This is worth reading (that’s true of almost all of Johnson’s posts). It highlights growing recognition of the too big to fail subsidy enjoyed by large banks and evidence of bipartisan efforts to end it. Just to remind folks that may have forgotten, a bloated financial sector is a drain on the economy in the same way as that huge government department of waste, fraud, and abuse that everyone in Washington is looking for. It also is a source of instability and a major generator of inequality. And, by the way, when it comes to estimating the size of big bank subsidies, CEPR got there first.
This is worth reading (that’s true of almost all of Johnson’s posts). It highlights growing recognition of the too big to fail subsidy enjoyed by large banks and evidence of bipartisan efforts to end it. Just to remind folks that may have forgotten, a bloated financial sector is a drain on the economy in the same way as that huge government department of waste, fraud, and abuse that everyone in Washington is looking for. It also is a source of instability and a major generator of inequality. And, by the way, when it comes to estimating the size of big bank subsidies, CEPR got there first.
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The NYT had a piece discussing views in the Czech Republic on joining the euro. It left the issue very much as a he said, she said, providing little information that could provide readers with a basis for assessing the merits of the policy. While the piece did report the Czech Republic’s unemployment rate as 7.5 percent, indicating it has not escaped the effects of the euro crisis, it would have been a simple matter to compare the change in unemployment from the pre-crisis years.
In the Czech case, the rise was 3.1 percentage points from a 2008 unemployment rate of 4.4 percent. The rise in the euro zone as a whole was 4.1 percentage points to 11.7 percent. The rise in the unemployment rate in the peripheral countries like Spain and Greece, which may provide a more appropriate comparison, was in the double digits. This may suggest that the Czech Republic benefited substantially as a result of the fact that it was not tied to the euro and the European Central Bank.
Addendum:
Okay folks, here’s the data. According to the IMF, the Czech Republic had a per capita GDP in 2007 of $25,300. In Greece it was $28,600 and Spain $30,200. By comparison, per capita GDP in Austria was $38,600 and in Germany it was $34,600. If you think the Czech economy is more like Austria and Germany’s than Greece’s and Spain’s then you better go straighten out the folks who compile the data at the IMF.
The NYT had a piece discussing views in the Czech Republic on joining the euro. It left the issue very much as a he said, she said, providing little information that could provide readers with a basis for assessing the merits of the policy. While the piece did report the Czech Republic’s unemployment rate as 7.5 percent, indicating it has not escaped the effects of the euro crisis, it would have been a simple matter to compare the change in unemployment from the pre-crisis years.
In the Czech case, the rise was 3.1 percentage points from a 2008 unemployment rate of 4.4 percent. The rise in the euro zone as a whole was 4.1 percentage points to 11.7 percent. The rise in the unemployment rate in the peripheral countries like Spain and Greece, which may provide a more appropriate comparison, was in the double digits. This may suggest that the Czech Republic benefited substantially as a result of the fact that it was not tied to the euro and the European Central Bank.
Addendum:
Okay folks, here’s the data. According to the IMF, the Czech Republic had a per capita GDP in 2007 of $25,300. In Greece it was $28,600 and Spain $30,200. By comparison, per capita GDP in Austria was $38,600 and in Germany it was $34,600. If you think the Czech economy is more like Austria and Germany’s than Greece’s and Spain’s then you better go straighten out the folks who compile the data at the IMF.
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I hate to have to correct Nobel prize winners (okay, that’s not true), but Robert Solow does get one item somewhat wrong in an otherwise useful column on the government’s debt. Solow notes that close to half of the publicly held debt is owned by foreigners. He then tells readers:
“This part of the debt is a direct burden on ourselves and future generations. Foreigners are entitled to receive interest and principal and can use those dollars to acquire goods and services produced here. If our government had used borrowed money to improve infrastructure or to improve the skills of workers, the resulting extra production would have made repayment easier. Instead, over the last decade, it used the money for wars and tax cuts.”
This is somewhat misleading. Suppose that the United States had been running balanced budgets for the last three decades, so there was little or no public debt for foreigners to buy, but we had run the same trade deficits over this period. In this case, foreigners would own the same amount of U.S. assets, except they would be private assets like stocks, bonds, and real estate. The income from these assets would be:
“a direct burden on ourselves and future generations. Foreigners are entitled to receive interest and principal and can use those dollars to acquire goods and services produced here.”
In other words, the fact that we have given foreigners a substantial claim to our future income is the result of our trade deficits, not our budget deficits.
There is an argument that the budget deficit has contributed to the trade deficit, but it is not as simple as many people in policy debates seem to believe. If a budget deficit provides a boost to the economy, as the stimulus did in 2009-2010, then it will increase the trade deficit. The logic here is simple. If the economy is bigger, then we buy more of everything, including more imports.
In this argument, if we cut our budget deficit, we can reduce our borrowing from abroad by shrinking the economy. This is true, but it seems like a rather dubious argument. Do we really want to have millions more people out of work just so that we can deny foreigners a share of our future income? It is also worth noting that an increase in private sector investment or consumption would have the same impact in increasing the trade deficit.
When the economy is below full employment, anything that raises GDP will lead us to purchase more imports. This includes budget deficits.
The other way in which the budget deficit can lead to a higher trade deficit is by causing the dollar to rise. The logic here is usually that larger budget deficits mean higher interest rates, which in turn will raise the value of the dollar. However the exact mechanism does not matter, the point is that the proximate cause of the larger trade deficit is a higher valued dollar, not the budget deficit. If the deficit does not cause the dollar to rise, then it would not have an impact on the trade deficit.
The other implication of this line of reasoning is that if we are concerned about our growing indebtedness to foreigners then we should be concerned about the over-valuation of the dollar. Whatever steps we take to reduce the value of the dollar will increase the competitiveness of U.S. goods, reducing imports and increasing exports. This means that those who are troubled by the extent to which foreigners will have a claim on future income should be concerned about the value of the dollar, not the budget deficit.
If we lower the budget deficit without lowering the value of the dollar, then it will not improve our trade deficit (except to the extent that the lower deficit reduces GDP). On the other hand, if we can lower the value of the dollar without reducing the budget deficit then we will have addressed the concern about foreigners buying up U.S. assets and thereby getting claims to future income.
Note: Typo corrected — thanks John.
I hate to have to correct Nobel prize winners (okay, that’s not true), but Robert Solow does get one item somewhat wrong in an otherwise useful column on the government’s debt. Solow notes that close to half of the publicly held debt is owned by foreigners. He then tells readers:
“This part of the debt is a direct burden on ourselves and future generations. Foreigners are entitled to receive interest and principal and can use those dollars to acquire goods and services produced here. If our government had used borrowed money to improve infrastructure or to improve the skills of workers, the resulting extra production would have made repayment easier. Instead, over the last decade, it used the money for wars and tax cuts.”
This is somewhat misleading. Suppose that the United States had been running balanced budgets for the last three decades, so there was little or no public debt for foreigners to buy, but we had run the same trade deficits over this period. In this case, foreigners would own the same amount of U.S. assets, except they would be private assets like stocks, bonds, and real estate. The income from these assets would be:
“a direct burden on ourselves and future generations. Foreigners are entitled to receive interest and principal and can use those dollars to acquire goods and services produced here.”
In other words, the fact that we have given foreigners a substantial claim to our future income is the result of our trade deficits, not our budget deficits.
There is an argument that the budget deficit has contributed to the trade deficit, but it is not as simple as many people in policy debates seem to believe. If a budget deficit provides a boost to the economy, as the stimulus did in 2009-2010, then it will increase the trade deficit. The logic here is simple. If the economy is bigger, then we buy more of everything, including more imports.
In this argument, if we cut our budget deficit, we can reduce our borrowing from abroad by shrinking the economy. This is true, but it seems like a rather dubious argument. Do we really want to have millions more people out of work just so that we can deny foreigners a share of our future income? It is also worth noting that an increase in private sector investment or consumption would have the same impact in increasing the trade deficit.
When the economy is below full employment, anything that raises GDP will lead us to purchase more imports. This includes budget deficits.
The other way in which the budget deficit can lead to a higher trade deficit is by causing the dollar to rise. The logic here is usually that larger budget deficits mean higher interest rates, which in turn will raise the value of the dollar. However the exact mechanism does not matter, the point is that the proximate cause of the larger trade deficit is a higher valued dollar, not the budget deficit. If the deficit does not cause the dollar to rise, then it would not have an impact on the trade deficit.
The other implication of this line of reasoning is that if we are concerned about our growing indebtedness to foreigners then we should be concerned about the over-valuation of the dollar. Whatever steps we take to reduce the value of the dollar will increase the competitiveness of U.S. goods, reducing imports and increasing exports. This means that those who are troubled by the extent to which foreigners will have a claim on future income should be concerned about the value of the dollar, not the budget deficit.
If we lower the budget deficit without lowering the value of the dollar, then it will not improve our trade deficit (except to the extent that the lower deficit reduces GDP). On the other hand, if we can lower the value of the dollar without reducing the budget deficit then we will have addressed the concern about foreigners buying up U.S. assets and thereby getting claims to future income.
Note: Typo corrected — thanks John.
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I know it’s rude to bring numbers to DC policy debates, but some of us uncouth types just can’t control ourselves. Just for fun, I thought I would see what government spending measured as a share of GDP would look like if the economy had grown as had been projected before the 2008 collapse.
This is similar to taking the deficits as a share of potential GDP, but not exactly the same. Potential GDP is based on the Congressional Budget Office’s (CBO) estimate of the economy’s potential level of output. I am looking at the levels of GDP that CBO projected back in January of 2008 (Table 2-1), before it recognized the impact that the collapse of the housing bubble would have on the economy.
The estimate of potential GDP will differ for three reasons. First CBO may just be wrong about the economy’s potential, it could be higher or lower than the level they estimate. Second, potential GDP may be lower as a result of economic developments over the last five years. For example, the large number of workers who have experienced long periods of unemployment may have effectively reduced the size of our potential labor force as some have lost skills. Third, CBO may just have been out to lunch when they made their projections in 2008.
In any case, this is still a useful exercise. It gives a chance to see the extent to which the ratio of spending to GDP has increased as a result of the fact that we are spending more than we had in 2007 relative to the size of the economy as opposed to the fact that the economy did not grow as much as we expected. Here’s the picture:
Source: CBO and author’s calculations.
CBO projects that spending will be 22.8 percent of GDP in fiscal 2013 (this includes the effects of the sequester). That puts spending above the average of the last four decades, but below the peaks reached in the Reagan years. However, if the economy had grown at the rate that was projected in 2008, the current year’s spending would be just 19.6 percent of GDP. That puts 2013 spending well below the 20.7 percent of GDP average for the years from 1973-2007. That is especially striking since we know that Medicare and Social Security have grown substantially as a share GDP due to the aging of the population.
So where is the runaway spending? Oh well, this is Washington. Let’s get back to the sequester.
I know it’s rude to bring numbers to DC policy debates, but some of us uncouth types just can’t control ourselves. Just for fun, I thought I would see what government spending measured as a share of GDP would look like if the economy had grown as had been projected before the 2008 collapse.
This is similar to taking the deficits as a share of potential GDP, but not exactly the same. Potential GDP is based on the Congressional Budget Office’s (CBO) estimate of the economy’s potential level of output. I am looking at the levels of GDP that CBO projected back in January of 2008 (Table 2-1), before it recognized the impact that the collapse of the housing bubble would have on the economy.
The estimate of potential GDP will differ for three reasons. First CBO may just be wrong about the economy’s potential, it could be higher or lower than the level they estimate. Second, potential GDP may be lower as a result of economic developments over the last five years. For example, the large number of workers who have experienced long periods of unemployment may have effectively reduced the size of our potential labor force as some have lost skills. Third, CBO may just have been out to lunch when they made their projections in 2008.
In any case, this is still a useful exercise. It gives a chance to see the extent to which the ratio of spending to GDP has increased as a result of the fact that we are spending more than we had in 2007 relative to the size of the economy as opposed to the fact that the economy did not grow as much as we expected. Here’s the picture:
Source: CBO and author’s calculations.
CBO projects that spending will be 22.8 percent of GDP in fiscal 2013 (this includes the effects of the sequester). That puts spending above the average of the last four decades, but below the peaks reached in the Reagan years. However, if the economy had grown at the rate that was projected in 2008, the current year’s spending would be just 19.6 percent of GDP. That puts 2013 spending well below the 20.7 percent of GDP average for the years from 1973-2007. That is especially striking since we know that Medicare and Social Security have grown substantially as a share GDP due to the aging of the population.
So where is the runaway spending? Oh well, this is Washington. Let’s get back to the sequester.
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The NYT had a very good piece on how government cutbacks in spending and employment have slowed the recovery. At one point it presents the view of Tyler Cowen, an economics professor at George Mason University, that:
“military contractors and personnel might be able to find new jobs with relative ease, because unemployment rates are fairly low for well-educated workers.”
While workers with college degrees do have lower unemployment rates than less educated workers, the current unemployment rate is close to twice its pre-recession level.
Unemployment Rate for College Graduates
![[Unemployment Rate for People With at Least a College Degree. Source: Bureau of Labor Statistics.]](/images/stories/blogs/college_grads.jpg)
Source: Bureau of Labor Statistics.
Note: Typo corrected.
The NYT had a very good piece on how government cutbacks in spending and employment have slowed the recovery. At one point it presents the view of Tyler Cowen, an economics professor at George Mason University, that:
“military contractors and personnel might be able to find new jobs with relative ease, because unemployment rates are fairly low for well-educated workers.”
While workers with college degrees do have lower unemployment rates than less educated workers, the current unemployment rate is close to twice its pre-recession level.
Unemployment Rate for College Graduates
Source: Bureau of Labor Statistics.
Note: Typo corrected.
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At least it is for those who want to see its economy grow. In a context where the government is cutting back spending in an already depressed economy, the boost in net exports that would be expected to be the result of a lower valued currency is pretty much the only plausible source for an increase in demand. It would have been useful to mention this fact in an article that implied the fall in the pound is bad news for the UK.
At least it is for those who want to see its economy grow. In a context where the government is cutting back spending in an already depressed economy, the boost in net exports that would be expected to be the result of a lower valued currency is pretty much the only plausible source for an increase in demand. It would have been useful to mention this fact in an article that implied the fall in the pound is bad news for the UK.
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That might seem to be the definition given the way they are often featured in news accounts. A NYT piece on the results of the election in Italy, in which a comedian received almost a quarter of the votes, told readers:
“Few experts anticipated the depth of anger displayed by Italian voters over the austerity that Mr. Monti, the technocrat beloved by other European leaders but resented at home for pushing tax increases and spending cuts, represented. The electorate chose two men convicted of crimes — Mr. Berlusconi and Mr. Grillo — over the one Italian leader in whom the rest of Europe had put great faith.”
It is interesting that the experts were surprised. There have been large protests against the austerity measures across southern Europe. And, there was a clear shift away from the centrist parties in earlier elections in Greece. It is not clear why experts would be surprised to see a similar development in Italy.
Of course experts in economics were almost all surprised by the largest economic downturn since the Great Depression. It seems that the word may not mean what people think it means.
At one point, the piece notes that interest rates could again rise on Italian debt, imposing serious strains on its budget, commenting:
“Market pressures could nevertheless return to Italy and other euro zone countries.”
It is somewhat misleading to describe the prospect of higher interest rates as simply “market pressures.” The European Central Bank (ECB) has the ability to keep down the interest rate on the debt of Italy and other euro zone countries or to make it rise. If these countries come to see higher interest rates it will be the result of a policy decision by the ECB, not simply the random workings of the market.
That might seem to be the definition given the way they are often featured in news accounts. A NYT piece on the results of the election in Italy, in which a comedian received almost a quarter of the votes, told readers:
“Few experts anticipated the depth of anger displayed by Italian voters over the austerity that Mr. Monti, the technocrat beloved by other European leaders but resented at home for pushing tax increases and spending cuts, represented. The electorate chose two men convicted of crimes — Mr. Berlusconi and Mr. Grillo — over the one Italian leader in whom the rest of Europe had put great faith.”
It is interesting that the experts were surprised. There have been large protests against the austerity measures across southern Europe. And, there was a clear shift away from the centrist parties in earlier elections in Greece. It is not clear why experts would be surprised to see a similar development in Italy.
Of course experts in economics were almost all surprised by the largest economic downturn since the Great Depression. It seems that the word may not mean what people think it means.
At one point, the piece notes that interest rates could again rise on Italian debt, imposing serious strains on its budget, commenting:
“Market pressures could nevertheless return to Italy and other euro zone countries.”
It is somewhat misleading to describe the prospect of higher interest rates as simply “market pressures.” The European Central Bank (ECB) has the ability to keep down the interest rate on the debt of Italy and other euro zone countries or to make it rise. If these countries come to see higher interest rates it will be the result of a policy decision by the ECB, not simply the random workings of the market.
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The Post had a useful article on the growing wealth gap between whites and African Americans. It notes various factors such as higher unemployment rates and smaller inheritances that prevent African Americans from accumulating wealth. However the piece concludes by saying:
“Many experts say housing is still the best way for Americans of all races to build wealth. But it is critical for families to have low-cost financing so they can have predictable housing costs going forward and build wealth over time.
‘If done right and responsibly, homeownership is a very important piece of the wealth puzzle for the long term,’ said Reid Cramer, director of the Asset Building Program at the New America Foundation.”
It would have been worth pointing out that almost all of these experts also pushed homeownership as a wealth building strategy at the peak of the bubble. Those who followed the advice of these experts were virtually certain to see large losses in home values that would wipe out much or all of their wealth.
Even when housing is not in a bubble, for many individuals who are not in a stable job or family situation, homeownership is likely to be a very bad way to build wealth. There are large transactions costs associated with homeownership, typically around 10 percent of the purchase price. (That’s combining buy and sell side costs.)
If a person cannot expect to stay in a home for at least five years, they are unlikely to cover these costs. In such situations they would be better off renting and trying to save the extra money they would have paid on a mortgage and other ownership costs.
The Post had a useful article on the growing wealth gap between whites and African Americans. It notes various factors such as higher unemployment rates and smaller inheritances that prevent African Americans from accumulating wealth. However the piece concludes by saying:
“Many experts say housing is still the best way for Americans of all races to build wealth. But it is critical for families to have low-cost financing so they can have predictable housing costs going forward and build wealth over time.
‘If done right and responsibly, homeownership is a very important piece of the wealth puzzle for the long term,’ said Reid Cramer, director of the Asset Building Program at the New America Foundation.”
It would have been worth pointing out that almost all of these experts also pushed homeownership as a wealth building strategy at the peak of the bubble. Those who followed the advice of these experts were virtually certain to see large losses in home values that would wipe out much or all of their wealth.
Even when housing is not in a bubble, for many individuals who are not in a stable job or family situation, homeownership is likely to be a very bad way to build wealth. There are large transactions costs associated with homeownership, typically around 10 percent of the purchase price. (That’s combining buy and sell side costs.)
If a person cannot expect to stay in a home for at least five years, they are unlikely to cover these costs. In such situations they would be better off renting and trying to save the extra money they would have paid on a mortgage and other ownership costs.
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