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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The Washington Post ran a front page piece on Governor Romney’s debate performance that was headlined, “Romney benefits from rigorous defense of tax plan.” The article begins:
“With his forceful denial of charges that he would raise taxes on the middle class, Mitt Romney used Wednesday’s debate to launch an aggressive new effort to regain his footing in the battle over taxes.
In one of the debate’s first exchanges, the Republican presidential nominee directly challenged President Obama’s assertion that Romney’s tax plan would finance big new breaks for the wealthy by wiping out popular deductions for those who earn less than $250,000 a year.”
As the article later explains, Romney’s assertion is inconsistent with his past description of his tax plan. Romney proposes to cut income tax rates by 20 percent but also to have a deficit neutral tax cut. He argues that the lower tax rates will be offset by eliminating tax deductions.
However, it is not possible to make up the lost revenue from lower tax rates on the wealthy simply by taking away tax breaks for the wealthy. (Romney explicitly rejected raising the tax rate on capital gains or dividends, so the main tax break for the wealthy is off-limits.)
The point here is very simple. If you cut Warren Buffett’s tax rate by 20 percent you will not get back the money by taking away his mortgage interest deduction. This is why every independent economist who has analyzed the tax cut has said that Romney’s plan implies large tax increases on middle income families. However the Washington Post is apparently proud of Romney for denying for boldly denying this fact.
The Washington Post ran a front page piece on Governor Romney’s debate performance that was headlined, “Romney benefits from rigorous defense of tax plan.” The article begins:
“With his forceful denial of charges that he would raise taxes on the middle class, Mitt Romney used Wednesday’s debate to launch an aggressive new effort to regain his footing in the battle over taxes.
In one of the debate’s first exchanges, the Republican presidential nominee directly challenged President Obama’s assertion that Romney’s tax plan would finance big new breaks for the wealthy by wiping out popular deductions for those who earn less than $250,000 a year.”
As the article later explains, Romney’s assertion is inconsistent with his past description of his tax plan. Romney proposes to cut income tax rates by 20 percent but also to have a deficit neutral tax cut. He argues that the lower tax rates will be offset by eliminating tax deductions.
However, it is not possible to make up the lost revenue from lower tax rates on the wealthy simply by taking away tax breaks for the wealthy. (Romney explicitly rejected raising the tax rate on capital gains or dividends, so the main tax break for the wealthy is off-limits.)
The point here is very simple. If you cut Warren Buffett’s tax rate by 20 percent you will not get back the money by taking away his mortgage interest deduction. This is why every independent economist who has analyzed the tax cut has said that Romney’s plan implies large tax increases on middle income families. However the Washington Post is apparently proud of Romney for denying for boldly denying this fact.
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Casey Mulligan takes another shot at explaining the downturn as a decision by millions of people to stay at home and collect government benefits (joining the 47 percent) rather than work, in response to the increased generosity of programs like unemployment insurance and food stamps under the Bush and Obama administration. I don’t have time to deal with all the points that Mulligan raises, but it is worth focusing on one implication of his story.
Not everyone was in a position to gain from these benefits. For example, young workers just entering the labor force with no work history would not be eligible for unemployment insurance. Also, if they have no children they will probably not eligible for food stamps or other government benefits. In other words, this group of workers would not have seen any increased disincentive to work as a result of any changes in benefits over the last 5 years.
For these workers the increase in benefits for other workers would imply somewhat of a bonanza in Mulligan’s world. It would effectively pull many of their competitors out of the labor force. Think of a situation where your employer just offered a very generous early retirement plan to everyone who had more seniority to you at your workplace. With these people out of the way, there will be great opportunities for promotions and pay increases.
The same would situation would exist if we believe Mulligan’s supply-side theory. This should mean that workers who stay in the workforce have much lower unemployment rates that we would have otherwise expected (i.e. lower than their 2007 levels) and higher wages. I haven’t looked closely at the data, but this doesn’t seem to fit the facts. The sharpest rise in unemployment rates or fall in employment rates has been among the young workers who are likely not eligible for the benefits that have become more generous. (The minimum wage story won’t help here, their employment rates have not risen as the its real value was eroded inflation.) In other words, this trip to the supply side again looks like a dead end.
Casey Mulligan takes another shot at explaining the downturn as a decision by millions of people to stay at home and collect government benefits (joining the 47 percent) rather than work, in response to the increased generosity of programs like unemployment insurance and food stamps under the Bush and Obama administration. I don’t have time to deal with all the points that Mulligan raises, but it is worth focusing on one implication of his story.
Not everyone was in a position to gain from these benefits. For example, young workers just entering the labor force with no work history would not be eligible for unemployment insurance. Also, if they have no children they will probably not eligible for food stamps or other government benefits. In other words, this group of workers would not have seen any increased disincentive to work as a result of any changes in benefits over the last 5 years.
For these workers the increase in benefits for other workers would imply somewhat of a bonanza in Mulligan’s world. It would effectively pull many of their competitors out of the labor force. Think of a situation where your employer just offered a very generous early retirement plan to everyone who had more seniority to you at your workplace. With these people out of the way, there will be great opportunities for promotions and pay increases.
The same would situation would exist if we believe Mulligan’s supply-side theory. This should mean that workers who stay in the workforce have much lower unemployment rates that we would have otherwise expected (i.e. lower than their 2007 levels) and higher wages. I haven’t looked closely at the data, but this doesn’t seem to fit the facts. The sharpest rise in unemployment rates or fall in employment rates has been among the young workers who are likely not eligible for the benefits that have become more generous. (The minimum wage story won’t help here, their employment rates have not risen as the its real value was eroded inflation.) In other words, this trip to the supply side again looks like a dead end.
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I’m not kidding. In his column today he complains about the Independent Payment Advisory Board (IPAB) for Medicare that was set up under one of the provisions of the Affordable Care Act. The IPAB will decide on which procedures will be covered under Medicare. If it determines that a procedure is either not effective or not worth the cost, then Medicare will not cover it, unless Congress overturns the decision.
George Will then trumpets this as rationing of health care. Of course under this system, anyone will be able to get whatever health care they want, they will just have to pay for it out of their own pocket. The fact that Will now calls this situation “rationing” of care shows the state of modern conservatism.
Btw, the same situation under all the plans put forward by Governor Romney and Representative Ryan. There is no insurance company that covers all care. So insurers will decide which procedures they want to pay for. Furthermore, unlike Medicare, there will be no elected representatives who can overturn their decisions. They can also change coverage on people unexpectedly — that is unless pointy headed bureaucrats in Washington stand in their way.
[Note — headline corrected 11:00 A.M. 10-6-12 and “IPAB” was originally written as “IPAD”]
I’m not kidding. In his column today he complains about the Independent Payment Advisory Board (IPAB) for Medicare that was set up under one of the provisions of the Affordable Care Act. The IPAB will decide on which procedures will be covered under Medicare. If it determines that a procedure is either not effective or not worth the cost, then Medicare will not cover it, unless Congress overturns the decision.
George Will then trumpets this as rationing of health care. Of course under this system, anyone will be able to get whatever health care they want, they will just have to pay for it out of their own pocket. The fact that Will now calls this situation “rationing” of care shows the state of modern conservatism.
Btw, the same situation under all the plans put forward by Governor Romney and Representative Ryan. There is no insurance company that covers all care. So insurers will decide which procedures they want to pay for. Furthermore, unlike Medicare, there will be no elected representatives who can overturn their decisions. They can also change coverage on people unexpectedly — that is unless pointy headed bureaucrats in Washington stand in their way.
[Note — headline corrected 11:00 A.M. 10-6-12 and “IPAB” was originally written as “IPAD”]
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The Washington Post was quick to do a fact check on the debate claiming that President Obama had misrepresented the budget plan put forward by Morgan Stanley director Erskine Bowles and former Senator Alan Simpson, the co-chairs of the deficit commission. The fact check wrongly describes the plan as the “Simpson-Bowles deficit commission proposal.”
In fact there was no proposal from the commission. According the commission’s by-laws a plan would have needed the support of 14 of the 18 commissioners to have been approved. This plan never had the support of more than 10 of the commissioners. It is therefore inaccurate to describe it as a plan of the commission.
The Washington Post was quick to do a fact check on the debate claiming that President Obama had misrepresented the budget plan put forward by Morgan Stanley director Erskine Bowles and former Senator Alan Simpson, the co-chairs of the deficit commission. The fact check wrongly describes the plan as the “Simpson-Bowles deficit commission proposal.”
In fact there was no proposal from the commission. According the commission’s by-laws a plan would have needed the support of 14 of the 18 commissioners to have been approved. This plan never had the support of more than 10 of the commissioners. It is therefore inaccurate to describe it as a plan of the commission.
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The NYT is badly confused. While most of us recognize President Obama and Governor Romney as politicians, the NYT somehow came to believe that they are political philosophers. That is the inevitable conclusion that would be drawn from a front page piece headlined:
“a clash of philosophies.”
The first paragraph tells readers:
“Somewhere in the wonky blizzard of facts, statistics and studies thrown out on stage here on Wednesday night was a fundamental philosophical choice about the future of America, quite possibly the starkest in nearly three decades.”
This theme is repeated throughout the piece.
Of course neither candidate has gotten their position based on their political philosophy. They both managed to get their party’s nomination as a result of their ability to appeal to powerful interest groups.
The effort by the article to imply clear philosophical distinctions falls on its face. For example, the piece reports that
“Mr. Obama expressed worry about those who would lose out if government programs are cut too deeply, while Mr. Romney talked about those who feel constrained by excessive government taxation and regulation.”
Mr. Romney presumably knows that taxes are no higher today than they were in the Bush administration and that they are considerably lower than they were when the economy was growing 4.0 percent annually in the last four years of the Clinton administration. He also knows that relatively few new regulations have been put in place in the Obama years, so this cannot be a major factor slowing growth. In other words, Romney is saying these things because he hopes that they will have some resonance with the public or at least people who will support his campaign, not because he actually believes them.
Later the piece tells readers:
“Mr. Romney talked about the impact of the continuing economic problems, noting that the cost of gasoline, electricity, food and health care has grown. ‘I’ll call it the economy tax,’ he said. ‘It’s been crushing.'”
In fact, gas prices have generally lagged behind the peaks reached in 2008, so Romney cannot “note” that the cost of gasoline has grown. Electricity prices have also fallen in many areas. Furthermore, Governor Romney surely knows that the price of gas is determined on world markets and the U.S. government’s actions have little or no impact on it. So these comments are being said for their political effect, it is implausible to believe that they reflect a political philosophy.
The same logic applies to the next paragraph:
“The Republican focused on the impact on small business of Mr. Obama’s policies. ‘It’s not just Donald Trump you’re taxing,’ he said. ‘It’s all those businesses that employ one-quarter of the workers in America.’ He added, ‘You raise taxes and you kill jobs.’”
Only a small percent of businesses are structured as proprietorships and owned by individuals who will be subject to the higher tax rate supported by President Obama. These businesses do not employ anywhere close to one-quarter of the workers in America. (If they did, they hardly could be considered “small.”) Romney surely knows these facts, so again these assertions cannot possibly reflect a political philosophy.
On the other side, the piece tells readers:
“Mr. Obama expressed worry about those who would lose out if government programs are cut too deeply.”
On several occasions, most notably the bailout of Wall Street banks and the promotion of trade agreements that will redistribute billions to the pharmaceutical and entertainment industries, President Obama has clearly put the interest of powerful corporate interests ahead of the interests of middle and lower income families.
In short, the effort to portray the contest between President Obama and Governor Romney as a debate over philosophy is an invention of the media. It has no basis in the world.
The NYT is badly confused. While most of us recognize President Obama and Governor Romney as politicians, the NYT somehow came to believe that they are political philosophers. That is the inevitable conclusion that would be drawn from a front page piece headlined:
“a clash of philosophies.”
The first paragraph tells readers:
“Somewhere in the wonky blizzard of facts, statistics and studies thrown out on stage here on Wednesday night was a fundamental philosophical choice about the future of America, quite possibly the starkest in nearly three decades.”
This theme is repeated throughout the piece.
Of course neither candidate has gotten their position based on their political philosophy. They both managed to get their party’s nomination as a result of their ability to appeal to powerful interest groups.
The effort by the article to imply clear philosophical distinctions falls on its face. For example, the piece reports that
“Mr. Obama expressed worry about those who would lose out if government programs are cut too deeply, while Mr. Romney talked about those who feel constrained by excessive government taxation and regulation.”
Mr. Romney presumably knows that taxes are no higher today than they were in the Bush administration and that they are considerably lower than they were when the economy was growing 4.0 percent annually in the last four years of the Clinton administration. He also knows that relatively few new regulations have been put in place in the Obama years, so this cannot be a major factor slowing growth. In other words, Romney is saying these things because he hopes that they will have some resonance with the public or at least people who will support his campaign, not because he actually believes them.
Later the piece tells readers:
“Mr. Romney talked about the impact of the continuing economic problems, noting that the cost of gasoline, electricity, food and health care has grown. ‘I’ll call it the economy tax,’ he said. ‘It’s been crushing.'”
In fact, gas prices have generally lagged behind the peaks reached in 2008, so Romney cannot “note” that the cost of gasoline has grown. Electricity prices have also fallen in many areas. Furthermore, Governor Romney surely knows that the price of gas is determined on world markets and the U.S. government’s actions have little or no impact on it. So these comments are being said for their political effect, it is implausible to believe that they reflect a political philosophy.
The same logic applies to the next paragraph:
“The Republican focused on the impact on small business of Mr. Obama’s policies. ‘It’s not just Donald Trump you’re taxing,’ he said. ‘It’s all those businesses that employ one-quarter of the workers in America.’ He added, ‘You raise taxes and you kill jobs.’”
Only a small percent of businesses are structured as proprietorships and owned by individuals who will be subject to the higher tax rate supported by President Obama. These businesses do not employ anywhere close to one-quarter of the workers in America. (If they did, they hardly could be considered “small.”) Romney surely knows these facts, so again these assertions cannot possibly reflect a political philosophy.
On the other side, the piece tells readers:
“Mr. Obama expressed worry about those who would lose out if government programs are cut too deeply.”
On several occasions, most notably the bailout of Wall Street banks and the promotion of trade agreements that will redistribute billions to the pharmaceutical and entertainment industries, President Obama has clearly put the interest of powerful corporate interests ahead of the interests of middle and lower income families.
In short, the effort to portray the contest between President Obama and Governor Romney as a debate over philosophy is an invention of the media. It has no basis in the world.
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