Robert Samuelson looks to fear and uncertainty as the reasons that the economy is not doing better. He would be better off looking to national income accounting.
The basic story is that we have a big gap in demand that can only be filled in the short-term by government spending. The reason is simple. The housing bubble was driving around $1.2 trillion in demand that disappeared with the collapse of the bubble.
Roughly half of the falloff in demand was in residential construction. We had a huge building boom in the bubble years which went bust when builders realized that we had an enormous oversupply of housing.
Around $500 billion is from lower consumption. In the bubble years homeowners were spending based on the wealth in their home. That wealth has now disappeared. Therefore they have cut back spending. Why should we be surprised?
We also lost another $150 billion a year or so in demand when the bubble in the non-residential real estate collapsed. Also cutbacks in state and local spending as a result of a loss of tax revenue also contributed to the drop in demand.
So why is Samuelson looking for an explanation for inadequate demand to restore full employment? Where exactly would he expect this demand to come from?
Measured as a share of GDP, equipment and software spending is already back to its pre-recession level. This is actually quite impressive given the large amounts of excess capacity in many sectors of the economy. While consumption is down from its bubble peaks, the saving rate is still well below the post-war average, suggesting that consumers are spending a surprisingly high amount.
So where would Samuelson expect to see additional demand come from? In the longer term the gap in demand will presumably be filled by a reduction in the trade deficit spurred by a decline in the value of the dollar. Or at least that is what would happen if our system of exchange rates was working as it is supposed to. We will also see an increase in demand from construction as the oversupply of housing begins to be absorbed.
But in the short-run there is no alternative to having the government sector fill the demand gap. This is something that arithmetic fans everywhere recognize.
Robert Samuelson looks to fear and uncertainty as the reasons that the economy is not doing better. He would be better off looking to national income accounting.
The basic story is that we have a big gap in demand that can only be filled in the short-term by government spending. The reason is simple. The housing bubble was driving around $1.2 trillion in demand that disappeared with the collapse of the bubble.
Roughly half of the falloff in demand was in residential construction. We had a huge building boom in the bubble years which went bust when builders realized that we had an enormous oversupply of housing.
Around $500 billion is from lower consumption. In the bubble years homeowners were spending based on the wealth in their home. That wealth has now disappeared. Therefore they have cut back spending. Why should we be surprised?
We also lost another $150 billion a year or so in demand when the bubble in the non-residential real estate collapsed. Also cutbacks in state and local spending as a result of a loss of tax revenue also contributed to the drop in demand.
So why is Samuelson looking for an explanation for inadequate demand to restore full employment? Where exactly would he expect this demand to come from?
Measured as a share of GDP, equipment and software spending is already back to its pre-recession level. This is actually quite impressive given the large amounts of excess capacity in many sectors of the economy. While consumption is down from its bubble peaks, the saving rate is still well below the post-war average, suggesting that consumers are spending a surprisingly high amount.
So where would Samuelson expect to see additional demand come from? In the longer term the gap in demand will presumably be filled by a reduction in the trade deficit spurred by a decline in the value of the dollar. Or at least that is what would happen if our system of exchange rates was working as it is supposed to. We will also see an increase in demand from construction as the oversupply of housing begins to be absorbed.
But in the short-run there is no alternative to having the government sector fill the demand gap. This is something that arithmetic fans everywhere recognize.
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NPR seems to want listeners to ignore the economic downturn, by far the largest cause of the deficit, and to focus on cutting spending programs and raising everyone’s taxes. That was certainly the theme of its interview with David Wessel, an economics reporter with the Wall Street Journal, which discussed his new book, Red Ink.
The first sentence of the piece refers to the “ballooning deficit.” In fact the deficit is actually shrinking. While NPR can argue that the deficit is larger than it would like it to be, the direction of change is wrong. It cannot accurately be described as “ballooning.”
The piece included Wessel’s unchallenged assertion that the deficit probably cannot be closed without cutting spending and raising taxes across the board. It would have been helpful to note that the deficit is projected to get to a level that is almost consistent with a stable debt to GDP ratio if the economy were simply to get back to full employment. If health care costs were contained by reducing protectionism in the sector and a tax was imposed on financial speculation, the deficit would be at a sustainable level.
The segment also included the bizarre claim that there is widespread resentment against low and moderate income people who do not pay income taxes. It would be interesting if it presented evidence that supported this view. It is undoubtedly true that many people resent millionaires who use tax shelters in order to pay very low taxes, it is not clear that there is widespread anger over the fact that families earning $20,000-$30,000 a year are not paying income taxes (they do pay payroll taxes).
NPR seems to want listeners to ignore the economic downturn, by far the largest cause of the deficit, and to focus on cutting spending programs and raising everyone’s taxes. That was certainly the theme of its interview with David Wessel, an economics reporter with the Wall Street Journal, which discussed his new book, Red Ink.
The first sentence of the piece refers to the “ballooning deficit.” In fact the deficit is actually shrinking. While NPR can argue that the deficit is larger than it would like it to be, the direction of change is wrong. It cannot accurately be described as “ballooning.”
The piece included Wessel’s unchallenged assertion that the deficit probably cannot be closed without cutting spending and raising taxes across the board. It would have been helpful to note that the deficit is projected to get to a level that is almost consistent with a stable debt to GDP ratio if the economy were simply to get back to full employment. If health care costs were contained by reducing protectionism in the sector and a tax was imposed on financial speculation, the deficit would be at a sustainable level.
The segment also included the bizarre claim that there is widespread resentment against low and moderate income people who do not pay income taxes. It would be interesting if it presented evidence that supported this view. It is undoubtedly true that many people resent millionaires who use tax shelters in order to pay very low taxes, it is not clear that there is widespread anger over the fact that families earning $20,000-$30,000 a year are not paying income taxes (they do pay payroll taxes).
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While many of us learned arithmetic in third grade, apparently there are not enough people who retained this knowledge for the NYT to staff its opinion page. Hence they have Thomas Friedman warning us that the retirement of the baby boom cohort is going to devastate the country.
Now, if Friedman could do arithmetic he could turn to the Social Security trustees report and see that they project the ratio of workers to retirees to fall from 2.8 in 2012 to 2.0 in 2035. Is that scary?
Here’s where Mr. Arithmetic can help us. Let’s assume that retirees on average consume 75 percent as much as the working age population. That’s not their Social Security benefit (SS benefits are less than 40 percent of the average wage), this is their total consumption. Remember, they don’t have to travel to and from work every day, they don’t need to arrange child care, or incur other work related expenses.
If workers are taxed or in some other way have their consumption reduced to support retirees, then they currently get to keep 78.9 percent of what they make. The rising number of retirees will reduce this to 72.7 percent by 2035. This means that if nothing else changes workers would see a 7.8 percent decline in their take home pay as a result of this demographic change.
Fortunately, something else will change. It is called “productivity growth.” Currently productivity growth, adjusted for some index issues, is about 1.5 percent annually. Over the next 23 years this rate of productivity growth would imply an increase in average wages of 40.8 percent, more than five times the loss due to demographics.
What’s more, 2035 is a low point on demographic spectrum. The ratio of workers to retirees is projected to be pretty much stable over the next three decades. Each decade productivity growth should raise wages by another 16.1 percent if we maintain the current growth rate. In other words, there is no reason to think that demographics will cause workers to see declining living standards in the future.
There are important issues here about future living standards. Because of our broken health care system an ever larger portion of compensation is being diverted to health care. This is a drag on living standards, but the problem is our health care system, not demographics.
There is also the problem of inequality. Most workers have seen few gains from productivity over the last three decades because such a large share of income has been shifted to those at the top. If this trend continues it also threatens the living standards of workers in the future.
But Thomas Friedman apparently doesn’t understand these facts. Instead he is trying to get readers to focus on something that is not a problem, the aging of the population.
While many of us learned arithmetic in third grade, apparently there are not enough people who retained this knowledge for the NYT to staff its opinion page. Hence they have Thomas Friedman warning us that the retirement of the baby boom cohort is going to devastate the country.
Now, if Friedman could do arithmetic he could turn to the Social Security trustees report and see that they project the ratio of workers to retirees to fall from 2.8 in 2012 to 2.0 in 2035. Is that scary?
Here’s where Mr. Arithmetic can help us. Let’s assume that retirees on average consume 75 percent as much as the working age population. That’s not their Social Security benefit (SS benefits are less than 40 percent of the average wage), this is their total consumption. Remember, they don’t have to travel to and from work every day, they don’t need to arrange child care, or incur other work related expenses.
If workers are taxed or in some other way have their consumption reduced to support retirees, then they currently get to keep 78.9 percent of what they make. The rising number of retirees will reduce this to 72.7 percent by 2035. This means that if nothing else changes workers would see a 7.8 percent decline in their take home pay as a result of this demographic change.
Fortunately, something else will change. It is called “productivity growth.” Currently productivity growth, adjusted for some index issues, is about 1.5 percent annually. Over the next 23 years this rate of productivity growth would imply an increase in average wages of 40.8 percent, more than five times the loss due to demographics.
What’s more, 2035 is a low point on demographic spectrum. The ratio of workers to retirees is projected to be pretty much stable over the next three decades. Each decade productivity growth should raise wages by another 16.1 percent if we maintain the current growth rate. In other words, there is no reason to think that demographics will cause workers to see declining living standards in the future.
There are important issues here about future living standards. Because of our broken health care system an ever larger portion of compensation is being diverted to health care. This is a drag on living standards, but the problem is our health care system, not demographics.
There is also the problem of inequality. Most workers have seen few gains from productivity over the last three decades because such a large share of income has been shifted to those at the top. If this trend continues it also threatens the living standards of workers in the future.
But Thomas Friedman apparently doesn’t understand these facts. Instead he is trying to get readers to focus on something that is not a problem, the aging of the population.
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Apparently NYT reporters never heard of immigration. This is the only way to explain a front page piece that discusses an alleged shortage of doctors in the United States that never once discusses the possibility of bringing more doctors in from other countries.
As a practical matter this should be very easy to do since doctors in the United States earn on average about twice as much as their comparably trained counterparts in Western Europe and Canada.They earn five to ten times as much as doctors in the developing world.
If the government were to set up mechanisms that could fast track the certification of doctors from other countries so that they could quickly establish that they have been trained to U.S. standards and then would be free to come to practice in the United States just as any native-born doctor, it is likely hundreds of thousands of doctors from around the world would quickly take advantage of the opportunity. (In the case of developing countries, it is easy [even a DC policy wonk could do it] to design mechanisms where they would be compensated for doctors who came to the United States so that they could train two or three doctors for every one that came to the United States. This would ensure that developing countries gained from the arrangement as well.)
It is incredible that the NYT is so committed to protectionism that it would not even discuss immigration in this context of a doctor shortage. This protectionism is far more harmful both economically and to the country’s health than the trade barriers that the NYT has often written about. It is perhaps worth noting that the protectionism that gets highlighted in the NYT and other media outlets tends to favor less-educated workers.
Apparently NYT reporters never heard of immigration. This is the only way to explain a front page piece that discusses an alleged shortage of doctors in the United States that never once discusses the possibility of bringing more doctors in from other countries.
As a practical matter this should be very easy to do since doctors in the United States earn on average about twice as much as their comparably trained counterparts in Western Europe and Canada.They earn five to ten times as much as doctors in the developing world.
If the government were to set up mechanisms that could fast track the certification of doctors from other countries so that they could quickly establish that they have been trained to U.S. standards and then would be free to come to practice in the United States just as any native-born doctor, it is likely hundreds of thousands of doctors from around the world would quickly take advantage of the opportunity. (In the case of developing countries, it is easy [even a DC policy wonk could do it] to design mechanisms where they would be compensated for doctors who came to the United States so that they could train two or three doctors for every one that came to the United States. This would ensure that developing countries gained from the arrangement as well.)
It is incredible that the NYT is so committed to protectionism that it would not even discuss immigration in this context of a doctor shortage. This protectionism is far more harmful both economically and to the country’s health than the trade barriers that the NYT has often written about. It is perhaps worth noting that the protectionism that gets highlighted in the NYT and other media outlets tends to favor less-educated workers.
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Okay, it’s not really secret. You can find it here, but the almost complete absence of media coverage might have led people to believe that the report was secret.
Anyhow, the numbers are striking. The report showed a decline in the rental vacancy rate from 8.8 percent to 8.6 percent. The vacancy rate for ownership units fell from 2.2 percent to 2.1 percent. While the quarterly drop by itself is not that impressive, it follows a sharp drop reported for the prior quarter. This suggests that the first quarter data was not a fluke, but rather indicative of a clear trend towards lower vacancy rates.
Comparing these numbers to prior years, the rental vacancy rate was 9.2 percent in the second quarter last year and 10.6 percent in the second quarter of 2010. This is the lowest number on the rental side since the early years of the bubble in 2001.
The vacancy rate on ownership units is down from 2.5 percent a year ago and a peak of 2.9 reached in 2008. It is important to remember that units change status all the time between rental and ownership, so the most important factor here is the general decline in the vacancy rate.
It is amazing that reporters ignore these data. The soaring vacancy rate in the years when house prices were rising rapidly was one of the ways to recognize that they were being driven by a speculative bubble. If supply is exceeding demand, then prices should not be rising. Unfortunately, most reporters and people in policy-making positions could not be bothered to look at these data back then. Apparently this is still the case.
Okay, it’s not really secret. You can find it here, but the almost complete absence of media coverage might have led people to believe that the report was secret.
Anyhow, the numbers are striking. The report showed a decline in the rental vacancy rate from 8.8 percent to 8.6 percent. The vacancy rate for ownership units fell from 2.2 percent to 2.1 percent. While the quarterly drop by itself is not that impressive, it follows a sharp drop reported for the prior quarter. This suggests that the first quarter data was not a fluke, but rather indicative of a clear trend towards lower vacancy rates.
Comparing these numbers to prior years, the rental vacancy rate was 9.2 percent in the second quarter last year and 10.6 percent in the second quarter of 2010. This is the lowest number on the rental side since the early years of the bubble in 2001.
The vacancy rate on ownership units is down from 2.5 percent a year ago and a peak of 2.9 reached in 2008. It is important to remember that units change status all the time between rental and ownership, so the most important factor here is the general decline in the vacancy rate.
It is amazing that reporters ignore these data. The soaring vacancy rate in the years when house prices were rising rapidly was one of the ways to recognize that they were being driven by a speculative bubble. If supply is exceeding demand, then prices should not be rising. Unfortunately, most reporters and people in policy-making positions could not be bothered to look at these data back then. Apparently this is still the case.
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It’s so nice not to exist. After all, the NYT told readers today:
“By all accounts, the next few years of declining deficits will be followed by years in which deficits will send the overall debt to unsustainable heights as the large baby boom generation ages, qualifying for ever-costlier medical benefits.”
Of course that isn’t my account. My account points out that the story of deficits that will “send the overall debt to unsustainable heights” is the story of a badly broken health care system. The United States already spends more than twice as much per person on health care as other wealthy countries. The tales of exploding deficits assume that this gap will continue to rise in the years ahead.
By 2022 these projections show the United States spending more than 20 percent of GDP on health care. In today’s economy this would be equivalent to more than $34,000 for an average family of four. Such costs would imply an unbearable burden regardless of whether health care was paid for by the public or private sector.
This is why serious analyst might describe the issue as a health care problem, not a deficit problem. If U.S. health care costs were in line with those elsewhere in the world, there would be no long-term deficit problem. But hey, as long as the inside Washington gang all agree, why bother with such details?
It’s so nice not to exist. After all, the NYT told readers today:
“By all accounts, the next few years of declining deficits will be followed by years in which deficits will send the overall debt to unsustainable heights as the large baby boom generation ages, qualifying for ever-costlier medical benefits.”
Of course that isn’t my account. My account points out that the story of deficits that will “send the overall debt to unsustainable heights” is the story of a badly broken health care system. The United States already spends more than twice as much per person on health care as other wealthy countries. The tales of exploding deficits assume that this gap will continue to rise in the years ahead.
By 2022 these projections show the United States spending more than 20 percent of GDP on health care. In today’s economy this would be equivalent to more than $34,000 for an average family of four. Such costs would imply an unbearable burden regardless of whether health care was paid for by the public or private sector.
This is why serious analyst might describe the issue as a health care problem, not a deficit problem. If U.S. health care costs were in line with those elsewhere in the world, there would be no long-term deficit problem. But hey, as long as the inside Washington gang all agree, why bother with such details?
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David Brooks concludes a bizarre column explaining our love for the Olympics with the ability to keep contradictory ideas simultaneously in our mind. We admire both glory of the winner and also the nobility of the good loser.
He uses this observation to then criticize “monomaniacs.”
“The world, unfortunately, has too many monomaniacs — people who pick one side of any creative tension and wish the other would just go away. Some parents and teachers like the cooperative virtues and distrust the competitive ones, so, laughably, they tell their kids that they are going to play sports but nobody is going to keep score.
“Politics has become a contest of monomaniacs. One faction champions austerity while another champions growth. ….
“The right course is usually to push hard in both directions, to be a house creatively divided against itself, to thrive amid the contradictions.”
Obviously, the right course is usually to push hard in both directions. We should both use modern medicine to cure people of illness and also let them die because we believe the power of prayer is more important. We should both eliminate segregation and racial discrimination and preserve them because of the inherent superiority of the white race.
What the hell does Brooks think he is saying here? There are any number of issues where there is right and wrong and David Brooks believes that every bit as much as the monomaniacs he is criticizing. He has apparently decided that there is no right or wrong in the debate over fiscal policy.
That’s fine, we would then expect a columnist for the country’s most important newspaper to give us the evidence for this position, not to call people names because they believe that the evidence supports one or the other position. (It does support the case for growth.)
Oh well, at least the NYT is giving a job to a person without the skills to compete in the modern world economy.
David Brooks concludes a bizarre column explaining our love for the Olympics with the ability to keep contradictory ideas simultaneously in our mind. We admire both glory of the winner and also the nobility of the good loser.
He uses this observation to then criticize “monomaniacs.”
“The world, unfortunately, has too many monomaniacs — people who pick one side of any creative tension and wish the other would just go away. Some parents and teachers like the cooperative virtues and distrust the competitive ones, so, laughably, they tell their kids that they are going to play sports but nobody is going to keep score.
“Politics has become a contest of monomaniacs. One faction champions austerity while another champions growth. ….
“The right course is usually to push hard in both directions, to be a house creatively divided against itself, to thrive amid the contradictions.”
Obviously, the right course is usually to push hard in both directions. We should both use modern medicine to cure people of illness and also let them die because we believe the power of prayer is more important. We should both eliminate segregation and racial discrimination and preserve them because of the inherent superiority of the white race.
What the hell does Brooks think he is saying here? There are any number of issues where there is right and wrong and David Brooks believes that every bit as much as the monomaniacs he is criticizing. He has apparently decided that there is no right or wrong in the debate over fiscal policy.
That’s fine, we would then expect a columnist for the country’s most important newspaper to give us the evidence for this position, not to call people names because they believe that the evidence supports one or the other position. (It does support the case for growth.)
Oh well, at least the NYT is giving a job to a person without the skills to compete in the modern world economy.
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I have often used to space to harangue news outlets for making too much of relatively small changes in weekly unemployment insurance (UI) claims. After all, it is just one week’s worth of data. The numbers are erratic and subject to substantial revision.
Still, I would have thought the decline in claims reported yesterday would have gotten some more attention. It wasn’t so much the single week decline that was newsworthy as the fact that the 4-week moving average, 367,250 was very close to the low for the recovery that we saw back in February.
More rapid job growth usually does follow declines in UI claims, although the relationship is far from exact. Nonetheless, the new claims seen over the last month is consistent with a much more rapid pace of job growth than we have been seeing. My bet for July is now in excess of 160k with some upward revision to the June number.
That’s still not really worth celebrating given our jobs deficit, but it is a step in the right direction.
I have often used to space to harangue news outlets for making too much of relatively small changes in weekly unemployment insurance (UI) claims. After all, it is just one week’s worth of data. The numbers are erratic and subject to substantial revision.
Still, I would have thought the decline in claims reported yesterday would have gotten some more attention. It wasn’t so much the single week decline that was newsworthy as the fact that the 4-week moving average, 367,250 was very close to the low for the recovery that we saw back in February.
More rapid job growth usually does follow declines in UI claims, although the relationship is far from exact. Nonetheless, the new claims seen over the last month is consistent with a much more rapid pace of job growth than we have been seeing. My bet for July is now in excess of 160k with some upward revision to the June number.
That’s still not really worth celebrating given our jobs deficit, but it is a step in the right direction.
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