The Washington Post ran an incredibly confusing piece on the ending of the Bush tax cuts which was highly favorable to those wanting to keep the tax breaks for the rich. First, the piece repeatedly uses the term “fiscal cliff,” which implies that there is some ledge that the country will hurtle over at the end of the year. This metaphor is completely wrong. The impact of letting the tax cuts expire on January 1 is in fact minor. There will only be a substantial impact if the higher tax rates are left in place as written through much of the year.
The piece also presents comments from an aide to House Speaker John Boehner about the impact of higher tax rates on jobs without any explanation. Boehner is quoted as saying:
“‘The hard truth, which even the president’s advisers must know, is that raising those tax rates will have a major effect on small businesses and cost hundreds of thousands of jobs,’ said Boehner spokesman Kevin Smith. ‘In this troubled economy, it’s hard to see how anyone in a post-election scenario could be for that.'”
In the middle of a steep recession, any measure that reduces the deficit will cost jobs. That is because it will reduce demand. If anyone wants to see a lower deficit in 2013 (certainly the Post does), then they want to throw people out of work.
This is sort of like pulling the trigger on a gun pointed at someone’s head. Presumably this is not done unless the desire is to see the person dead.
The Post should have reminded readers of this fact, since many may not remember the relationship between deficit reduction in a downturn and jobs. It also would have been worth reminding readers that tax increases on rich people have less impact on jobs than almost any other form of deficit reduction. In other words, if we want to reduce the deficit by some fixed amount in 2013, there is no way that leads to less job loss than raising taxes on rich people.
It would have been helpful to remind readers of this fact, since many may not have not realized that Boehner’s aide was being deceptive.
The Washington Post ran an incredibly confusing piece on the ending of the Bush tax cuts which was highly favorable to those wanting to keep the tax breaks for the rich. First, the piece repeatedly uses the term “fiscal cliff,” which implies that there is some ledge that the country will hurtle over at the end of the year. This metaphor is completely wrong. The impact of letting the tax cuts expire on January 1 is in fact minor. There will only be a substantial impact if the higher tax rates are left in place as written through much of the year.
The piece also presents comments from an aide to House Speaker John Boehner about the impact of higher tax rates on jobs without any explanation. Boehner is quoted as saying:
“‘The hard truth, which even the president’s advisers must know, is that raising those tax rates will have a major effect on small businesses and cost hundreds of thousands of jobs,’ said Boehner spokesman Kevin Smith. ‘In this troubled economy, it’s hard to see how anyone in a post-election scenario could be for that.'”
In the middle of a steep recession, any measure that reduces the deficit will cost jobs. That is because it will reduce demand. If anyone wants to see a lower deficit in 2013 (certainly the Post does), then they want to throw people out of work.
This is sort of like pulling the trigger on a gun pointed at someone’s head. Presumably this is not done unless the desire is to see the person dead.
The Post should have reminded readers of this fact, since many may not remember the relationship between deficit reduction in a downturn and jobs. It also would have been worth reminding readers that tax increases on rich people have less impact on jobs than almost any other form of deficit reduction. In other words, if we want to reduce the deficit by some fixed amount in 2013, there is no way that leads to less job loss than raising taxes on rich people.
It would have been helpful to remind readers of this fact, since many may not have not realized that Boehner’s aide was being deceptive.
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A NYT piece that discussed negotiations between Greece and the “troika” over its budget deficit should have pointed out the risk to Germany and the other core euro zone from a Greek exit from the euro zone. The austerity policies demanded by the troika have led to 25 percent unemployment in Greece. With the economy projected to continue to contract for at least another year, the unemployment rate is almost certain to go higher.
By contrast, if Greece were to leave the euro and re-establish its own currency, it would experience a full-fledged financial crisis and a period of extreme disruption, but its economy would likely then bounce back quickly, as was the case with Argentina in 2002. The troika is undoubtedly concerned that if Greece were to follow this path it would set an example for Spain, which also has 25 percent unemployment, and possibly other crisis countries in the euro zone.
For this reason, the troika will almost certainly back away from demands if the Greek government proves unable to meet them. It does not want to risk a departure from the euro of one of the larger countries.
A NYT piece that discussed negotiations between Greece and the “troika” over its budget deficit should have pointed out the risk to Germany and the other core euro zone from a Greek exit from the euro zone. The austerity policies demanded by the troika have led to 25 percent unemployment in Greece. With the economy projected to continue to contract for at least another year, the unemployment rate is almost certain to go higher.
By contrast, if Greece were to leave the euro and re-establish its own currency, it would experience a full-fledged financial crisis and a period of extreme disruption, but its economy would likely then bounce back quickly, as was the case with Argentina in 2002. The troika is undoubtedly concerned that if Greece were to follow this path it would set an example for Spain, which also has 25 percent unemployment, and possibly other crisis countries in the euro zone.
For this reason, the troika will almost certainly back away from demands if the Greek government proves unable to meet them. It does not want to risk a departure from the euro of one of the larger countries.
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Since the Washington Post decided to attack Mitt Romney for China bashing as part of his presidential race, it seems only appropriate to attack the Post’s own China bashing in the same editorial. While the Post is almost certainly right about Romney’s motives, it’s wrong about the logic of the case.
The United States has a huge trade deficit. China has a huge trade surplus. This is 180 degrees at odds with the textbook story. A fast growing developing country like China is supposed to be borrowing capital from the rest of the world. The idea is that capital is in short supply and can get a high rate of return there. This means that it should have a trade deficit.
The opposite is true with a relatively slow growing wealthy country like the United States. We should be lending capital to developing countries where it will get a higher return. This means that we would have a trade surplus.
Since the story is 180 at odds with theory — China having a large surplus and the U.S. having a large trade deficit — the question is how we correct the imbalance. The textbook story, and also the only plausible story, is that we get the dollar down against the Chinese and other currencies, making U.S. exports cheaper to other countries and imports more expensive for people in the United States. (It is important to remember that we got into this hole primarily because of the strong dollar of the Clinton-Rubin years. Our trade deficit had been relatively modest in the mid-90s until the dollar soared in the wake of the East Asian financial crisis.)
This means that Governor Romney is absolutely right as a matter of policy to be hammering on the over-valued dollar as a major cause of our trade deficit, even if he may be insincere in a commitment to a lower valued dollar. (It is worth noting that the Post’s claim that the real value of the Chinese currency has risen by 37.5 percent in the last two presidential terms is misleading. This is based in large part on differences in the inflation rates in the two countries. The inflation rate in China has been pushed up by higher housing costs and food prices. We actually want to know the change in the prices of traded goods. The gap in the rates of inflation between China and the United States in this area is almost certainly much smaller.)
The Post’s own excursion in China bashing came at the end of the piece where it tells readers:
“China has given the United States many legitimate causes of complaint, from its human rights violations to its incessant intellectual-property theft…”
Actually, it is not clear how much of the transfer of intellectual products in China can be deemed “theft.” Furthermore, those who support free trade should not be interested in pushing this incredibly costly form of protectionism on China. Insofar as the Chinese are forced to pay monopoly prices for items subject to patent and copyright protection it will slow growth and reduce the amount of money that the country has available to buy U.S. goods and services.
It is probably worth noting that many companies that advertise in the Post, most importantly drug companies, have much to gain from increased patent and copyright enforcement in China. Since the Post raises issues of motives in reference to others, it is only appropriate that the same standard be applied to it.
Since the Washington Post decided to attack Mitt Romney for China bashing as part of his presidential race, it seems only appropriate to attack the Post’s own China bashing in the same editorial. While the Post is almost certainly right about Romney’s motives, it’s wrong about the logic of the case.
The United States has a huge trade deficit. China has a huge trade surplus. This is 180 degrees at odds with the textbook story. A fast growing developing country like China is supposed to be borrowing capital from the rest of the world. The idea is that capital is in short supply and can get a high rate of return there. This means that it should have a trade deficit.
The opposite is true with a relatively slow growing wealthy country like the United States. We should be lending capital to developing countries where it will get a higher return. This means that we would have a trade surplus.
Since the story is 180 at odds with theory — China having a large surplus and the U.S. having a large trade deficit — the question is how we correct the imbalance. The textbook story, and also the only plausible story, is that we get the dollar down against the Chinese and other currencies, making U.S. exports cheaper to other countries and imports more expensive for people in the United States. (It is important to remember that we got into this hole primarily because of the strong dollar of the Clinton-Rubin years. Our trade deficit had been relatively modest in the mid-90s until the dollar soared in the wake of the East Asian financial crisis.)
This means that Governor Romney is absolutely right as a matter of policy to be hammering on the over-valued dollar as a major cause of our trade deficit, even if he may be insincere in a commitment to a lower valued dollar. (It is worth noting that the Post’s claim that the real value of the Chinese currency has risen by 37.5 percent in the last two presidential terms is misleading. This is based in large part on differences in the inflation rates in the two countries. The inflation rate in China has been pushed up by higher housing costs and food prices. We actually want to know the change in the prices of traded goods. The gap in the rates of inflation between China and the United States in this area is almost certainly much smaller.)
The Post’s own excursion in China bashing came at the end of the piece where it tells readers:
“China has given the United States many legitimate causes of complaint, from its human rights violations to its incessant intellectual-property theft…”
Actually, it is not clear how much of the transfer of intellectual products in China can be deemed “theft.” Furthermore, those who support free trade should not be interested in pushing this incredibly costly form of protectionism on China. Insofar as the Chinese are forced to pay monopoly prices for items subject to patent and copyright protection it will slow growth and reduce the amount of money that the country has available to buy U.S. goods and services.
It is probably worth noting that many companies that advertise in the Post, most importantly drug companies, have much to gain from increased patent and copyright enforcement in China. Since the Post raises issues of motives in reference to others, it is only appropriate that the same standard be applied to it.
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In his column yesterday, Robert Samuelson expressed his unhappiness that the presidential debate didn’t focus on the budget deficit, his pet peeve. Of course it is understandable that the questioners didn’t want to waste the country’s time on the topic since they probably all knew that the reason that we have large deficits is because the collapse of the housing bubble crashed the economy. If the economy had continued along with 4.5 percent unemployment, the deficits today would be fairly modest, as can be seen from the Congressional Budget Office’s (CBO) projections from January of 2008, before it recognized the severity of the downturn.
At one point Samuelson bizarrely asserts:
“And then there’s the “fiscal cliff” — the roughly $600 billion of spending cuts and tax increases scheduled for early 2013 that, if allowed to take effect, would almost certainly plunge the economy back into recession.”
Actually there are probably not any economists who think that the economy would plunge into recession if there is not a deal in place by the beginning of 2013. The projections for a recession assume that a deal is not reached all year so that we actually see the full amount of tax increases and spending cuts now scheduled.
However the really strange assertion is:
“Nor will large deficits miraculously vanish even if the recovery continues and strengthens.”
Of course this is not consistent with the CBO projections. If the unemployment rate were to quickly fall back to a 4.5-5.0 percent rate, then we would again be looking at deficits in a range of 1.-2.0 percent of GDP, even less if the Bush tax cuts for the wealthy are allowed to expire. If Samuelson has some analysis that shows otherwise, it would be interesting to see.
In his column yesterday, Robert Samuelson expressed his unhappiness that the presidential debate didn’t focus on the budget deficit, his pet peeve. Of course it is understandable that the questioners didn’t want to waste the country’s time on the topic since they probably all knew that the reason that we have large deficits is because the collapse of the housing bubble crashed the economy. If the economy had continued along with 4.5 percent unemployment, the deficits today would be fairly modest, as can be seen from the Congressional Budget Office’s (CBO) projections from January of 2008, before it recognized the severity of the downturn.
At one point Samuelson bizarrely asserts:
“And then there’s the “fiscal cliff” — the roughly $600 billion of spending cuts and tax increases scheduled for early 2013 that, if allowed to take effect, would almost certainly plunge the economy back into recession.”
Actually there are probably not any economists who think that the economy would plunge into recession if there is not a deal in place by the beginning of 2013. The projections for a recession assume that a deal is not reached all year so that we actually see the full amount of tax increases and spending cuts now scheduled.
However the really strange assertion is:
“Nor will large deficits miraculously vanish even if the recovery continues and strengthens.”
Of course this is not consistent with the CBO projections. If the unemployment rate were to quickly fall back to a 4.5-5.0 percent rate, then we would again be looking at deficits in a range of 1.-2.0 percent of GDP, even less if the Bush tax cuts for the wealthy are allowed to expire. If Samuelson has some analysis that shows otherwise, it would be interesting to see.
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The Washington Post had a nice piece on the potential impact of the recovery of the housing market on the economy. The piece reasonably assumes that construction returns to its long-term trend share of GDP, rather than getting back to its bubble levels of the last decade. In this case it will make a substantial contribution to the recovery, although it still will not possible to return to full employment without large budget deficits, unless there is a substantial reduction in the size of the trade deficit.
The Washington Post had a nice piece on the potential impact of the recovery of the housing market on the economy. The piece reasonably assumes that construction returns to its long-term trend share of GDP, rather than getting back to its bubble levels of the last decade. In this case it will make a substantial contribution to the recovery, although it still will not possible to return to full employment without large budget deficits, unless there is a substantial reduction in the size of the trade deficit.
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There is a serious effort by corporate honchos to cut Social Security and Medicare in the lame duck session of Congress. As has been reporting in several major media outlets, this campaign has raised tens of millions of dollars for this purpose.
Readers of a NYT “fact-check” on the presidential debate were no doubt wondering whether the paper had sold space to this campaign. The fact-check was addressing the question of whether Governor Romney wanted to increase military spending by $2.3 trillion over the course of the decade. At one point the piece told readers:
“The drop in military budgets as a share of G.D.P. is due less to any reductions for the Pentagon and more to the fact that a growing piece of the federal budget pie is being consumed by spending for entitlement programs like Medicare, Medicaid and Social Security as more baby boomers reach retirement age.”
Of course that one makes no sense. Increased spending on Medicare, Medicaid and Social Security will raise their percentage of the budget and therefore could explain a decline in military spending as a share of the budget. It can only explain a decline in military spending as a share of GDP if spending on these programs raises GDP. While that is possible in a depressed economy, like the one we have seen the last 5 years, that is not the argument that we usually hear about these programs.
Furthermore, the Congressional Budget Office and other agencies do not project that the economy will remain depressed throughout the decade. Therefore this is assertion is not true in the context of the generally used budget projections. Presumably it just reflected a willingness of the NYT to get in a standard jibe about the growth of these programs, but skeptics may see the hand of the corporate campaign.
Thanks to Robert Naiman for calling this to my attention.
There is a serious effort by corporate honchos to cut Social Security and Medicare in the lame duck session of Congress. As has been reporting in several major media outlets, this campaign has raised tens of millions of dollars for this purpose.
Readers of a NYT “fact-check” on the presidential debate were no doubt wondering whether the paper had sold space to this campaign. The fact-check was addressing the question of whether Governor Romney wanted to increase military spending by $2.3 trillion over the course of the decade. At one point the piece told readers:
“The drop in military budgets as a share of G.D.P. is due less to any reductions for the Pentagon and more to the fact that a growing piece of the federal budget pie is being consumed by spending for entitlement programs like Medicare, Medicaid and Social Security as more baby boomers reach retirement age.”
Of course that one makes no sense. Increased spending on Medicare, Medicaid and Social Security will raise their percentage of the budget and therefore could explain a decline in military spending as a share of the budget. It can only explain a decline in military spending as a share of GDP if spending on these programs raises GDP. While that is possible in a depressed economy, like the one we have seen the last 5 years, that is not the argument that we usually hear about these programs.
Furthermore, the Congressional Budget Office and other agencies do not project that the economy will remain depressed throughout the decade. Therefore this is assertion is not true in the context of the generally used budget projections. Presumably it just reflected a willingness of the NYT to get in a standard jibe about the growth of these programs, but skeptics may see the hand of the corporate campaign.
Thanks to Robert Naiman for calling this to my attention.
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A Washington Post fact check on the debate commented on a debate question on outsourcing:
“But economists are unanimous that trade, including outsourcing, is hugely beneficial to economic growth at home and abroad.”
This is highly misleading for two reasons. First, economists are unanimous in agreeing that trade could have major distributional consequences. And some prominent economists, such as Paul Krugman, have argued that the recent pattern of trade for the United States has had negative distributional consequences for large segment of the U.S. workforce.
The second reason that it is misleading is that economists are unanimous in believing that in the context of below full employment economy, like the one we have seen the last five years, a larger trade deficit implies lower growth and fewer jobs. In this context outsourcing hurts the economy.
A Washington Post fact check on the debate commented on a debate question on outsourcing:
“But economists are unanimous that trade, including outsourcing, is hugely beneficial to economic growth at home and abroad.”
This is highly misleading for two reasons. First, economists are unanimous in agreeing that trade could have major distributional consequences. And some prominent economists, such as Paul Krugman, have argued that the recent pattern of trade for the United States has had negative distributional consequences for large segment of the U.S. workforce.
The second reason that it is misleading is that economists are unanimous in believing that in the context of below full employment economy, like the one we have seen the last five years, a larger trade deficit implies lower growth and fewer jobs. In this context outsourcing hurts the economy.
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That what people who saw this NPR Planet Money piece must be wondering. The problem is that the United States, as a result of its loss of manufacturing production, now has a large annual trade deficit of $600 billion or 4 percent of GDP. If were closer to full employment it would likely be around 5 percent of GDP, or $750 billion.
At the moment we are able to run these deficits because countries like China are willing to subsidize their exports to the U.S. by spending hundreds of billions of dollars every year to buy U.S. bonds and other assets. This keeps up the price of the dollar relative to their currencies, which makes their goods cheap for people in the United States.
While it is very generous of these countries to subsidize our consumption, it is unlikely they will do so forever. These subsidies keep up demand for their products in the United States, but they could also use the same money to subsidize the purchase of goods and services by their own people. This could lead to substantial improvements in the living standards of the people in the countries who are sustaining the over-valued dollar.
If these countries stopped propping up the dollar then the dollar would presumably fall to a level that it is roughly consistent with balanced trade. This would almost certainly mean a large increase in manufactured exports as well as increased domestic production to replace imports of manufactured goods. Roughly 70 percent of U.S. trade is in goods, and most of these goods involve some degree of manufacturing (as opposed to raw agricultural products or mining output).
It is difficult to imagine an adjustment to more balanced trade that doesn’t involve a large increase in production of U.S. manufactured goods. While our trade surplus on services can increase, it seems unlikely that it could go too far towards filling this gap. Also, it is not clear how many more people in the United States will want to work as housekeepers and table servers, since tourism is by far the largest category of service exports, accounting for more than a quarter of the total (travel plus passenger fares).
If we moved to balanced trade and manufacturing adjusted in accordance to its share of total trade, it would imply an increase in manufacturing output of close to 30 percent. Unless we have extraordinary gains in productivity, this would mean considerably more employment in the sector.
That what people who saw this NPR Planet Money piece must be wondering. The problem is that the United States, as a result of its loss of manufacturing production, now has a large annual trade deficit of $600 billion or 4 percent of GDP. If were closer to full employment it would likely be around 5 percent of GDP, or $750 billion.
At the moment we are able to run these deficits because countries like China are willing to subsidize their exports to the U.S. by spending hundreds of billions of dollars every year to buy U.S. bonds and other assets. This keeps up the price of the dollar relative to their currencies, which makes their goods cheap for people in the United States.
While it is very generous of these countries to subsidize our consumption, it is unlikely they will do so forever. These subsidies keep up demand for their products in the United States, but they could also use the same money to subsidize the purchase of goods and services by their own people. This could lead to substantial improvements in the living standards of the people in the countries who are sustaining the over-valued dollar.
If these countries stopped propping up the dollar then the dollar would presumably fall to a level that it is roughly consistent with balanced trade. This would almost certainly mean a large increase in manufactured exports as well as increased domestic production to replace imports of manufactured goods. Roughly 70 percent of U.S. trade is in goods, and most of these goods involve some degree of manufacturing (as opposed to raw agricultural products or mining output).
It is difficult to imagine an adjustment to more balanced trade that doesn’t involve a large increase in production of U.S. manufactured goods. While our trade surplus on services can increase, it seems unlikely that it could go too far towards filling this gap. Also, it is not clear how many more people in the United States will want to work as housekeepers and table servers, since tourism is by far the largest category of service exports, accounting for more than a quarter of the total (travel plus passenger fares).
If we moved to balanced trade and manufacturing adjusted in accordance to its share of total trade, it would imply an increase in manufacturing output of close to 30 percent. Unless we have extraordinary gains in productivity, this would mean considerably more employment in the sector.
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Andrew Ross Sorkin uses his column today to highlight the troubles of those suffering the most from the downturn: the CEOs of major banks who bought up failing competitors in the midst of the financial crisis. Jamie Dimon, J.P. Morgan’s CEO, get center stage for having to deal with Bear Stearns’ legal liabilities, but Sorkin also has some tears for Wells Fargo, which bought up Wachovia, and Bank of America, which took over Merrill Lynch.
While Sorkin apparently feels sorry for the burdens imposed on these banks and their bosses, those of us who are less sentimental might remember that these are people who all draw 8 figure paychecks. They are supposed to know what they are doing. For example, Sorkin presents Dimon’s perspective:
“Mr. Dimon is clearly frustrated. Had Bear Stearns filed for bankruptcy, he said, there ‘would be no money. There would be no lawsuits. There would be no stock-drop lawsuits, there would be no class actions, there would be no mortgage lawsuits because there would be no money. But we bought it.’ ….
“‘When the government helped save General Motors by providing money and guarantees as part of its bankruptcy, ‘they absolved G.M. of all prior legal liability,’ Mr. Dimon said in an earnings conference call with investors and analysts on Friday. ‘So the government’s being a little inconsistent here.'”
Actually, there is no inconsistency here whatsoever. Mr. Dimon negotiated the terms under which he took over Bear Stearns. He did not arrange for a bankruptcy of the latter or some other measure that would have absolved J.P. Morgan from the companies’ legal liabilities. Presumably Dimon understood this fact at the time of the takeover, as did the CEOs of the other banks.
If CEOs of our largest banks do not understand such simple concepts perhaps the remedy is remedial education. Maybe we should require CEOs of banks with more than $500 billion in assets to take course on legal liabilities for acquired companies. Or, perhaps they need the equivalent of a Consumer Financial Products Protection Bureau which will ensure that they do not stumble into deals that turn out to be bad for them.
One last point that is worth remembering. Had it not been for the special assistance provided by the Fed, the Treasury, and the FDIC at the peak of the financial crisis, it is likely that all of the major Wall Street bank CEOs would be among the nation’s unemployed today. It is understandable that they would want more from the government (“job creators” always do), but it can be a bit difficult for those who are less sentimental than Mr. Sorkin to take their whining seriously.
Andrew Ross Sorkin uses his column today to highlight the troubles of those suffering the most from the downturn: the CEOs of major banks who bought up failing competitors in the midst of the financial crisis. Jamie Dimon, J.P. Morgan’s CEO, get center stage for having to deal with Bear Stearns’ legal liabilities, but Sorkin also has some tears for Wells Fargo, which bought up Wachovia, and Bank of America, which took over Merrill Lynch.
While Sorkin apparently feels sorry for the burdens imposed on these banks and their bosses, those of us who are less sentimental might remember that these are people who all draw 8 figure paychecks. They are supposed to know what they are doing. For example, Sorkin presents Dimon’s perspective:
“Mr. Dimon is clearly frustrated. Had Bear Stearns filed for bankruptcy, he said, there ‘would be no money. There would be no lawsuits. There would be no stock-drop lawsuits, there would be no class actions, there would be no mortgage lawsuits because there would be no money. But we bought it.’ ….
“‘When the government helped save General Motors by providing money and guarantees as part of its bankruptcy, ‘they absolved G.M. of all prior legal liability,’ Mr. Dimon said in an earnings conference call with investors and analysts on Friday. ‘So the government’s being a little inconsistent here.'”
Actually, there is no inconsistency here whatsoever. Mr. Dimon negotiated the terms under which he took over Bear Stearns. He did not arrange for a bankruptcy of the latter or some other measure that would have absolved J.P. Morgan from the companies’ legal liabilities. Presumably Dimon understood this fact at the time of the takeover, as did the CEOs of the other banks.
If CEOs of our largest banks do not understand such simple concepts perhaps the remedy is remedial education. Maybe we should require CEOs of banks with more than $500 billion in assets to take course on legal liabilities for acquired companies. Or, perhaps they need the equivalent of a Consumer Financial Products Protection Bureau which will ensure that they do not stumble into deals that turn out to be bad for them.
One last point that is worth remembering. Had it not been for the special assistance provided by the Fed, the Treasury, and the FDIC at the peak of the financial crisis, it is likely that all of the major Wall Street bank CEOs would be among the nation’s unemployed today. It is understandable that they would want more from the government (“job creators” always do), but it can be a bit difficult for those who are less sentimental than Mr. Sorkin to take their whining seriously.
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