Paul Krugman is engaged in battle with the 90 percent zombie: the claim that economies go to hell when their ratio of debt to GDP exceeds 90 percent. He makes the obvious point that it is really impossible to untangle cause and effect with such a small sample. The countries that had debt to GDP ratios above 90 percent all had other major problems that likely would have impeded growth even if they had no debt.
I have written numerous times as to why this claim is beyond silly. Among other things, government can sell off assets that would substantially reduce their debt. In the old days governments used to sell off the right to collect certain taxes. We do something similar today with patent and copyright monopolies. Anyhow, if we used these routes to get our debt to GDP ratio below 90 percent, would everyone be happy?
However, to my mind, the bullet to zombie head in this story is the fact that we can easily change the debt to GDP ratio with some simple and costless debt management. If interest rates rise as projected, we would have the opportunity to buy back trillions of dollars of the debt issued in the current low interest rate environment at sharp discounts. Suppose we bought back $4 trillion in long-term debt at a price of $3 trillion because higher interest rates lowered the price of the outstanding bonds.
This would immediately chop 6 percentage points off our debt to GDP ratio. If that pushed us from 92 percent of GDP to 86 percent of GDP, is everything now hunky dory? According to the 90 percent zombie story it would be. For folks more grounded in reality this is a waste of time.
Paul Krugman is engaged in battle with the 90 percent zombie: the claim that economies go to hell when their ratio of debt to GDP exceeds 90 percent. He makes the obvious point that it is really impossible to untangle cause and effect with such a small sample. The countries that had debt to GDP ratios above 90 percent all had other major problems that likely would have impeded growth even if they had no debt.
I have written numerous times as to why this claim is beyond silly. Among other things, government can sell off assets that would substantially reduce their debt. In the old days governments used to sell off the right to collect certain taxes. We do something similar today with patent and copyright monopolies. Anyhow, if we used these routes to get our debt to GDP ratio below 90 percent, would everyone be happy?
However, to my mind, the bullet to zombie head in this story is the fact that we can easily change the debt to GDP ratio with some simple and costless debt management. If interest rates rise as projected, we would have the opportunity to buy back trillions of dollars of the debt issued in the current low interest rate environment at sharp discounts. Suppose we bought back $4 trillion in long-term debt at a price of $3 trillion because higher interest rates lowered the price of the outstanding bonds.
This would immediately chop 6 percentage points off our debt to GDP ratio. If that pushed us from 92 percent of GDP to 86 percent of GDP, is everything now hunky dory? According to the 90 percent zombie story it would be. For folks more grounded in reality this is a waste of time.
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The NYT reported on questions from Senate Republicans on the investments of Jack Lew, President Obama’s nominee to be Treasury Secretary. The questions focused on whether Lew had taken advantage of tax havens in the Cayman Islands. It then told readers:
“Privately, officials involved in the confirmation process called the spate of attacks on Mr. Lew politically motivated, arguing that the Cayman Islands criticisms are a direct reprisal for attacks leveled at Mitt Romney during the presidential campaign for his offshore bank accounts.”
It’s not obvious why “officials involved in the confirmation process” could not make their views known on the record or why the NYT should print their views if they insist on being off the record. The article also cites Lew’s assertion that he did not enjoy any tax advantage because of the investment’s location in the Cayman Islands and his claim that he lost money on the investment.
While the claim that he lost money is obviously intended to imply that there was nothing improper about the investment, the piece should have pointed out to readers that this is a non-sequitur. Suppose that Lew was offered the opportunity to buy $1 million in lottery tickets at half price as a way of making a payoff to him. The fact that Lew may still have lost money on his tickets would not change the fact that he had accepted a payoff. It would have been helpful if the NYT had reminded readers of this logic.
The NYT reported on questions from Senate Republicans on the investments of Jack Lew, President Obama’s nominee to be Treasury Secretary. The questions focused on whether Lew had taken advantage of tax havens in the Cayman Islands. It then told readers:
“Privately, officials involved in the confirmation process called the spate of attacks on Mr. Lew politically motivated, arguing that the Cayman Islands criticisms are a direct reprisal for attacks leveled at Mitt Romney during the presidential campaign for his offshore bank accounts.”
It’s not obvious why “officials involved in the confirmation process” could not make their views known on the record or why the NYT should print their views if they insist on being off the record. The article also cites Lew’s assertion that he did not enjoy any tax advantage because of the investment’s location in the Cayman Islands and his claim that he lost money on the investment.
While the claim that he lost money is obviously intended to imply that there was nothing improper about the investment, the piece should have pointed out to readers that this is a non-sequitur. Suppose that Lew was offered the opportunity to buy $1 million in lottery tickets at half price as a way of making a payoff to him. The fact that Lew may still have lost money on his tickets would not change the fact that he had accepted a payoff. It would have been helpful if the NYT had reminded readers of this logic.
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In this century Mexico has had the slowest per capita GDP growth of any country in Latin America. It has made almost no progress in reducing poverty and it is plagued by drug gangs and corruption. But Thomas Friedman sees a Mexico that doesn’t show up in the data:
“In India, people ask you about China, and, in China, people ask you about India: Which country will become the more dominant economic power in the 21st century? I now have the answer: Mexico.”
How does he come to this conclusion? Well one of the big factors in Friedman’s story is that wages for workers in Mexico are falling behind wages elsewhere:
“with massive cheap natural gas finds, and rising wage and transportation costs in China, and it is no surprise that Mexico now is taking manufacturing market share back from Asia.”
While Mexico might not do well by standard economic measures, Friedman points out that it does very well when it comes to signing trade agreements;
“Mexico has signed 44 free trade agreements — more than any country in the world — which, according to The Financial Times, is more than twice as many as China and four times more than Brazil.”
In this same vein, Friedman excitedly quotes the Financial Times:
“Today, Mexico exports more manufactured products than the rest of Latin America put together.”
Let’s assume this is true. Much of what Mexico exports are products like cars where it imports most of the parts. These are then assembled in Mexico and exported back to the United States. This assembly doesn’t add much to Mexico’s economy, but if for some reason you think that exports by themselves are a measure of economic success, you can score big through this route.
After telling readers that people in Mexico use Twitter, Friedman then comments that U.S. companies are investing more in Mexico, “which is one reason Mexico grew last year at 3.9 percent.” Friedman apparently doesn’t realize that 3.9 percent was not an especially rapid growth rate for Latin America last year.
Just to ensure a regional balance, Friedman managed to overstate the cost of the war in Afghanistan by a factor of three by telling readers that:
“We do $1.5 billion a day in trade with Mexico, and we spend $1 billion a day in Afghanistan. Not smart.”
Yes, the war in Afghanistan may not be smart, but CBO puts the price tag at less than $100 billion in 2013.
Anyhow, it is easy to see why the NYT runs Thomas Friedman’s columns. He gives you all sorts of information that you would never find anywhere else.
In this century Mexico has had the slowest per capita GDP growth of any country in Latin America. It has made almost no progress in reducing poverty and it is plagued by drug gangs and corruption. But Thomas Friedman sees a Mexico that doesn’t show up in the data:
“In India, people ask you about China, and, in China, people ask you about India: Which country will become the more dominant economic power in the 21st century? I now have the answer: Mexico.”
How does he come to this conclusion? Well one of the big factors in Friedman’s story is that wages for workers in Mexico are falling behind wages elsewhere:
“with massive cheap natural gas finds, and rising wage and transportation costs in China, and it is no surprise that Mexico now is taking manufacturing market share back from Asia.”
While Mexico might not do well by standard economic measures, Friedman points out that it does very well when it comes to signing trade agreements;
“Mexico has signed 44 free trade agreements — more than any country in the world — which, according to The Financial Times, is more than twice as many as China and four times more than Brazil.”
In this same vein, Friedman excitedly quotes the Financial Times:
“Today, Mexico exports more manufactured products than the rest of Latin America put together.”
Let’s assume this is true. Much of what Mexico exports are products like cars where it imports most of the parts. These are then assembled in Mexico and exported back to the United States. This assembly doesn’t add much to Mexico’s economy, but if for some reason you think that exports by themselves are a measure of economic success, you can score big through this route.
After telling readers that people in Mexico use Twitter, Friedman then comments that U.S. companies are investing more in Mexico, “which is one reason Mexico grew last year at 3.9 percent.” Friedman apparently doesn’t realize that 3.9 percent was not an especially rapid growth rate for Latin America last year.
Just to ensure a regional balance, Friedman managed to overstate the cost of the war in Afghanistan by a factor of three by telling readers that:
“We do $1.5 billion a day in trade with Mexico, and we spend $1 billion a day in Afghanistan. Not smart.”
Yes, the war in Afghanistan may not be smart, but CBO puts the price tag at less than $100 billion in 2013.
Anyhow, it is easy to see why the NYT runs Thomas Friedman’s columns. He gives you all sorts of information that you would never find anywhere else.
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The Washington Post gave us one of its classics, an opinion piece that struggled with the dilemma of the proper pricing of cancer drugs. While the piece tells readers how the prices of these drugs are bankrupting families, it never once mentions why the prices are so high. The word “patent” does not appear in the column. Of course without patent monopolies most cancer drugs could be easily copied and sold as low-priced generics.
Drugs are expensive to develop, but once they have been developed the cost of producing another dose is almost always very low. In the economists’ dream world, cancer drugs would sell at their cheap marginal cost.
Of course we would need an alternative mechanism for financing the research. Such alternatives do exist. We could have direct public funding similar to the $30 billion that we spend each year to finance research at National Institutes of Health. (That funding could even go through private drug companies, as long as all the research was fully public.)
We could also go the route of a patent buyout system, where patents would be purchased by the government and then put in the public domain. This method has been suggested by Nobel Laureate Joe Stiglitz and actually proposed in a bill by Vermont Senator Bernie Sanders. Unfortunately it is difficult to get information on such proposals in Washington.
The Washington Post gave us one of its classics, an opinion piece that struggled with the dilemma of the proper pricing of cancer drugs. While the piece tells readers how the prices of these drugs are bankrupting families, it never once mentions why the prices are so high. The word “patent” does not appear in the column. Of course without patent monopolies most cancer drugs could be easily copied and sold as low-priced generics.
Drugs are expensive to develop, but once they have been developed the cost of producing another dose is almost always very low. In the economists’ dream world, cancer drugs would sell at their cheap marginal cost.
Of course we would need an alternative mechanism for financing the research. Such alternatives do exist. We could have direct public funding similar to the $30 billion that we spend each year to finance research at National Institutes of Health. (That funding could even go through private drug companies, as long as all the research was fully public.)
We could also go the route of a patent buyout system, where patents would be purchased by the government and then put in the public domain. This method has been suggested by Nobel Laureate Joe Stiglitz and actually proposed in a bill by Vermont Senator Bernie Sanders. Unfortunately it is difficult to get information on such proposals in Washington.
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Ezra Klein tells us that both sides are badly confused about the issues at stake in the sequester. (The piece is more appropriately headlined in the print version, “Why both sides are misreading the budget battle.”)
Klein explains that tax expenditures, like the mortgage interest deduction and the deduction for state and local income taxes, are really forms of spending. He says that the problem is that Republicans are just failing to understand this fact:
“No one has worked harder to disabuse Republicans of this misconception than top Republican economists. Harvard’s Martin Feldstein, who served as President Ronald Reagan’s chief economist, says “the distinction between spending cuts and revenue increases breaks down if one considers tax expenditures.” Former Federal Reserve chairman Alan Greenspan says they should be ‘viewed as cuts in outlays rather than a reduction in revenues.’ Greg Mankiw, who led President George W. Bush’s Council of Economic Advisers, calls them “stealth spending implemented through the tax code.”
Ezra Klein tells us that both sides are badly confused about the issues at stake in the sequester. (The piece is more appropriately headlined in the print version, “Why both sides are misreading the budget battle.”)
Klein explains that tax expenditures, like the mortgage interest deduction and the deduction for state and local income taxes, are really forms of spending. He says that the problem is that Republicans are just failing to understand this fact:
“No one has worked harder to disabuse Republicans of this misconception than top Republican economists. Harvard’s Martin Feldstein, who served as President Ronald Reagan’s chief economist, says “the distinction between spending cuts and revenue increases breaks down if one considers tax expenditures.” Former Federal Reserve chairman Alan Greenspan says they should be ‘viewed as cuts in outlays rather than a reduction in revenues.’ Greg Mankiw, who led President George W. Bush’s Council of Economic Advisers, calls them “stealth spending implemented through the tax code.”
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Wow, you’ve got to give those economists credit. As Neil Irwin tells us, they figured out that the Fed’s bond purchases affect the budget. Of course they put it on the negative side, noting that the Fed stands to lose money when it sells off its bonds at a loss later in the decade if interest rates rise as projected.
There are two important points that are worth pointing out on this one. First, the Fed does not have to sell off the bonds. It can simply hold its bonds until maturity as those of us who are a few years ahead of mainstream economists pointed out a while back.
If the Fed were to go this route, it could reach its targets for restricting money supply expansion by raising reserve requirements. This shouldn’t be that hard a concept to understand, the option appears in every intro textbook. While changing the base of reserves, rather than the money multiplier by changing the reserve requirement, is the preferred manner for the conduct of monetary policy, a set of higher reserve requirements scheduled long in advance should not be too disruptive to the banking system. We did use to have much higher reserve requirements. Also, China’s central bank routinely uses reserve requirement changes to conduct its monetary policy.
The other point that should jump out at folks is that the projected drop in bond prices, which is the reason that the Fed is projected to lose money, presents a great opportunity for the government to reduce its debt burden. The idea is that long-term bonds issued at the current low interest rates will sell at sharp discounts later in the decade, if interest rates rise as projected.
These discounted prices will give the government the opportunity to reduce its debt by hundreds of billions of dollars — perhaps more than $1 trillion — simply by buying these bonds back at lower prices. Such a move would be utterly pointless since it would not change the country’s interest burden at all, but since we currently live in a political environment where the debt to GDP ratio is an object of worship, this would be a great way to appease that god. It sure beats big cuts to Social Security and Medicare.
There is one other point about this piece that is worth noting. It tells readers:
“The great risk is that the political blowback from those losses would endanger the Fed’s independence.”
While the Fed deserves points for trying to boost the economy in the wake of the downturn it is hard to argue that the country has been well-served by an independent Fed. Greenspan at least looked the other way as the housing bubble grew to ever more dangerous proportions. Arguably, he even sought to fuel its growth as a way to recover from the collapse of the stock bubble.
The result has been incredibly disastrous with millions of lives being ruined by unemployment and the country likely to lose more than $7 trillion in output from the downturn. Could we really have done worse with a Fed that was more responsive to Congress? Perhaps, but it doesn’t seem like we have much to lose here.
Note — slight edits were made to an earlier verison.
Wow, you’ve got to give those economists credit. As Neil Irwin tells us, they figured out that the Fed’s bond purchases affect the budget. Of course they put it on the negative side, noting that the Fed stands to lose money when it sells off its bonds at a loss later in the decade if interest rates rise as projected.
There are two important points that are worth pointing out on this one. First, the Fed does not have to sell off the bonds. It can simply hold its bonds until maturity as those of us who are a few years ahead of mainstream economists pointed out a while back.
If the Fed were to go this route, it could reach its targets for restricting money supply expansion by raising reserve requirements. This shouldn’t be that hard a concept to understand, the option appears in every intro textbook. While changing the base of reserves, rather than the money multiplier by changing the reserve requirement, is the preferred manner for the conduct of monetary policy, a set of higher reserve requirements scheduled long in advance should not be too disruptive to the banking system. We did use to have much higher reserve requirements. Also, China’s central bank routinely uses reserve requirement changes to conduct its monetary policy.
The other point that should jump out at folks is that the projected drop in bond prices, which is the reason that the Fed is projected to lose money, presents a great opportunity for the government to reduce its debt burden. The idea is that long-term bonds issued at the current low interest rates will sell at sharp discounts later in the decade, if interest rates rise as projected.
These discounted prices will give the government the opportunity to reduce its debt by hundreds of billions of dollars — perhaps more than $1 trillion — simply by buying these bonds back at lower prices. Such a move would be utterly pointless since it would not change the country’s interest burden at all, but since we currently live in a political environment where the debt to GDP ratio is an object of worship, this would be a great way to appease that god. It sure beats big cuts to Social Security and Medicare.
There is one other point about this piece that is worth noting. It tells readers:
“The great risk is that the political blowback from those losses would endanger the Fed’s independence.”
While the Fed deserves points for trying to boost the economy in the wake of the downturn it is hard to argue that the country has been well-served by an independent Fed. Greenspan at least looked the other way as the housing bubble grew to ever more dangerous proportions. Arguably, he even sought to fuel its growth as a way to recover from the collapse of the stock bubble.
The result has been incredibly disastrous with millions of lives being ruined by unemployment and the country likely to lose more than $7 trillion in output from the downturn. Could we really have done worse with a Fed that was more responsive to Congress? Perhaps, but it doesn’t seem like we have much to lose here.
Note — slight edits were made to an earlier verison.
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That seems the obvious response to the comment by Federal Reserve Governor Jerome Powell on the prospect of the United States government facing a debt crisis:
“We don’t know where the tipping point is, but wherever it is, we’re getting closer to it.”
Needless to say, the concern seems more than a bit silly given the problem of unemployment facing the country and the fact that both interest rates and the interest burden of the debt are near post-war lows.
But hey, at least worrying about the debt keeps these economists employed and off the streets. We can think of it as being like Keynes tongue in cheek proposal to bury pound notes and then let people dig them up. It might be pointless activity, but in a badly depressed economy it still can create jobs and increase output.
That seems the obvious response to the comment by Federal Reserve Governor Jerome Powell on the prospect of the United States government facing a debt crisis:
“We don’t know where the tipping point is, but wherever it is, we’re getting closer to it.”
Needless to say, the concern seems more than a bit silly given the problem of unemployment facing the country and the fact that both interest rates and the interest burden of the debt are near post-war lows.
But hey, at least worrying about the debt keeps these economists employed and off the streets. We can think of it as being like Keynes tongue in cheek proposal to bury pound notes and then let people dig them up. It might be pointless activity, but in a badly depressed economy it still can create jobs and increase output.
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The Washington Post once again showed why it is known as “Fox on 15th Street” when it reported on a group of small business owners urging that Social Security, Medicare and Medicaid be protected from cuts. At one point the piece refers to plans for “overhauling the nation’s revenue-bleeding entitlement system.”
“Revenue-bleeding” does not appear to be the official name for the programs in question. Most newspapers would try to constrain their enthusiasm for cuts to Social Security, Medicare, and Medicaid and leave phrases like “revenue-bleeding” for the opinion pages.
The piece also includes the inaccurate assertion that:
“Once again, the hour is growing late for elected officials to strike a deal to avoid a potentially catastrophic blow to the economy, as the $1.2 trillion round of automatic spending cuts known as ‘sequestration’ is scheduled to commence at the end of the month.”
It is not clear what is meant by “catastrophic.” Any deficit reduction of the sort that the Post routinely advocates will slow growth and increase unemployment. The sequester cuts are no different in this respect, however the Post has usually urged these cuts and praised others for pushing such cuts. It is striking that it now seems to treat it as a fact that deficit reduction would be catastrophic.
The paper also includes an assertion from a small business owner that:
““Economists agree that sequestration would send us back into recession.”
Actually, almost no economists would claim that the sequester cuts would lead to a recession, although they would slow growth by between 0.6-0.8 percentage points in 2013.
The Washington Post once again showed why it is known as “Fox on 15th Street” when it reported on a group of small business owners urging that Social Security, Medicare and Medicaid be protected from cuts. At one point the piece refers to plans for “overhauling the nation’s revenue-bleeding entitlement system.”
“Revenue-bleeding” does not appear to be the official name for the programs in question. Most newspapers would try to constrain their enthusiasm for cuts to Social Security, Medicare, and Medicaid and leave phrases like “revenue-bleeding” for the opinion pages.
The piece also includes the inaccurate assertion that:
“Once again, the hour is growing late for elected officials to strike a deal to avoid a potentially catastrophic blow to the economy, as the $1.2 trillion round of automatic spending cuts known as ‘sequestration’ is scheduled to commence at the end of the month.”
It is not clear what is meant by “catastrophic.” Any deficit reduction of the sort that the Post routinely advocates will slow growth and increase unemployment. The sequester cuts are no different in this respect, however the Post has usually urged these cuts and praised others for pushing such cuts. It is striking that it now seems to treat it as a fact that deficit reduction would be catastrophic.
The paper also includes an assertion from a small business owner that:
““Economists agree that sequestration would send us back into recession.”
Actually, almost no economists would claim that the sequester cuts would lead to a recession, although they would slow growth by between 0.6-0.8 percentage points in 2013.
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