We all know that economists aren’t very good when it comes to understanding the economy. This is exactly what economic theory predicts.
When economists completely mess up, for example by missing an $8 trillion housing bubble, they do not risk any sanction, such as being fired. This means that they have little incentive to get things right. If waiters had no incentive to get orders right and bring food to customers quickly, then people would have to wait a long time for their dinners and frequently get the wrong dish. Since economists aren’t held to same standard as waiters, we typically get wrong economic analysis.
Thus we had numerous stories telling us about the bad news on existing home sales. That is not what the data show. May sales were down 1.5 percent from April levels, but this is hardly bad news. We had just seen four months of relatively strong sales, which were spurred in part by unusually mild winter weather. (Remember sales typically take place 6-8 weeks after a contract is signed. The homes sold in May were mostly contracted in March and early April.)
If people buy a home in January or February, they will not rush out and buy another one in March and April. In other words, the relatively strong sales through the winter should have led us to expect weaker sales in the spring. The 1.5 percent falloff is relatively mild. If we look back over a longer period, May sales were 9.6 percent above the year-ago level.
Looking further back, May’s sales are roughly 30 percent higher than average monthly sales from the mid-90s, before the housing bubble distorted the market beyond recognition. Since population has only risen by a bit more 10 percent over this period, we are actually seeing a very high rate of sales.
Furthermore, May sales indicated a sharp rise in prices. Monthly price data on existing homes sales are always erratic and are typically driven much more by a change in the mix of homes being sold rather than a rise in the price of homes. Nonetheless, this is the third consecutive large monthly rise in the price of existing homes. The median price of a home sold in May was 17.3 percent above its February level and 7.9 percent above its year-ago level. The price increases show up in every region indicating that this is not a story of high-priced regions seeing an increase in sales relative to low-priced regions.
This report should have been seen as very positive news on the housing market. Unfortunately, the economists who missed the bubble still don’t seem to know much about the housing market. While house prices are not going to return to their bubble levels (which no one in their right mind should want), they have bottomed out and will likely be rising modestly through the rest of 2012 and beyond. Furthermore, we are seeing higher rates of construction as the backlog of unsold homes has been whittled away in many areas. Housing is now making a positive contribution to the recovery.
We all know that economists aren’t very good when it comes to understanding the economy. This is exactly what economic theory predicts.
When economists completely mess up, for example by missing an $8 trillion housing bubble, they do not risk any sanction, such as being fired. This means that they have little incentive to get things right. If waiters had no incentive to get orders right and bring food to customers quickly, then people would have to wait a long time for their dinners and frequently get the wrong dish. Since economists aren’t held to same standard as waiters, we typically get wrong economic analysis.
Thus we had numerous stories telling us about the bad news on existing home sales. That is not what the data show. May sales were down 1.5 percent from April levels, but this is hardly bad news. We had just seen four months of relatively strong sales, which were spurred in part by unusually mild winter weather. (Remember sales typically take place 6-8 weeks after a contract is signed. The homes sold in May were mostly contracted in March and early April.)
If people buy a home in January or February, they will not rush out and buy another one in March and April. In other words, the relatively strong sales through the winter should have led us to expect weaker sales in the spring. The 1.5 percent falloff is relatively mild. If we look back over a longer period, May sales were 9.6 percent above the year-ago level.
Looking further back, May’s sales are roughly 30 percent higher than average monthly sales from the mid-90s, before the housing bubble distorted the market beyond recognition. Since population has only risen by a bit more 10 percent over this period, we are actually seeing a very high rate of sales.
Furthermore, May sales indicated a sharp rise in prices. Monthly price data on existing homes sales are always erratic and are typically driven much more by a change in the mix of homes being sold rather than a rise in the price of homes. Nonetheless, this is the third consecutive large monthly rise in the price of existing homes. The median price of a home sold in May was 17.3 percent above its February level and 7.9 percent above its year-ago level. The price increases show up in every region indicating that this is not a story of high-priced regions seeing an increase in sales relative to low-priced regions.
This report should have been seen as very positive news on the housing market. Unfortunately, the economists who missed the bubble still don’t seem to know much about the housing market. While house prices are not going to return to their bubble levels (which no one in their right mind should want), they have bottomed out and will likely be rising modestly through the rest of 2012 and beyond. Furthermore, we are seeing higher rates of construction as the backlog of unsold homes has been whittled away in many areas. Housing is now making a positive contribution to the recovery.
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Readers of an article that highlighted a study by the National Association of Manufacturers warning of the loss of nearly 1 million jobs due to cuts in military spending are undoubtedly asking this question. They no doubt remember a plan cooked up by the paper’s publisher, Katherine Weymouth, to sell lobbyists access to its reporters at dinners at her house. This article essentially lent the paper’s authority to a completely misleading study.
The basic story here is very simple, when you are in a severe downturn any spending creates jobs. If we spend money on schools and hospitals that creates jobs. If we pay people to dig holes and fill them up again, it creates jobs. And, if we pay people to build weapons for the military it creates jobs.
There is nothing magical about military spending in this story. In fact, research that was not paid for by the National Association of Manufacturers shows that military spending actually creates fewer jobs per dollar than other types of government spending.
When the economy is not in a downturn, then military spending destroys jobs. An analysis done for CEPR by Global insights showed that a long-run increase in military spending of 1 percent of GDP (roughly the amount spent on the war in Iraq in its peak years) would reduce the number of jobs by almost 700,000. The hardest hit sectors would be construction and manufacturing.
If the Post wanted to inform rather than mislead its readers, it could have just run a piece pointing out that cutting government spending at this point in the business cycle will cost jobs. (Raising taxes will also cost jobs, but not by as much, especially if the tax increases target higher income people who would not change their spending much in response to a decline in disposable income.)
In short deficit reduction right now will cost jobs. The politicians in Washington may not understand this fact, but the Post’s reporters and editors should.
Readers of an article that highlighted a study by the National Association of Manufacturers warning of the loss of nearly 1 million jobs due to cuts in military spending are undoubtedly asking this question. They no doubt remember a plan cooked up by the paper’s publisher, Katherine Weymouth, to sell lobbyists access to its reporters at dinners at her house. This article essentially lent the paper’s authority to a completely misleading study.
The basic story here is very simple, when you are in a severe downturn any spending creates jobs. If we spend money on schools and hospitals that creates jobs. If we pay people to dig holes and fill them up again, it creates jobs. And, if we pay people to build weapons for the military it creates jobs.
There is nothing magical about military spending in this story. In fact, research that was not paid for by the National Association of Manufacturers shows that military spending actually creates fewer jobs per dollar than other types of government spending.
When the economy is not in a downturn, then military spending destroys jobs. An analysis done for CEPR by Global insights showed that a long-run increase in military spending of 1 percent of GDP (roughly the amount spent on the war in Iraq in its peak years) would reduce the number of jobs by almost 700,000. The hardest hit sectors would be construction and manufacturing.
If the Post wanted to inform rather than mislead its readers, it could have just run a piece pointing out that cutting government spending at this point in the business cycle will cost jobs. (Raising taxes will also cost jobs, but not by as much, especially if the tax increases target higher income people who would not change their spending much in response to a decline in disposable income.)
In short deficit reduction right now will cost jobs. The politicians in Washington may not understand this fact, but the Post’s reporters and editors should.
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Casey Mulligan used his NYT blogpost this week to tell readers:
“there is no such thing as a monopoly in the computer industry.”
The rest of the piece is devoted to criticizing the foolishness of the Justice Department in having brought an anti-trust suit against Microsoft. The rise of Apple is at the center of the story, with Apple having surged past Microsoft in profits and market value and Microsoft now struggling to maintain its position with a new tablet computer.
This is a great story of the dynamism of the market in the computer industry. But there is some history that Mulligan apparently does not know. Back in 1997 Apple was in the intensive care ward with its survival very much in doubt. At that time, it was just a computer company. There were no iPads, iPhones, or even iPods, just Apple computers and it didn’t seem that many people wanted to buy them.
The big question facing Apple was whether Microsoft would continue to design its office suite to be compatible with Apple computers. After all, Apple had a relatively small share of the market at the time, why should Microsoft go through the effort and expense of making Word, Excel and the rest compatible with Apple’s silly system.
Here’s what the NYT had to say at the time about Microsoft’s decision to throw $150 million Apple’s way and to continue to produce Apple compatible software:
“Odd or not, the bailout is good for both. Apple users are assured that their beloved company gets desperately needed cash and that Microsoft will continue to supply them up-to-date word processing and other applications software. Many would-be Apple buyers had been turning away out of fear that as Apple’s market share shriveled, so would the programs made available for use on Apple machines.
“The bailout is also good for Microsoft because it preserves a demand for its software programs designed to be compatible with Apple machines. But some suspect a more Machiavellian purpose by Microsoft as well. Microsoft can now fend off antitrust charges by pointing out that Apple’s continued existence will prevent Microsoft from acting as a monopolist. If Apple dies, Microsoft will appear nakedly monopolistic, the only major producer of operating systems for personal computers.”
Of course there is no guarantee that the NYT’s assessment is correct (others in the business press had a similar view) but if it is, we get a very different picture of the impact of the government’s anti-trust suit. The implication of the NYT’s assessment is that the threat of anti-trust litigation forced Microsoft to be less predatory even to the point of working to keep a competitor alive. In this case, the competitor in question turned out to be an enormously innovative company that now produces great products that consumers value immensely.
That story makes the government’s anti-trust case against Microsoft look pretty damn good. Of course the benefits may even go well beyond the survival of Apple. Would Google have had the space to develop a first-rate search engine and subsequent products like the Android phone system if Microsoft had continued its practice of broadening its scope into other areas? (The immediate focus of the anti-trust case was the decision by Microsoft to add a browser to its operating system that essentially wiped out Netscape.)
Of course this doesn’t establish that the Justice Department was necessarily right in going after Microsoft in the 90s, but the slam dunk case going in the other direction that Mulligan thinks is demonstrated by Apple’s success requires a major re-write of history.
Casey Mulligan used his NYT blogpost this week to tell readers:
“there is no such thing as a monopoly in the computer industry.”
The rest of the piece is devoted to criticizing the foolishness of the Justice Department in having brought an anti-trust suit against Microsoft. The rise of Apple is at the center of the story, with Apple having surged past Microsoft in profits and market value and Microsoft now struggling to maintain its position with a new tablet computer.
This is a great story of the dynamism of the market in the computer industry. But there is some history that Mulligan apparently does not know. Back in 1997 Apple was in the intensive care ward with its survival very much in doubt. At that time, it was just a computer company. There were no iPads, iPhones, or even iPods, just Apple computers and it didn’t seem that many people wanted to buy them.
The big question facing Apple was whether Microsoft would continue to design its office suite to be compatible with Apple computers. After all, Apple had a relatively small share of the market at the time, why should Microsoft go through the effort and expense of making Word, Excel and the rest compatible with Apple’s silly system.
Here’s what the NYT had to say at the time about Microsoft’s decision to throw $150 million Apple’s way and to continue to produce Apple compatible software:
“Odd or not, the bailout is good for both. Apple users are assured that their beloved company gets desperately needed cash and that Microsoft will continue to supply them up-to-date word processing and other applications software. Many would-be Apple buyers had been turning away out of fear that as Apple’s market share shriveled, so would the programs made available for use on Apple machines.
“The bailout is also good for Microsoft because it preserves a demand for its software programs designed to be compatible with Apple machines. But some suspect a more Machiavellian purpose by Microsoft as well. Microsoft can now fend off antitrust charges by pointing out that Apple’s continued existence will prevent Microsoft from acting as a monopolist. If Apple dies, Microsoft will appear nakedly monopolistic, the only major producer of operating systems for personal computers.”
Of course there is no guarantee that the NYT’s assessment is correct (others in the business press had a similar view) but if it is, we get a very different picture of the impact of the government’s anti-trust suit. The implication of the NYT’s assessment is that the threat of anti-trust litigation forced Microsoft to be less predatory even to the point of working to keep a competitor alive. In this case, the competitor in question turned out to be an enormously innovative company that now produces great products that consumers value immensely.
That story makes the government’s anti-trust case against Microsoft look pretty damn good. Of course the benefits may even go well beyond the survival of Apple. Would Google have had the space to develop a first-rate search engine and subsequent products like the Android phone system if Microsoft had continued its practice of broadening its scope into other areas? (The immediate focus of the anti-trust case was the decision by Microsoft to add a browser to its operating system that essentially wiped out Netscape.)
Of course this doesn’t establish that the Justice Department was necessarily right in going after Microsoft in the 90s, but the slam dunk case going in the other direction that Mulligan thinks is demonstrated by Apple’s success requires a major re-write of history.
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Paul Krugman introduced the world to the “confidence fairy,” the creature that proponents of austerity think will cause investment and growth because governments cut budget deficits. Only people with the right eyes, and a well-respected perch in policy making, are able to see the confidence fairy.
In the same vein, we should also recognize the “regulation monster.” The regulation monster is the creature that strangles businesses in bureaucratic paperwork and red tape so that they can’t invest and hire people. The NYT had a great piece documenting the work of the regulation monster in western Pennsylvania.
Those following Mitt Romney’s presidential campaign or listening to Republicans in Congress have heard their complaints that President Obama’s regulations are bottling up domestic energy production. These regulations are unnecessarily leaving the United States at the mercy of foreign oil producers, obstructing job growth and forcing us to pay more for energy.
Having heard these stories, Jonathan Weisman went to western Pennsylvania, which is at the center of the Marcellus Shale, in search of the regulation monster. While the piece includes comments from industry people who complain about regulation, the people who live in the area all report no evidence of any regulation whatsoever. They seem to believe that the industry gets away with pretty much whatever it wants.
The evidence on natural gas prices would seem to support the residents’ case. The current spot price is down by more than 40 percent from what it was when President Obama took office. In fact, there have been many reports in the business press of gas companies scaling back drilling plans because prices are too low.
In short, there is about as much evidence for the regulation monster in the energy industry as there is for the confidence fairy in the macroeconomic picture. Yet, these mythical creatures seem destined to have enormous importance in national politics and policy debates. Better get to know them.
Paul Krugman introduced the world to the “confidence fairy,” the creature that proponents of austerity think will cause investment and growth because governments cut budget deficits. Only people with the right eyes, and a well-respected perch in policy making, are able to see the confidence fairy.
In the same vein, we should also recognize the “regulation monster.” The regulation monster is the creature that strangles businesses in bureaucratic paperwork and red tape so that they can’t invest and hire people. The NYT had a great piece documenting the work of the regulation monster in western Pennsylvania.
Those following Mitt Romney’s presidential campaign or listening to Republicans in Congress have heard their complaints that President Obama’s regulations are bottling up domestic energy production. These regulations are unnecessarily leaving the United States at the mercy of foreign oil producers, obstructing job growth and forcing us to pay more for energy.
Having heard these stories, Jonathan Weisman went to western Pennsylvania, which is at the center of the Marcellus Shale, in search of the regulation monster. While the piece includes comments from industry people who complain about regulation, the people who live in the area all report no evidence of any regulation whatsoever. They seem to believe that the industry gets away with pretty much whatever it wants.
The evidence on natural gas prices would seem to support the residents’ case. The current spot price is down by more than 40 percent from what it was when President Obama took office. In fact, there have been many reports in the business press of gas companies scaling back drilling plans because prices are too low.
In short, there is about as much evidence for the regulation monster in the energy industry as there is for the confidence fairy in the macroeconomic picture. Yet, these mythical creatures seem destined to have enormous importance in national politics and policy debates. Better get to know them.
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That’s basically zero right now (and higher inflation would be good — reducing the debt of homeowners and lowering real interest rates), but if Operation Twist boosts growth and increases employment then it threatens inflation in the same way as printing money. Someone has to straighten out the Post.
That’s basically zero right now (and higher inflation would be good — reducing the debt of homeowners and lowering real interest rates), but if Operation Twist boosts growth and increases employment then it threatens inflation in the same way as printing money. Someone has to straighten out the Post.
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The PBS Newshour last night included a segment on state and local pension liabilities. While it included Josh Rauh, one of the people who has been most visible raising alarms about the condition of state pensions, it did not include the voice of anyone who was prepared to defend the financial situation of state pensions.
This meant, for example, that when Rauh told viewers that unfunded liabilities came to $9,000 for every U.S. household, there was no one to point out that this comes to less than 0.3 percent of projected household income over the next 30 years, the relevant time frame for paying off this unfunded liability. It is likely that listeners would be less concerned if they were given this additional piece of information.
There was also no one to point out that pension funds are simply assuming that their asset mix will get their historic rate of return when they assume an 8.0 percent. Contrary to Ruah’s statement:
“Anybody who’s looked at their own accounts lately know that that’s very difficult particularly in an environment where bonds, 10-year Treasury bonds are yielding 1.6 percent.”
A knowledgeable person could have reminded readers that the price to earnings ratios for stock have now fallen back to their long-term average. While it was in fact foolish for pensions to assume 8.0 percent returns when the PEs were inflated in the 90s and the last decade, as some of us pointed out at the time, it is difficult to construct a plausible scenario now where pension assets will provide a return that is much below 8.0 percent.
Unfortunately, because the show did not have a balanced panel, there was no one to make these points to viewers.
The PBS Newshour last night included a segment on state and local pension liabilities. While it included Josh Rauh, one of the people who has been most visible raising alarms about the condition of state pensions, it did not include the voice of anyone who was prepared to defend the financial situation of state pensions.
This meant, for example, that when Rauh told viewers that unfunded liabilities came to $9,000 for every U.S. household, there was no one to point out that this comes to less than 0.3 percent of projected household income over the next 30 years, the relevant time frame for paying off this unfunded liability. It is likely that listeners would be less concerned if they were given this additional piece of information.
There was also no one to point out that pension funds are simply assuming that their asset mix will get their historic rate of return when they assume an 8.0 percent. Contrary to Ruah’s statement:
“Anybody who’s looked at their own accounts lately know that that’s very difficult particularly in an environment where bonds, 10-year Treasury bonds are yielding 1.6 percent.”
A knowledgeable person could have reminded readers that the price to earnings ratios for stock have now fallen back to their long-term average. While it was in fact foolish for pensions to assume 8.0 percent returns when the PEs were inflated in the 90s and the last decade, as some of us pointed out at the time, it is difficult to construct a plausible scenario now where pension assets will provide a return that is much below 8.0 percent.
Unfortunately, because the show did not have a balanced panel, there was no one to make these points to viewers.
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There is a lengthy and painful debate over at the Trichordist over whether young people are being immoral when they listen to music that they didn’t pay for. The lead piece “letter to Emily” explains to a young woman how she has an obligation to pay for the music she listens to. The piece accurately documents the dismal economic plight of most musicians. It then throws in the statistics that are familiar to those of us who follow the issue closely:
Recorded music revenue is down 64% since 1999.
Per capita spending on music is 47% lower than it was in 1973!!
The number of professional musicians has fallen 25% since 2000.
Of the 75,000 albums released in 2010 only 2,000 sold more than 5,000 copies. Only 1,000 sold more than 10,000 copies. Without going into details, 10,000 albums is about the point where independent artists begin to go into the black on professional album production, marketing and promotion.
All of these facts are right. That should tell us that we have a system that doesn’t work. We can harangue Emily about being an immoral person, but that is not a serious response. The copyright system might have been fine for 16th century Venice but it is not a viable way to support creative work in the Internet Age and we are not going to change that by preaching to the heretics.
The serious route is to find an alternative mechanism. I have proposed one, an Artistic Freedom Voucher. This is essentially an individual tax credit, modeled on the charitable deduction, that would allow everyone to give a certain sum (e.g. $150) to the creative worker(s) or organization who they most like. The condition of getting the money would be that a creative worker register with the I.R.S. just like a charity or non-profit must register and give up their ability to get copyright protection for a period of time (e.g. 5 years).
It is a simple, low-bureaucracy way to get tens of billions of dollars a year to support creative workers. I am sure that there are other better ways to do this, but the point is that copyright is dying fast.
Creative workers can get upset about that fact and scream at the Emilys of the world for being immoral or they can try to think of a way of developing a model that works in the Internet Age.
There is a lengthy and painful debate over at the Trichordist over whether young people are being immoral when they listen to music that they didn’t pay for. The lead piece “letter to Emily” explains to a young woman how she has an obligation to pay for the music she listens to. The piece accurately documents the dismal economic plight of most musicians. It then throws in the statistics that are familiar to those of us who follow the issue closely:
Recorded music revenue is down 64% since 1999.
Per capita spending on music is 47% lower than it was in 1973!!
The number of professional musicians has fallen 25% since 2000.
Of the 75,000 albums released in 2010 only 2,000 sold more than 5,000 copies. Only 1,000 sold more than 10,000 copies. Without going into details, 10,000 albums is about the point where independent artists begin to go into the black on professional album production, marketing and promotion.
All of these facts are right. That should tell us that we have a system that doesn’t work. We can harangue Emily about being an immoral person, but that is not a serious response. The copyright system might have been fine for 16th century Venice but it is not a viable way to support creative work in the Internet Age and we are not going to change that by preaching to the heretics.
The serious route is to find an alternative mechanism. I have proposed one, an Artistic Freedom Voucher. This is essentially an individual tax credit, modeled on the charitable deduction, that would allow everyone to give a certain sum (e.g. $150) to the creative worker(s) or organization who they most like. The condition of getting the money would be that a creative worker register with the I.R.S. just like a charity or non-profit must register and give up their ability to get copyright protection for a period of time (e.g. 5 years).
It is a simple, low-bureaucracy way to get tens of billions of dollars a year to support creative workers. I am sure that there are other better ways to do this, but the point is that copyright is dying fast.
Creative workers can get upset about that fact and scream at the Emilys of the world for being immoral or they can try to think of a way of developing a model that works in the Internet Age.
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Well, he didn’t say that exactly, but we can infer it from his column. In this piece he again called for President Obama to embrace the deficit reduction plan put forward by former Senator Alan Simpson and Morgan Stanley director Erskine Bowles.
One of the central features of the Bowles-Simpson plan is a reduction in the annual cost of living adjustment for Social Security by 0.3 percentage points. After ten years this implies a cut in benefits of 3 percent. After twenty years it implies a cut in benefits of 6 percent. If we assume that the average beneficiary will collect benefits for twenty years, then the average fall in benefits will be 3 percent over a retiree’s lifetime.
Roughly a third of beneficiaries rely on Social Security for 90 percent or more of their income. For these people this change in the cost of living adjustment would be equivalent to a 3 percentage point increase in their income taxes. They would see a much sharper decline in their income than say a person earning $300,000 a year would from seeing the expiration of the Bush tax cuts.
Obviously Friedman does not believe that the cut in Social Security benefits that he is advocating is a big deal. Therefore we can infer that he also does not view the smaller percentage cut in income that would result from ending the Bush tax cuts as a big deal.
It is worth noting that Friedman continually harangues Obama for not doing what he in fact already has done. Friedman wants Obama to be brave and embrace a package involving major budget cuts. Obama has in fact repeatedly indicated his willingness to support the Bowles-Simpson plan.
Given that this plan implies a big hit to many low and moderate income people, and is enthusiastically embraced by DC pundit class, once can question how brave it is to embrace it. But Friedman is essentially making a career out of haranguing Obama to do something he has already done.
Well, he didn’t say that exactly, but we can infer it from his column. In this piece he again called for President Obama to embrace the deficit reduction plan put forward by former Senator Alan Simpson and Morgan Stanley director Erskine Bowles.
One of the central features of the Bowles-Simpson plan is a reduction in the annual cost of living adjustment for Social Security by 0.3 percentage points. After ten years this implies a cut in benefits of 3 percent. After twenty years it implies a cut in benefits of 6 percent. If we assume that the average beneficiary will collect benefits for twenty years, then the average fall in benefits will be 3 percent over a retiree’s lifetime.
Roughly a third of beneficiaries rely on Social Security for 90 percent or more of their income. For these people this change in the cost of living adjustment would be equivalent to a 3 percentage point increase in their income taxes. They would see a much sharper decline in their income than say a person earning $300,000 a year would from seeing the expiration of the Bush tax cuts.
Obviously Friedman does not believe that the cut in Social Security benefits that he is advocating is a big deal. Therefore we can infer that he also does not view the smaller percentage cut in income that would result from ending the Bush tax cuts as a big deal.
It is worth noting that Friedman continually harangues Obama for not doing what he in fact already has done. Friedman wants Obama to be brave and embrace a package involving major budget cuts. Obama has in fact repeatedly indicated his willingness to support the Bowles-Simpson plan.
Given that this plan implies a big hit to many low and moderate income people, and is enthusiastically embraced by DC pundit class, once can question how brave it is to embrace it. But Friedman is essentially making a career out of haranguing Obama to do something he has already done.
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The euro zone crisis is very bad news for the people of the region, especially in the peripheral countries where unemployment is soaring well into the double digits. However its impact on the economic situation in the United States has been hugely exaggerated, as in this NYT article that told readers:
“With his own re-election chances directly tied to the European economic crisis as it drags down growth in the United States, Mr. Obama desperately wants Ms. Merkel to loosen the reins on spending and the austerity programs that have been imposed on Greece and the other struggling euro zone economies.”
In fact, exports to the euro zone countries are less than 1.5 percent of GDP. Even if these were to fall by 10 percent (a huge decline) it would have only a minimal impact on growth in the United States. Also, the euro zone crises has helped to lower interest rates in the United States as investors turn to Treasury bonds as a safe haven. This has had a modest positive impact on growth in the United States.
Of course the situation would be different if there were a complete meltdown in the euro zone. This could lead to a Lehman-type financial crisis, which would be a serious hit to growth.
The euro zone crisis is very bad news for the people of the region, especially in the peripheral countries where unemployment is soaring well into the double digits. However its impact on the economic situation in the United States has been hugely exaggerated, as in this NYT article that told readers:
“With his own re-election chances directly tied to the European economic crisis as it drags down growth in the United States, Mr. Obama desperately wants Ms. Merkel to loosen the reins on spending and the austerity programs that have been imposed on Greece and the other struggling euro zone economies.”
In fact, exports to the euro zone countries are less than 1.5 percent of GDP. Even if these were to fall by 10 percent (a huge decline) it would have only a minimal impact on growth in the United States. Also, the euro zone crises has helped to lower interest rates in the United States as investors turn to Treasury bonds as a safe haven. This has had a modest positive impact on growth in the United States.
Of course the situation would be different if there were a complete meltdown in the euro zone. This could lead to a Lehman-type financial crisis, which would be a serious hit to growth.
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The Post told readers that with the Federal Reserve Board’s “Operation Twist” (selling short-term debt to buy longer term debt):
“the Fed is able to bring down more stubborn long-term rates — from corporate loans to mortgages — without “printing more money” to do so. Increasing the money supply increases the chance of inflation, which invites political criticism.”
This is not true. Anything the Fed does to boost demand in the economy increases the risk of inflation. As a practical matter, the idea that there would be a problem of inflation in an economy with so much excess capacity is almost absurd on its face. But if printing money raises fears of inflation, then so should another round of operation twist.
The Post told readers that with the Federal Reserve Board’s “Operation Twist” (selling short-term debt to buy longer term debt):
“the Fed is able to bring down more stubborn long-term rates — from corporate loans to mortgages — without “printing more money” to do so. Increasing the money supply increases the chance of inflation, which invites political criticism.”
This is not true. Anything the Fed does to boost demand in the economy increases the risk of inflation. As a practical matter, the idea that there would be a problem of inflation in an economy with so much excess capacity is almost absurd on its face. But if printing money raises fears of inflation, then so should another round of operation twist.
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