 4 percent. We enjoyed a virtuous circle in which reduced deficits led to lower capital costs and increased confidence, which led to more rapid growth, which further reduced deficits.”
Of course the reason that the country was repaying debt was that a $10 trillion stock bubble led to an investment boom (much of it in junk dot.com investment) and a much larger consumption boom through the stock wealth effect. This bubble fueled the strong growth at the end of the 1990s.
While the growth and resulting low unemployment rate were great news, bubbles are inherently unsustainable. This bubble burst beginning in 2000 and led to the recession of 2001. It is difficult to recover from a recession caused by a bursting bubble. The economy did not begin to create jobs following the 2001 recession until September of 2003. It did not make up the jobs lost in the downturn until January of 2005. Until the current downturn this was the longest period without job growth since the Great Depression.
The demand from the stock bubble was necessary to support the economy as a result of large trade deficit the country was running at the time. Robert Rubin, Larry Summers’ predecessor as Treasury Secretary, pushed a strong dollar policy. He put force behind this policy with his control of the IMF’s bailout from the East Asian financial crisis. The sharp run-up in the value of the dollar over these years made U.S. goods uncompetitive in the world economy leading to a sharp rise in the trade deficit. The deficit eventually peaked at 6.0 percent of GDP in 2005. The demand from the stock bubble and later the housing bubble were needed to offset the demand lost due to the trade deficit.
It is remarkable that Summers does not seem to be aware of this history, but I guess economics at Harvard is different from economics elsewhere in the world.
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Last year the Washington Post was anxious to highlight claims from the military industry that the military side of the sequester would have severe economic consequences especially in the DC area (e.g. here and here). Thus far it doesn’t seem to have worked out that way. Industry groups tend to exaggerate the general impact of policies that will hurt them directly. Unfortunately the Post apparently is not aware of this fact, at least when it comes to defense related industries.
Addendum:
The Post did run its own piece making this point last week.
Last year the Washington Post was anxious to highlight claims from the military industry that the military side of the sequester would have severe economic consequences especially in the DC area (e.g. here and here). Thus far it doesn’t seem to have worked out that way. Industry groups tend to exaggerate the general impact of policies that will hurt them directly. Unfortunately the Post apparently is not aware of this fact, at least when it comes to defense related industries.
Addendum:
The Post did run its own piece making this point last week.
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