Currently net interest rate payments are 1.4 percent of GDP. The Congressional Budget Office (CBO) projects this will rise to 3.3 percent of GDP by 2023. This 1.9 percentage point rise in projected interest payments is by far the largest cause of projected increases in deficits over the decade. In addition, the interest refunded from the Fed to the Treasury is projected to fall by 0.3 percentage points, meaning that higher interest costs are projected to add a total of 2.2 percentage points to the deficit.
This rise is noteworthy because it is almost entirely due to higher interest rates rather than large debt, since the debt to GDP ratio is projected to be only marginally higher in 2023 than it is today. The projection of higher interest rates is in turn a projection about Federal Reserve Board policy. In other words, CBO projects that the Fed’s decision to raise interest rates over the next decade will be the main factor pushing deficits higher.
The Post somehow missed this one.
Currently net interest rate payments are 1.4 percent of GDP. The Congressional Budget Office (CBO) projects this will rise to 3.3 percent of GDP by 2023. This 1.9 percentage point rise in projected interest payments is by far the largest cause of projected increases in deficits over the decade. In addition, the interest refunded from the Fed to the Treasury is projected to fall by 0.3 percentage points, meaning that higher interest costs are projected to add a total of 2.2 percentage points to the deficit.
This rise is noteworthy because it is almost entirely due to higher interest rates rather than large debt, since the debt to GDP ratio is projected to be only marginally higher in 2023 than it is today. The projection of higher interest rates is in turn a projection about Federal Reserve Board policy. In other words, CBO projects that the Fed’s decision to raise interest rates over the next decade will be the main factor pushing deficits higher.
The Post somehow missed this one.
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One of the arguments that the Wall Street boys put forward to preserve their too big to fail subsidy from the government is that if we broke up the behemoth banks then big corporations would turn to foreign banks for many of their financial needs. The Post presents this assertion as a serious argument in a Neil Irwin column reporting on a paper arguing the case for big banks.
It is difficult to understand why anyone should give a damn if corporations get financial services from overseas. We import clothes and steel, what’s the problem if we import financial services? Maybe the Wall Street whizes just need a lecture on how free trade benefits everyone. Their argument that we should be concerned that we are importing financial services is probably less compelling than the argument that we should be concerned that we are importing clothes. (Do we really want to be like Ireland or Iceland with hugely out-sized banks that we are stuck bailing out?) Maybe if we can teach the Wall Street boys intro economics we will finally be able to break up too big to fail banks.
One of the arguments that the Wall Street boys put forward to preserve their too big to fail subsidy from the government is that if we broke up the behemoth banks then big corporations would turn to foreign banks for many of their financial needs. The Post presents this assertion as a serious argument in a Neil Irwin column reporting on a paper arguing the case for big banks.
It is difficult to understand why anyone should give a damn if corporations get financial services from overseas. We import clothes and steel, what’s the problem if we import financial services? Maybe the Wall Street whizes just need a lecture on how free trade benefits everyone. Their argument that we should be concerned that we are importing financial services is probably less compelling than the argument that we should be concerned that we are importing clothes. (Do we really want to be like Ireland or Iceland with hugely out-sized banks that we are stuck bailing out?) Maybe if we can teach the Wall Street boys intro economics we will finally be able to break up too big to fail banks.
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No, I am not kidding. Steven Davidoff has a DealBook column touting the fact that Hostess Twinkies are likely to survive as a product, even though the company that makes them has gone bankrupt. The Twinkie brand, along with other iconic brands owned by the company, will be sold off in bankruptcy to other companies who expect to be able to profitably market them. Of course there is no guarantee that they will restart the old factories and rehire the Hostess workers, likely leaving them out in the cold.
There are two major issues here. First, in the United States firms can in general fire workers at will. This means that if they can find workers elsewhere in or outside the country who will work for less, then they can dump their current workforce and hire lower cost labor. This happens all the time. Most other wealthy countries require some sort of severance payment to longer term workers, but the United States does not.
Bankruptcy only changes the picture in this respect in cases where you have union contracts, which was the situation with Hostess. Bankruptcy voids these contracts allowing the company to change terms of employment and discharge workers in ways that would have prohibited under the union contract.
The other issue with bankruptcy is that it eliminates the company’s pension obligations. While pensions are guaranteed by the government, the guarantee is not 100 percent. This means that a bankrupt company can leave many workers with sharply reduced pensions. In principle the pension is supposed to be a privileged creditor, standing at the front of the line to get the proceeds from the sale of Twinkies and other brands. However, it doesn’t always work out this way. It remains to be seen what the situation will be with Hostess.
No, I am not kidding. Steven Davidoff has a DealBook column touting the fact that Hostess Twinkies are likely to survive as a product, even though the company that makes them has gone bankrupt. The Twinkie brand, along with other iconic brands owned by the company, will be sold off in bankruptcy to other companies who expect to be able to profitably market them. Of course there is no guarantee that they will restart the old factories and rehire the Hostess workers, likely leaving them out in the cold.
There are two major issues here. First, in the United States firms can in general fire workers at will. This means that if they can find workers elsewhere in or outside the country who will work for less, then they can dump their current workforce and hire lower cost labor. This happens all the time. Most other wealthy countries require some sort of severance payment to longer term workers, but the United States does not.
Bankruptcy only changes the picture in this respect in cases where you have union contracts, which was the situation with Hostess. Bankruptcy voids these contracts allowing the company to change terms of employment and discharge workers in ways that would have prohibited under the union contract.
The other issue with bankruptcy is that it eliminates the company’s pension obligations. While pensions are guaranteed by the government, the guarantee is not 100 percent. This means that a bankrupt company can leave many workers with sharply reduced pensions. In principle the pension is supposed to be a privileged creditor, standing at the front of the line to get the proceeds from the sale of Twinkies and other brands. However, it doesn’t always work out this way. It remains to be seen what the situation will be with Hostess.
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The Huffington Post reported on a recent paper published by the St. Louis Federal Reserve Bank that produced evidence showing that patents impede innovation and growth. Maybe other news outlets will be allowed to talk about such isssues one day.
The Huffington Post reported on a recent paper published by the St. Louis Federal Reserve Bank that produced evidence showing that patents impede innovation and growth. Maybe other news outlets will be allowed to talk about such isssues one day.
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It’s so difficult when you run a major national newspaper to find out about the laws passed by Congress and signed by the president. Clearly that would be the conclusion drawn by readers of the NYT and Washington Post‘s coverage of a suit brought by the Justice Department against S.&P. over its ratings of mortgage backed securities during the housing bubble.
Both pieces note the obvious conflict of interest of having the rating agencies paid by the issuer. This gives the agency an incentive to provide a strong rating in order to continue to get business from the issuer.
The Franken Amendment to the Dodd-Frank bill eliminated this conflict by requiring an issuer to contact the Securities and Exchange Commission (SEC), which would then arrange for a rating agency to be assigned. By taking the hiring decision away from the issuer, the rating agency would no longer have an incentive to falsify its assessment.
It is incredible that neither article mentioned the amendment. It won an overwhelming majority of votes in the Senate, attracting bi-partisan support. It would have gone into effect with the rest of the bill, except that Barney Frank, then head of the House Financial Services Committee, arranged to delay its enactment by requiring a SEC study (i.e. he had the SEC use taxpayer dollars to figure out what it would mean to have the SEC call a bond rating agency rather than the issuer).
The SEC did finally complete its study in December of 2012, but the final status of the Franken Amendment is not yet clear. It would be helpful if these papers could hire reporters who know how to find out the status of laws passed by Congress.
It’s so difficult when you run a major national newspaper to find out about the laws passed by Congress and signed by the president. Clearly that would be the conclusion drawn by readers of the NYT and Washington Post‘s coverage of a suit brought by the Justice Department against S.&P. over its ratings of mortgage backed securities during the housing bubble.
Both pieces note the obvious conflict of interest of having the rating agencies paid by the issuer. This gives the agency an incentive to provide a strong rating in order to continue to get business from the issuer.
The Franken Amendment to the Dodd-Frank bill eliminated this conflict by requiring an issuer to contact the Securities and Exchange Commission (SEC), which would then arrange for a rating agency to be assigned. By taking the hiring decision away from the issuer, the rating agency would no longer have an incentive to falsify its assessment.
It is incredible that neither article mentioned the amendment. It won an overwhelming majority of votes in the Senate, attracting bi-partisan support. It would have gone into effect with the rest of the bill, except that Barney Frank, then head of the House Financial Services Committee, arranged to delay its enactment by requiring a SEC study (i.e. he had the SEC use taxpayer dollars to figure out what it would mean to have the SEC call a bond rating agency rather than the issuer).
The SEC did finally complete its study in December of 2012, but the final status of the Franken Amendment is not yet clear. It would be helpful if these papers could hire reporters who know how to find out the status of laws passed by Congress.
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The cause for complaint this morning is Japan where the new Prime Minister, Shinzo Abe, has plans for an ambitious new stimulus program. This makes Samuelson unhappy since he is much more fond of the sort of austerity that has given Greece a 26 percent unemployment rate or now threatens the United Kingdom with a triple dip recession.
Samuelson tells us that Abe’s plan won’t work because it doesn’t address the structural problems in Japan’s economy, especially in its service sector. Samuelson notes that Japan has had several stimulus programs over the last two decades. He tells readers:
“The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan.”
Yes, this is where we can see that Samuelson is badly confused. Japan did have asset bubbles, but that was back in the 1980s. At the that time the country was not pursuing any stimulus at all. In fact, it had balanced budgets and a very low debt to GDP ratio.
As far as inflation, here again someone has to introduce Samuelson to the data. Japan’s problem is the opposite of inflation. Its consumer price level in 2012 was about 3 percent lower than it had been in 2000, implying an average annual rate of deflation of 0.3 percent.
In fact one of the most intriguing ways that Abe hopes to boost the economy is to have the central bank deliberately target a higher rate of inflation, committing itself to buy as many assets as necessary to raise the inflation rate to 2.0 percent. It is difficult to understand how Samuelson could think Japan has a problem with inflation.
Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.
This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio.
(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)
It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.
The cause for complaint this morning is Japan where the new Prime Minister, Shinzo Abe, has plans for an ambitious new stimulus program. This makes Samuelson unhappy since he is much more fond of the sort of austerity that has given Greece a 26 percent unemployment rate or now threatens the United Kingdom with a triple dip recession.
Samuelson tells us that Abe’s plan won’t work because it doesn’t address the structural problems in Japan’s economy, especially in its service sector. Samuelson notes that Japan has had several stimulus programs over the last two decades. He tells readers:
“The lesson is that huge budget deficits and ultra-low interest rates — the basics of stimulus — have limits and can be self-defeating. To use a well-worn metaphor: Stimulus becomes a narcotic. People feel better for a while, but the effect wears off. The economy then needs a new fix. Too many fixes may spawn new problems (examples: excessive debt, asset “bubbles,” inflation). That’s already happened in Japan.”
Yes, this is where we can see that Samuelson is badly confused. Japan did have asset bubbles, but that was back in the 1980s. At the that time the country was not pursuing any stimulus at all. In fact, it had balanced budgets and a very low debt to GDP ratio.
As far as inflation, here again someone has to introduce Samuelson to the data. Japan’s problem is the opposite of inflation. Its consumer price level in 2012 was about 3 percent lower than it had been in 2000, implying an average annual rate of deflation of 0.3 percent.
In fact one of the most intriguing ways that Abe hopes to boost the economy is to have the central bank deliberately target a higher rate of inflation, committing itself to buy as many assets as necessary to raise the inflation rate to 2.0 percent. It is difficult to understand how Samuelson could think Japan has a problem with inflation.
Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.
This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio.
(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)
It is undoubtedly true that Japan, like all countries, has serious structural problems. The real issue is whether these would be more easily addressed in an economy that is growing at a healthy pace or whether structural reform is somehow advanced by stagnation and high unemployment. The latter view has been tested extensively in the last five years throughout the euro zone, the U.K., and perhaps now in the United States. Thus far it has been shown wrong everywhere.
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Just wondering, since Thomas Friedman says there are 400 million bloggers in China.
Just wondering, since Thomas Friedman says there are 400 million bloggers in China.
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Tyler Cowan argues in his column today that we should let the sequester cuts go into effect but his argument is a bit hard to follow. He tells readers:
“One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy.”
He then goes on to point out that we can have cuts in military spending, farm subsidies and other areas that could benefit the economy.
This is where the story gets confusing. If we are looking to Keynes then the argument is straightforward, if we make cuts to the budget in a period of high unemployment like the present, then we are throwing more people out of work. These people will not be re-employed elsewhere, or if they are, they will be displacing other workers. (Btw, it’s not clear why the word “recession” appears in the paragraph. The point is simply that we would have slower growth and fewer jobs, there is no magic recession threshold in any Keynesian text I have seen.)
This Keynesian argument that cuts leads to unemployment in a depressed economy applies regardless of whether the spending is for good or bad purposes. In other words, even if we cut $100 billion from the government Department of Waste, Fraud, and Abuse, which does nothing but write reports and throw them in the garbage, it would still slow growth and raise unemployment. The problem facing the economy right now is demand, demand, and demand. If you reduce demand, you hurt the economy.
In the longer term, when the economy does get back to something resembling full employment, it will be helpful if we can eliminate wasteful areas of government spending. Of course it would also help the economy if we can expand useful areas of government spending. But that is not particularly a Keynesian story. I assume that almost anyone would agree with these propositions even if they might draw the lines differently between wasteful and useful.
Anyhow, the reference to Keynes is a bit peculiar here. If Cowan thinks he has argued for cuts that are consistent with the Keynesian view, he is mistaken. The idea that cuts in areas of relatively strong demand like health care will have less effect on employment is at best true in only a trivial sense. Wages are not rising especially rapidly in this sector, it is not as though we have any reason to believe that there would be large numbers of additional hires to replace workers who lose their jobs due to government cutbacks, even if the impact might be marginally less than cutbacks in other sectors.
Of course Cowan also brings in the reference to investor sentiment and refers to the bond-rating agencies. This is a strange argument for a strong believer in markets. The markets are yelling at us as loudly as they can that they have no fears about the health of the U.S. government and its ability to pay its debts, hence the 2.0 percent nominal interest rates on 10-year Treasury bonds. Why would Cowan take the word of bond-rating agencies who thought subpime mortgage backed securities were Aaa over the view of financial markets?
Anyhow, it is hard to know from this column whether Cowan thinks his preferred list of cuts won’t slow growth and add to unemployment or whether the additional unemployment is a price worth paying to make the bond-rating agencies happy.
Tyler Cowan argues in his column today that we should let the sequester cuts go into effect but his argument is a bit hard to follow. He tells readers:
“One common argument against letting this process run its course is a Keynesian claim — namely, that cuts or slowdowns in government spending can throw an economy into recession by lowering total demand for goods and services. Nonetheless, spending cuts of the right kind can help an economy.”
He then goes on to point out that we can have cuts in military spending, farm subsidies and other areas that could benefit the economy.
This is where the story gets confusing. If we are looking to Keynes then the argument is straightforward, if we make cuts to the budget in a period of high unemployment like the present, then we are throwing more people out of work. These people will not be re-employed elsewhere, or if they are, they will be displacing other workers. (Btw, it’s not clear why the word “recession” appears in the paragraph. The point is simply that we would have slower growth and fewer jobs, there is no magic recession threshold in any Keynesian text I have seen.)
This Keynesian argument that cuts leads to unemployment in a depressed economy applies regardless of whether the spending is for good or bad purposes. In other words, even if we cut $100 billion from the government Department of Waste, Fraud, and Abuse, which does nothing but write reports and throw them in the garbage, it would still slow growth and raise unemployment. The problem facing the economy right now is demand, demand, and demand. If you reduce demand, you hurt the economy.
In the longer term, when the economy does get back to something resembling full employment, it will be helpful if we can eliminate wasteful areas of government spending. Of course it would also help the economy if we can expand useful areas of government spending. But that is not particularly a Keynesian story. I assume that almost anyone would agree with these propositions even if they might draw the lines differently between wasteful and useful.
Anyhow, the reference to Keynes is a bit peculiar here. If Cowan thinks he has argued for cuts that are consistent with the Keynesian view, he is mistaken. The idea that cuts in areas of relatively strong demand like health care will have less effect on employment is at best true in only a trivial sense. Wages are not rising especially rapidly in this sector, it is not as though we have any reason to believe that there would be large numbers of additional hires to replace workers who lose their jobs due to government cutbacks, even if the impact might be marginally less than cutbacks in other sectors.
Of course Cowan also brings in the reference to investor sentiment and refers to the bond-rating agencies. This is a strange argument for a strong believer in markets. The markets are yelling at us as loudly as they can that they have no fears about the health of the U.S. government and its ability to pay its debts, hence the 2.0 percent nominal interest rates on 10-year Treasury bonds. Why would Cowan take the word of bond-rating agencies who thought subpime mortgage backed securities were Aaa over the view of financial markets?
Anyhow, it is hard to know from this column whether Cowan thinks his preferred list of cuts won’t slow growth and add to unemployment or whether the additional unemployment is a price worth paying to make the bond-rating agencies happy.
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The NYT is still pushing the line that, “uncertainty over fiscal policy and the fragility of the economy still seem to be holding back employers.” There is no evidence in this or prior job reports to support this contention. If employers are seeing a level of demand that would otherwise justify hiring, but are reluctant to do so because of uncertainty, they would look to fill this demand through alternative channels.
The two obvious alternatives are increasing the length of the average workweek and hiring temporary employees. The average workweek has been stable or even gotten slightly shorter in recent months. Temp hiring has been extremely weak. These facts suggest that the reason for lack of hiring is simply that employers are not seeing adequate demand, not uncertainty.
The piece also told readers:
“Economists are forecasting job growth of around 170,000 a month for the rest of 2013, comparable to job growth over the last year.”
That would probably be the view of economists who could not see an $8 trillion housing bubble. Economists with a better understanding of the economy would probably project a slower rate of job growth. The economy had been growing at just a 1.5 percent annual rate in the second half of 2012. There will be downward pressure on growth from the ending of the tax cuts and the sequester or other budget cuts. In this context it is more likely that growth will be around 120,000 a month, a pace closer to the underlying rate of growth of the labor force.
The NYT is still pushing the line that, “uncertainty over fiscal policy and the fragility of the economy still seem to be holding back employers.” There is no evidence in this or prior job reports to support this contention. If employers are seeing a level of demand that would otherwise justify hiring, but are reluctant to do so because of uncertainty, they would look to fill this demand through alternative channels.
The two obvious alternatives are increasing the length of the average workweek and hiring temporary employees. The average workweek has been stable or even gotten slightly shorter in recent months. Temp hiring has been extremely weak. These facts suggest that the reason for lack of hiring is simply that employers are not seeing adequate demand, not uncertainty.
The piece also told readers:
“Economists are forecasting job growth of around 170,000 a month for the rest of 2013, comparable to job growth over the last year.”
That would probably be the view of economists who could not see an $8 trillion housing bubble. Economists with a better understanding of the economy would probably project a slower rate of job growth. The economy had been growing at just a 1.5 percent annual rate in the second half of 2012. There will be downward pressure on growth from the ending of the tax cuts and the sequester or other budget cuts. In this context it is more likely that growth will be around 120,000 a month, a pace closer to the underlying rate of growth of the labor force.
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It looks like relocation is a possibility.
It looks like relocation is a possibility.
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