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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In an article on the likelihood that the Fed would take steps to boost the economy at its meeting this week the NYT gave readers Governor Romney’s assessment of Fed actions to boost the economy. The article tells readers:
“As for the consequences [of measures to boost the economy], Mr. Romney said the program was ‘not extraordinarily harmful, but it does put in question the future value of the dollar and it will obviously encourage some inflation down the road.'”
Romney has repeatedly said that he would take strong measures against China to pressure it to raise the value of its currency against the dollar. This is the same thing as reducing the value of the dollar since it means that the dollar will fall against the Chinese yuan and almost certainly against the currencies of many other countries who will follow China’s lead.
If Romney really wants to see the value of the dollar fall against China’s currency, as he claims, then it is hard to see why he would be worried that dollar would fall in response to the Fed’s actions. This seems to be exactly the policy he is advocating.
It is also worth noting that a lower valued dollar is the standard mechanism for correcting the trade deficit. Those who want to see the United States borrowing less from foreigners should favor a lower valued dollar.
In an article on the likelihood that the Fed would take steps to boost the economy at its meeting this week the NYT gave readers Governor Romney’s assessment of Fed actions to boost the economy. The article tells readers:
“As for the consequences [of measures to boost the economy], Mr. Romney said the program was ‘not extraordinarily harmful, but it does put in question the future value of the dollar and it will obviously encourage some inflation down the road.'”
Romney has repeatedly said that he would take strong measures against China to pressure it to raise the value of its currency against the dollar. This is the same thing as reducing the value of the dollar since it means that the dollar will fall against the Chinese yuan and almost certainly against the currencies of many other countries who will follow China’s lead.
If Romney really wants to see the value of the dollar fall against China’s currency, as he claims, then it is hard to see why he would be worried that dollar would fall in response to the Fed’s actions. This seems to be exactly the policy he is advocating.
It is also worth noting that a lower valued dollar is the standard mechanism for correcting the trade deficit. Those who want to see the United States borrowing less from foreigners should favor a lower valued dollar.
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The NYT had two pieces today discussing the euro zone crisis, both of which implied that additional funds to support the peripheral countries will have to come from Germany and other core countries. Actually, this route would be problematic because at some point even Germany’s credit would be called into question.
The key to restoring the euro zone to stable growth would be to have the European Central Bank (ECB) back up the debts of the euro zone countries. This would immediately restore the market’s confidence in their debt and sharply reduce interest rates. The only risk from going this route is higher inflation.
Of course higher inflation is a necessary part of the solution to the crisis. The peripheral countries must regain their competitiveness relative to Germany. This can only be done by having prices rise less rapidly in the peripheral countries than in Germany. Since it is not plausible to envision prices declining in the peripheral countries (there is no precedence for such price declines) then prices must rise more rapidly in Germany.
For this reason, the guarantee of peripheral country debts by the ECB would accomplish both major tasks needed to end the crisis. It would immediately end the risk of a default by these countries and also set in motion a process that could restore their competitiveness. And, it would be largely painless for numerate people in Germany and other core euro zone countries.
The NYT had two pieces today discussing the euro zone crisis, both of which implied that additional funds to support the peripheral countries will have to come from Germany and other core countries. Actually, this route would be problematic because at some point even Germany’s credit would be called into question.
The key to restoring the euro zone to stable growth would be to have the European Central Bank (ECB) back up the debts of the euro zone countries. This would immediately restore the market’s confidence in their debt and sharply reduce interest rates. The only risk from going this route is higher inflation.
Of course higher inflation is a necessary part of the solution to the crisis. The peripheral countries must regain their competitiveness relative to Germany. This can only be done by having prices rise less rapidly in the peripheral countries than in Germany. Since it is not plausible to envision prices declining in the peripheral countries (there is no precedence for such price declines) then prices must rise more rapidly in Germany.
For this reason, the guarantee of peripheral country debts by the ECB would accomplish both major tasks needed to end the crisis. It would immediately end the risk of a default by these countries and also set in motion a process that could restore their competitiveness. And, it would be largely painless for numerate people in Germany and other core euro zone countries.
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Dana Milbank devoted his column to the disenchantment of progressives with the current political situation. At one point he comments that:
“the still-lumbering economy has depressed President Obama’s supporters.”
While this is no doubt true, it is worth mentioning that just about all progressives said at the time that the stimulus would be inadequate to restore the economy to a healthy growth path. The collapse of the housing bubble destroyed close to $1.2 trillion in annual demand from construction and consumption. At its peak in 2009 and 2010 the stimulus only replaced about $300 billion in annual spending.
It is discouraging to see so many people suffering unnecessarily, but this outcome is exactly what our analysis predicted at the time. Unfortunately, having a track record of being right is not generally a factor in determining which views carry weight in Washington policy debates.
Dana Milbank devoted his column to the disenchantment of progressives with the current political situation. At one point he comments that:
“the still-lumbering economy has depressed President Obama’s supporters.”
While this is no doubt true, it is worth mentioning that just about all progressives said at the time that the stimulus would be inadequate to restore the economy to a healthy growth path. The collapse of the housing bubble destroyed close to $1.2 trillion in annual demand from construction and consumption. At its peak in 2009 and 2010 the stimulus only replaced about $300 billion in annual spending.
It is discouraging to see so many people suffering unnecessarily, but this outcome is exactly what our analysis predicted at the time. Unfortunately, having a track record of being right is not generally a factor in determining which views carry weight in Washington policy debates.
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The Bureau of Labor Statistics issued its April report for the Job Opening and Labor Turnover Survey (JOLTS) today. It shows a big drop in job openings.
While some folks will no doubt make a big deal out of this report, there are a few things to keep in mind. First, there is a considerable lag in the data. We already knew that employment growth was weak in April and May, so it should not be very surprising that job openings were down in April.
The second point to keep in mind is that most of the drop is due to a March surge. While the number of openings is down by 325,000 compared with March, it is only down by 111,000 against the average of the prior three months — all of which had relatively strong job growth.
The third point is that this again looks to be a regional weather story. Most of the drop is from the Midwest, with the April number down by 92,000 from the Dec-Feb average. This is a story of people being hired in unusually warm winter months so that job openings that would ordinarily exist in the spring are not there.
We should all agree that the economy is not growing fast enough, but those yapping about an economic collapse, double-dip, etc. need to talk to a weatherperson to know which way the wind blows.
The Bureau of Labor Statistics issued its April report for the Job Opening and Labor Turnover Survey (JOLTS) today. It shows a big drop in job openings.
While some folks will no doubt make a big deal out of this report, there are a few things to keep in mind. First, there is a considerable lag in the data. We already knew that employment growth was weak in April and May, so it should not be very surprising that job openings were down in April.
The second point to keep in mind is that most of the drop is due to a March surge. While the number of openings is down by 325,000 compared with March, it is only down by 111,000 against the average of the prior three months — all of which had relatively strong job growth.
The third point is that this again looks to be a regional weather story. Most of the drop is from the Midwest, with the April number down by 92,000 from the Dec-Feb average. This is a story of people being hired in unusually warm winter months so that job openings that would ordinarily exist in the spring are not there.
We should all agree that the economy is not growing fast enough, but those yapping about an economic collapse, double-dip, etc. need to talk to a weatherperson to know which way the wind blows.
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The NYT told readers that Mexico looks set to surge past Brazil in its growth rate in the years ahead. It notes the fact that it grew more rapidly last year and looks set to grow more rapidly again in 2012. It is worth noting that Brazil grew considerably more rapidly since 2000, so Mexico would have a long way to go to make up lost ground, although its initial GDP was considerably higher than Brazil’s.
Source: IMF.
It’s also worth noting that Mexico’s 3.9 percent growth rate for 2011, which is 2.9 percent per capita, is not especially rapid for a developing country.
The NYT told readers that Mexico looks set to surge past Brazil in its growth rate in the years ahead. It notes the fact that it grew more rapidly last year and looks set to grow more rapidly again in 2012. It is worth noting that Brazil grew considerably more rapidly since 2000, so Mexico would have a long way to go to make up lost ground, although its initial GDP was considerably higher than Brazil’s.
Source: IMF.
It’s also worth noting that Mexico’s 3.9 percent growth rate for 2011, which is 2.9 percent per capita, is not especially rapid for a developing country.
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The United States has more than 25 million people unemployed, underemployed, or out of the labor force altogether because of the weak economy. Investors are willing to make long-term loans to the country at 1.5 percent interest. The idea that the budget deficit should be the country’s major concern is close to loony, but nonetheless in policy circles that seems to be the case.
This is best demonstrated by Niall Ferguson’s nutball column in the Financial Times, which we are warned is only the first of four. I would tear this thing to shreds but I want to get some sleep tonight.
I’ll just pick one choice nugget. Ferguson tells us:
“The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the U.S. Treasury.
Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion.”
Hmmmm, $200 trillion at the federal level and $38 trillion at the state and local level? Can we get a source for this? Is there a date there for when the Martians will attack Planet Earth?
In fairness, there are nutty projections that assume that per capita health care costs in the United States will be four or five times as high as in all other wealthy countries. If this proves true, over an infinite horizon we will have a very bad deficit problem. Of course, these health care costs would wreck our economy regardless of what we do with public sector health care programs. These projections would cause serious people to talk about the need to fix the health care system. But this is national economic policy that we are talking about.
But this piece suggests an easy route for dealing with the deficit. Clearly there is a big market for deficit hawks. (I assume that Mr. Ferguson was well-paid for this piece.) It certainly is not difficult to train someone to write this stuff. Suppose that we set up educational programs that will train millions of deficit hawks to write stuff for the Peter Peterson–BBC–Financial Times crew. We split the payments between our former students and the government.
This would be a great win-win-win story. Otherwise unemployed college grads could get good-paying jobs being deficit hawks. Taxpayers would get a cut of their payments, helping to bring down the deficit. And, even Peter Peterson, the BBC, and the Financial Times would gain because they would be able to find deficit hawks who would be every bit as knowledgeable as Niall Ferguson and would work for much less. (We could assure the deficit hawks that our students would not be more knowledgeable because then they probably would not write such dreck.)
There you have it: a plan for compromise and bipartisanship. Do we have a deal?
The United States has more than 25 million people unemployed, underemployed, or out of the labor force altogether because of the weak economy. Investors are willing to make long-term loans to the country at 1.5 percent interest. The idea that the budget deficit should be the country’s major concern is close to loony, but nonetheless in policy circles that seems to be the case.
This is best demonstrated by Niall Ferguson’s nutball column in the Financial Times, which we are warned is only the first of four. I would tear this thing to shreds but I want to get some sleep tonight.
I’ll just pick one choice nugget. Ferguson tells us:
“The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the U.S. Treasury.
Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion.”
Hmmmm, $200 trillion at the federal level and $38 trillion at the state and local level? Can we get a source for this? Is there a date there for when the Martians will attack Planet Earth?
In fairness, there are nutty projections that assume that per capita health care costs in the United States will be four or five times as high as in all other wealthy countries. If this proves true, over an infinite horizon we will have a very bad deficit problem. Of course, these health care costs would wreck our economy regardless of what we do with public sector health care programs. These projections would cause serious people to talk about the need to fix the health care system. But this is national economic policy that we are talking about.
But this piece suggests an easy route for dealing with the deficit. Clearly there is a big market for deficit hawks. (I assume that Mr. Ferguson was well-paid for this piece.) It certainly is not difficult to train someone to write this stuff. Suppose that we set up educational programs that will train millions of deficit hawks to write stuff for the Peter Peterson–BBC–Financial Times crew. We split the payments between our former students and the government.
This would be a great win-win-win story. Otherwise unemployed college grads could get good-paying jobs being deficit hawks. Taxpayers would get a cut of their payments, helping to bring down the deficit. And, even Peter Peterson, the BBC, and the Financial Times would gain because they would be able to find deficit hawks who would be every bit as knowledgeable as Niall Ferguson and would work for much less. (We could assure the deficit hawks that our students would not be more knowledgeable because then they probably would not write such dreck.)
There you have it: a plan for compromise and bipartisanship. Do we have a deal?
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The Washington Post had a piece that looked at the experience of Washington State to see what might happen with President Obama’s health care plan if the mandate is struck down. Washington State provides an interesting model because it had established a similar model of health care reform in the early 90s.
While the initial plan did have mandates, these were never put into law. As a result, people could opt to not buy insurance until they actually had serious medical problems. Many people went this route, which soon made insurance unaffordable since only sick people were buying insurance.
The state responded by allowing insurers to not cover pre-existing conditions, however they still had to take all applicants and charge the same amount. The piece implies that the net effect has been a failure for the people of Washington State, telling readers:
“Washington state’s insurance market now has nine companies selling individual policies, compared with the 19 that participated in 1993. Thirteen percent of Washington state residents currently lack health coverage, the same proportion as when the health reform experiment started.”
These comments ignore the larger national trends. There has been enormous concentration in the insurance market everywhere over the last two decades, with 2-3 insurance companies accounting for the vast majority of the market in nearly every state. It is not clear that Washington has fared any worse than other states in this area.
If Washington has been able to keep the percentage of the population without insurance at 13 percent it has done better than the rest of the country. Nationally, the percentage of uninsured rose from 15.0 percent in 1993 to 16.3 percent in 2010, the most recent year for which data is available. While its health insurance law may not be the reason, Washington States has fared somewhat better than the country as a whole by this measure.
The Washington Post had a piece that looked at the experience of Washington State to see what might happen with President Obama’s health care plan if the mandate is struck down. Washington State provides an interesting model because it had established a similar model of health care reform in the early 90s.
While the initial plan did have mandates, these were never put into law. As a result, people could opt to not buy insurance until they actually had serious medical problems. Many people went this route, which soon made insurance unaffordable since only sick people were buying insurance.
The state responded by allowing insurers to not cover pre-existing conditions, however they still had to take all applicants and charge the same amount. The piece implies that the net effect has been a failure for the people of Washington State, telling readers:
“Washington state’s insurance market now has nine companies selling individual policies, compared with the 19 that participated in 1993. Thirteen percent of Washington state residents currently lack health coverage, the same proportion as when the health reform experiment started.”
These comments ignore the larger national trends. There has been enormous concentration in the insurance market everywhere over the last two decades, with 2-3 insurance companies accounting for the vast majority of the market in nearly every state. It is not clear that Washington has fared any worse than other states in this area.
If Washington has been able to keep the percentage of the population without insurance at 13 percent it has done better than the rest of the country. Nationally, the percentage of uninsured rose from 15.0 percent in 1993 to 16.3 percent in 2010, the most recent year for which data is available. While its health insurance law may not be the reason, Washington States has fared somewhat better than the country as a whole by this measure.
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