Politicians, especially those who want to cut programs like Social Security and Medicare, are fond of telling people that our children and grandchildren will pay the national debt. That one may sell well with focus groups, but it is complete nonsense. Unfortunately, Eduardo Porter repeats this line in his column today.
A moment’s reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds. This can raise distributional issues within a generation. For example, if Bill Gates’ grandchildren own the entire U.S. debt there will be important within generation distributional consequences, however this says nothing about inter-generational distribution.
There is the issue of foreign ownership of the debt, but this is an issue of the trade deficit, not the budget deficit. If the country continues to run large trade deficits, then foreigners will continue to accumulate large amounts of U.S. assets, including government debt, even if we had balanced budgets. The key issue with the trade deficit is the over-valued dollar. In this respect, both candidates have effectively committed the country to large trade deficits by indicating that they will try to maintain the over-valuation of the dollar (a.k.a. “the strong dollar”).
As a generational matter, we pass a whole economy, society and environment to our children. Unless we have given them a really bad education, they would be crazy to opt for a government with a lower national debt in exchange for a weaker economy, a worse infrastructure or more damaged environment. As a practical matter, the sharp upturn in productivity growth in 1995 has virtually assured our children and grandchildren that they will enjoy far higher living standards than anything we could have done by way of lower deficits (and thereby boosting investment) had productivity growth remained at its much slower pre-1995 rate. (The fact that longstanding deficit hawks like Peter Peterson never acknowledge the impact of this uptick on productivity growth suggests that their agenda has little to do with the living standards of future generations.)
The column also contrasts the money paid out in Social Security and Medicare benefits to the money paid out for programs helping the young. While some may like to pit the old against the young, it is also possible to contrast payments to the wealthy to the young. We pay out hundreds of billions of dollars of interest on government debt each year, much of which goes to some of the wealthiest people in the country. These wealthy people surely don’t need the money.
Of course the wealthy paid for the government bonds they own, so they have a strong argument that they should get the interest. Similarly, retirees paid for their Social Security benefits. In addition, the government will save almost no money by taking away the Social Security benefits of the Warren Buffetts and the Bill Gates of the world. They are too few of them and they don’t get large checks. To have any substantial savings it would be necessary to cut benefits for retirees with incomes of around $40,000 a year.
While the government does pay out far more for Medicare than workers paid in taxes, the distributional issue here is with doctors, drug companies and other providers. We pay more than twice as much per person for our health care than people in other wealthy countries even though we have nothing obvious to show for this in terms of outcome. The reason is that we pay our providers far more for the same services. If we want to crack down on inequities here we would make bring pay for doctors and other providers in line with payments in other wealthy countries. It is bizarre to imply that we have done seniors some great favor because we make our doctors rich treating them.
Finally, it is important to note that the large deficits of recent years are entirely the result of the economic slump that followed the collapse of the housing bubble. This is easy to see by comparing the deficit projections from the Congressional Budget Office from January 2008, before the impact of the housing crash was recognized, with actual deficits.
Source: Congressional Budget Office.
There were no major new programs created in 2008 or 2009 nor were there permanent cuts in taxes put in place. The explosion of the deficit was either directly the result of the economy’s collapse (e.g. lower taxes and higher transfers like unemployment benefits) or temporary measures intended to counteract the downturn, like the payroll tax cut. Implying that large deficits have been a chronic problem is just wrong.
Politicians, especially those who want to cut programs like Social Security and Medicare, are fond of telling people that our children and grandchildren will pay the national debt. That one may sell well with focus groups, but it is complete nonsense. Unfortunately, Eduardo Porter repeats this line in his column today.
A moment’s reflection shows why the debt is not a measure of inter-generational equity. At some point everyone alive today will be dead. At that point, the bonds that comprise the debt will be held entirely by our children or grandchildren. The debt will be an asset for the members of future generations that hold these bonds. This can raise distributional issues within a generation. For example, if Bill Gates’ grandchildren own the entire U.S. debt there will be important within generation distributional consequences, however this says nothing about inter-generational distribution.
There is the issue of foreign ownership of the debt, but this is an issue of the trade deficit, not the budget deficit. If the country continues to run large trade deficits, then foreigners will continue to accumulate large amounts of U.S. assets, including government debt, even if we had balanced budgets. The key issue with the trade deficit is the over-valued dollar. In this respect, both candidates have effectively committed the country to large trade deficits by indicating that they will try to maintain the over-valuation of the dollar (a.k.a. “the strong dollar”).
As a generational matter, we pass a whole economy, society and environment to our children. Unless we have given them a really bad education, they would be crazy to opt for a government with a lower national debt in exchange for a weaker economy, a worse infrastructure or more damaged environment. As a practical matter, the sharp upturn in productivity growth in 1995 has virtually assured our children and grandchildren that they will enjoy far higher living standards than anything we could have done by way of lower deficits (and thereby boosting investment) had productivity growth remained at its much slower pre-1995 rate. (The fact that longstanding deficit hawks like Peter Peterson never acknowledge the impact of this uptick on productivity growth suggests that their agenda has little to do with the living standards of future generations.)
The column also contrasts the money paid out in Social Security and Medicare benefits to the money paid out for programs helping the young. While some may like to pit the old against the young, it is also possible to contrast payments to the wealthy to the young. We pay out hundreds of billions of dollars of interest on government debt each year, much of which goes to some of the wealthiest people in the country. These wealthy people surely don’t need the money.
Of course the wealthy paid for the government bonds they own, so they have a strong argument that they should get the interest. Similarly, retirees paid for their Social Security benefits. In addition, the government will save almost no money by taking away the Social Security benefits of the Warren Buffetts and the Bill Gates of the world. They are too few of them and they don’t get large checks. To have any substantial savings it would be necessary to cut benefits for retirees with incomes of around $40,000 a year.
While the government does pay out far more for Medicare than workers paid in taxes, the distributional issue here is with doctors, drug companies and other providers. We pay more than twice as much per person for our health care than people in other wealthy countries even though we have nothing obvious to show for this in terms of outcome. The reason is that we pay our providers far more for the same services. If we want to crack down on inequities here we would make bring pay for doctors and other providers in line with payments in other wealthy countries. It is bizarre to imply that we have done seniors some great favor because we make our doctors rich treating them.
Finally, it is important to note that the large deficits of recent years are entirely the result of the economic slump that followed the collapse of the housing bubble. This is easy to see by comparing the deficit projections from the Congressional Budget Office from January 2008, before the impact of the housing crash was recognized, with actual deficits.
Source: Congressional Budget Office.
There were no major new programs created in 2008 or 2009 nor were there permanent cuts in taxes put in place. The explosion of the deficit was either directly the result of the economy’s collapse (e.g. lower taxes and higher transfers like unemployment benefits) or temporary measures intended to counteract the downturn, like the payroll tax cut. Implying that large deficits have been a chronic problem is just wrong.
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The piece, titled “understanding the fiscal cliff” never once mentions the fact that there is not really a cliff. Almost nothing happens to the economy if we reach the end of the year without an agreement on taxes and spending. This point is well explained in another NYT piece today.
The piece, titled “understanding the fiscal cliff” never once mentions the fact that there is not really a cliff. Almost nothing happens to the economy if we reach the end of the year without an agreement on taxes and spending. This point is well explained in another NYT piece today.
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The NYT has a major article today that begins by telling readers about Asimco Technologies, which it describes as: “an auto parts manufacturer whose plants dot eastern China, would seem to underscore Mitt Romney’s campaign-trail complaint that China’s manufacturing juggernaut is costing America jobs.”
The piece then tells the story of two Michigan factors that Asimco bought and then shut down. Then we get the big punchline, Asimco is owned by Bain Capital. There you have it, Mitt Romney who complains about policies that lead to job loss to China, profited from job loss to China.
This gottcha doesn’t pass the laugh test. Romney’s point is that we have policies in place, the most important of which is an over-valued dollar, that make it profitable to ship jobs to China. The issue is the policies that make it more profitable to manufacture in China than in the United States.
We generally expect businesses to try to make it money, so it really should not be surprising that businesses move manufacturing to China if it is more profitable to produce goods there. In that context it is not especially surprising or in any obvious way contradictory for Romney to be associated with a company that has shipped jobs to China.
If we have policies that make manufacturing in China more profitable than manufacturing in the United States it would be foolish to think that jobs will stay in the United States because businesses are committed to their U.S. workforce. If this sort of ethic ever existed, it has long since passed. The key to keeping manufacturing or any other type of job in this country is to have policies that make it more profitable to produce in the United States.
The NYT has a major article today that begins by telling readers about Asimco Technologies, which it describes as: “an auto parts manufacturer whose plants dot eastern China, would seem to underscore Mitt Romney’s campaign-trail complaint that China’s manufacturing juggernaut is costing America jobs.”
The piece then tells the story of two Michigan factors that Asimco bought and then shut down. Then we get the big punchline, Asimco is owned by Bain Capital. There you have it, Mitt Romney who complains about policies that lead to job loss to China, profited from job loss to China.
This gottcha doesn’t pass the laugh test. Romney’s point is that we have policies in place, the most important of which is an over-valued dollar, that make it profitable to ship jobs to China. The issue is the policies that make it more profitable to manufacture in China than in the United States.
We generally expect businesses to try to make it money, so it really should not be surprising that businesses move manufacturing to China if it is more profitable to produce goods there. In that context it is not especially surprising or in any obvious way contradictory for Romney to be associated with a company that has shipped jobs to China.
If we have policies that make manufacturing in China more profitable than manufacturing in the United States it would be foolish to think that jobs will stay in the United States because businesses are committed to their U.S. workforce. If this sort of ethic ever existed, it has long since passed. The key to keeping manufacturing or any other type of job in this country is to have policies that make it more profitable to produce in the United States.
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Adam Davidson has an interesting piece in the NYT Magazine that highlights the similarities in the economic positions of President Obama and Governor Romney. While many of the points are likely true, some are less clear.
For example, if Governor Romney follows his budget plan, then he will have to dismantle most of the federal government after two terms in office. (Odds are that he won’t.) If he follows his campaign pledge he would also have to dismantle the health care plan that President Obama took from him. In this and other cases, whether the candidates are viewed as similar depends on what we think Governor Romney will actually do if he were elected.
However one area in which the piece clearly errs is in saying:
“both men strongly support expanding free trade.”
While both Obama and Romney are likely to push more trade agreements along the lines of NAFTA, it would be inaccurate to call this “free trade.” At this point most of the tariffs or quotas that would be viewed as obstacles to free trade have been removed. The issues that fill current trade agreements generally involve rules on investment, environmental and safety restrictions and intellectual property.
These are not traditional free trade issues. In fact, intellectual property is the opposite of free trade since it involves government granted monopolies. This is the reason that some conservative proponents of free trade have objected to the inclusion of intellectual property issues in trade agreements.
It is standard for political figures to wrap all these items into deals that they label as “free trade” agreements because educated people are scared to be opposed to anything that is called “free trade.” But this is not Alice in Wonderland, politicians don’t get to make words mean whatever they want them to mean.
Obama and Romney both support a pro-business trade agenda. They do not support expanding free trade.
Adam Davidson has an interesting piece in the NYT Magazine that highlights the similarities in the economic positions of President Obama and Governor Romney. While many of the points are likely true, some are less clear.
For example, if Governor Romney follows his budget plan, then he will have to dismantle most of the federal government after two terms in office. (Odds are that he won’t.) If he follows his campaign pledge he would also have to dismantle the health care plan that President Obama took from him. In this and other cases, whether the candidates are viewed as similar depends on what we think Governor Romney will actually do if he were elected.
However one area in which the piece clearly errs is in saying:
“both men strongly support expanding free trade.”
While both Obama and Romney are likely to push more trade agreements along the lines of NAFTA, it would be inaccurate to call this “free trade.” At this point most of the tariffs or quotas that would be viewed as obstacles to free trade have been removed. The issues that fill current trade agreements generally involve rules on investment, environmental and safety restrictions and intellectual property.
These are not traditional free trade issues. In fact, intellectual property is the opposite of free trade since it involves government granted monopolies. This is the reason that some conservative proponents of free trade have objected to the inclusion of intellectual property issues in trade agreements.
It is standard for political figures to wrap all these items into deals that they label as “free trade” agreements because educated people are scared to be opposed to anything that is called “free trade.” But this is not Alice in Wonderland, politicians don’t get to make words mean whatever they want them to mean.
Obama and Romney both support a pro-business trade agenda. They do not support expanding free trade.
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The NYT has an excellent piece on how patents can obstruct innovation in high tech. The sector has wasted tens of billions of dollars in lawsuits in recent years and now takes out patents routinely as a legal weapon. The one major error is that the piece implies at one point that the story with prescription drugs is better, if anything it is almost certainly much worse. The enormous patent rents that drug companies are able to earn (drugs that can be profitably sold for $5 are instead sold for 100 or even 1000 times this much with patent protection) give them a huge incentive to misrepresent their effectiveness and safety and to market them for inappropriate uses. As the NYT has frequently documented in news stories, the drug companies respond to these incentives as economic theory predicts.
The NYT has an excellent piece on how patents can obstruct innovation in high tech. The sector has wasted tens of billions of dollars in lawsuits in recent years and now takes out patents routinely as a legal weapon. The one major error is that the piece implies at one point that the story with prescription drugs is better, if anything it is almost certainly much worse. The enormous patent rents that drug companies are able to earn (drugs that can be profitably sold for $5 are instead sold for 100 or even 1000 times this much with patent protection) give them a huge incentive to misrepresent their effectiveness and safety and to market them for inappropriate uses. As the NYT has frequently documented in news stories, the drug companies respond to these incentives as economic theory predicts.
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Robert Samuelson is excited by the fact that Europe’s economy faces stagnation. Unfortunately he gets almost everything in the piece wrong.
First, his central point, that the stagnation is due to overly generous welfare state, is 100 percent at odds with reality. The countries with the most generous welfare states are the Nordic countries and Germany, all of which are doing fine. The problem countries are Greece, Italy, Spain, and Ireland, all countries that rate near the bottom in the generosity of their welfare states.
The proximate cause of stagnation is quite evidently the decision by the European Central Bank to require austerity across the continent. In case anyone disputed this fact, the Conservative government in the U.K. agreed to prove the point by implementing an austerity plan in that country, which quickly threw it back into recession. In short, the immediate problem facing Europe is hardly overly generous welfare states; it is contractionary fiscal policies being pursued by European governments, in many cases against their will.
Other items that Samuelson gets wrong is his obsession with GDP growth. There is no obvious reason to be interested in growth per se, as opposed to per capita growth. China is not richer than Denmark even though its GDP is more than 80 times as high. The reason is that its population is more than 400 times as high. Economists focus on GDP per person, not absolute levels of GDP.
Furthermore, if GDP per capita grows less rapidly because people opt to take the benefits of productivity growth in leisure time or in quality of life improvements that may not be picked up in GDP (e.g. more park space), there is no economic basis for objecting to this decision. Samuelson is just expressing a personal preference for people working longer hours and getting rewarded with more consumption goods.
Samuelson urges the removal of constraints on growth. While this is a good idea, the top of the list would probably include things like patent protection for prescription drugs, which raises prices by around $270 billion a year and the removal of obstacles to trade in professional services. While Samuelson was no doubt thinking of cuts to Medicare and Social Security, my list would have a much more positive impact on growth.
Robert Samuelson is excited by the fact that Europe’s economy faces stagnation. Unfortunately he gets almost everything in the piece wrong.
First, his central point, that the stagnation is due to overly generous welfare state, is 100 percent at odds with reality. The countries with the most generous welfare states are the Nordic countries and Germany, all of which are doing fine. The problem countries are Greece, Italy, Spain, and Ireland, all countries that rate near the bottom in the generosity of their welfare states.
The proximate cause of stagnation is quite evidently the decision by the European Central Bank to require austerity across the continent. In case anyone disputed this fact, the Conservative government in the U.K. agreed to prove the point by implementing an austerity plan in that country, which quickly threw it back into recession. In short, the immediate problem facing Europe is hardly overly generous welfare states; it is contractionary fiscal policies being pursued by European governments, in many cases against their will.
Other items that Samuelson gets wrong is his obsession with GDP growth. There is no obvious reason to be interested in growth per se, as opposed to per capita growth. China is not richer than Denmark even though its GDP is more than 80 times as high. The reason is that its population is more than 400 times as high. Economists focus on GDP per person, not absolute levels of GDP.
Furthermore, if GDP per capita grows less rapidly because people opt to take the benefits of productivity growth in leisure time or in quality of life improvements that may not be picked up in GDP (e.g. more park space), there is no economic basis for objecting to this decision. Samuelson is just expressing a personal preference for people working longer hours and getting rewarded with more consumption goods.
Samuelson urges the removal of constraints on growth. While this is a good idea, the top of the list would probably include things like patent protection for prescription drugs, which raises prices by around $270 billion a year and the removal of obstacles to trade in professional services. While Samuelson was no doubt thinking of cuts to Medicare and Social Security, my list would have a much more positive impact on growth.
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Politicians and the media just LOVE start-up businesses. We got another example of this relationship in an NYT piece on start-ups hiring fewer workers that told readers:
“But the implications for the American work force are worrisome, and may help explain why economic output is growing much faster than employers are adding jobs.”
Actually the economy always grows faster than employers add jobs because of productivity growth. It would be very scary if productivity growth vanished, which would mean that we are not getting wealthier collectively. In other words, there is zero mystery to be explained, businesses are not hiring because the economy is not growing fast enough.
The relationship more generally between start-ups and job growth is also misrepresented. The piece told readers:
“For decades, new companies have produced most of the country’s job growth. Without start-ups, the country would have had a net increase in jobs in only seven years since 1977.”
This assertion likely will lead readers to believe that we would need start-ups to create jobs. That is not true. Start-ups are a substitute for expanding existing businesses, often by choice. In many cases businesses find it more attractive to buy up a new firm in a sector that can show that it has a successful business model rather than expanding its own operations. If it lacked the opportunity to buy a new firm then it would simply expand itself.
The NYT piece is trying to imply that this accounting relationship (that job growth was concentrated in new firms) into a causal relationship. This would be comparable to a situation in which we found that all the hob growth in the United States was in states west of the Mississippi and thereby concluding that if we did not have the West there would have been no job growth. This is of course not at all an implication of finding that the job growth had been located west of the Mississippi. If firms did not have the option of expanding west of the Mississippi then they would have expanded east of the Mississippi.
While it’s great that people have the opportunity to start businesses and pursue their aspirations, that is not an excuse to make up stories about how they affect the economy. The NYT should know better.
Politicians and the media just LOVE start-up businesses. We got another example of this relationship in an NYT piece on start-ups hiring fewer workers that told readers:
“But the implications for the American work force are worrisome, and may help explain why economic output is growing much faster than employers are adding jobs.”
Actually the economy always grows faster than employers add jobs because of productivity growth. It would be very scary if productivity growth vanished, which would mean that we are not getting wealthier collectively. In other words, there is zero mystery to be explained, businesses are not hiring because the economy is not growing fast enough.
The relationship more generally between start-ups and job growth is also misrepresented. The piece told readers:
“For decades, new companies have produced most of the country’s job growth. Without start-ups, the country would have had a net increase in jobs in only seven years since 1977.”
This assertion likely will lead readers to believe that we would need start-ups to create jobs. That is not true. Start-ups are a substitute for expanding existing businesses, often by choice. In many cases businesses find it more attractive to buy up a new firm in a sector that can show that it has a successful business model rather than expanding its own operations. If it lacked the opportunity to buy a new firm then it would simply expand itself.
The NYT piece is trying to imply that this accounting relationship (that job growth was concentrated in new firms) into a causal relationship. This would be comparable to a situation in which we found that all the hob growth in the United States was in states west of the Mississippi and thereby concluding that if we did not have the West there would have been no job growth. This is of course not at all an implication of finding that the job growth had been located west of the Mississippi. If firms did not have the option of expanding west of the Mississippi then they would have expanded east of the Mississippi.
While it’s great that people have the opportunity to start businesses and pursue their aspirations, that is not an excuse to make up stories about how they affect the economy. The NYT should know better.
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