Outsourced to Mark Weisbrot.
The Economist’s editorial opinion on the second round of the French election is a bit unsubtle. The title “The rather dangerous Monsieur Hollande” and sub-head “The Socialist who is likely to be the next French president would be bad for his country and Europe” tell you all you might need to know about how the editors of this dull magazine really feel about the prospect of a left-of-center government in France.
To scare the readers, the editorial notes of this dangerous man that “By his own calculations, his proposals would splurge an extra €20 billion over five years. The state would grow even bigger.”
I asked our friend, Mr. Arithmetic, what he thought about this “splurge”. His answer was that “€20 billion is between one tenth and two tenths of one percent of France’s GDP over the next five years, according to the latest IMF projections.”
Mr. Arithmetic says that this isn’t much of a “splurge,” and that it will be hard for anyone to notice that the state is “even bigger.”
(Thanks to Anita Kirpalani for flagging the editorial).
Outsourced to Mark Weisbrot.
The Economist’s editorial opinion on the second round of the French election is a bit unsubtle. The title “The rather dangerous Monsieur Hollande” and sub-head “The Socialist who is likely to be the next French president would be bad for his country and Europe” tell you all you might need to know about how the editors of this dull magazine really feel about the prospect of a left-of-center government in France.
To scare the readers, the editorial notes of this dangerous man that “By his own calculations, his proposals would splurge an extra €20 billion over five years. The state would grow even bigger.”
I asked our friend, Mr. Arithmetic, what he thought about this “splurge”. His answer was that “€20 billion is between one tenth and two tenths of one percent of France’s GDP over the next five years, according to the latest IMF projections.”
Mr. Arithmetic says that this isn’t much of a “splurge,” and that it will be hard for anyone to notice that the state is “even bigger.”
(Thanks to Anita Kirpalani for flagging the editorial).
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Adam Davidson has a piece in the Sunday NYT magazine on Mitt Romney’s former business partner, Edward Conard and his new book, Unintended Consequences. At one point, the piece cites me as saying that for each dollar earned by investors (corporations), the rest of society gets five dollars.
This should not sound surprising. This is simply the division of national income between capital and labor. The after-tax capital share of corporate income is roughly one-sixth of total income. This means that if GDP increases by $1 billion, then capital will typically get around $160 million, with the rest going to labor and corporate taxes.
Note that this does not mean that investors are responsible for this $1 billion increase in output. Their actions contributed to the growth of output in the same way as did the actions of workers and the government. The misleading part of the picture is Conard’s implication that if not for the heroic investor, none of this wealth would have been created.
In standard economic theory if one investor had not put money to use, then another one would have. The difference in output would have been trivial.
(I have a review of Conard’s book on Huffington Post.)
[Thanks to Arthur Munisteri for spelling correction.]
Adam Davidson has a piece in the Sunday NYT magazine on Mitt Romney’s former business partner, Edward Conard and his new book, Unintended Consequences. At one point, the piece cites me as saying that for each dollar earned by investors (corporations), the rest of society gets five dollars.
This should not sound surprising. This is simply the division of national income between capital and labor. The after-tax capital share of corporate income is roughly one-sixth of total income. This means that if GDP increases by $1 billion, then capital will typically get around $160 million, with the rest going to labor and corporate taxes.
Note that this does not mean that investors are responsible for this $1 billion increase in output. Their actions contributed to the growth of output in the same way as did the actions of workers and the government. The misleading part of the picture is Conard’s implication that if not for the heroic investor, none of this wealth would have been created.
In standard economic theory if one investor had not put money to use, then another one would have. The difference in output would have been trivial.
(I have a review of Conard’s book on Huffington Post.)
[Thanks to Arthur Munisteri for spelling correction.]
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Eduardo Porter told readers in his Economic Scene column that because China’s trade surplus overall has fallen, Treasury Secretary Timothy Geithner:
“will have a harder time making the case that America’s trade deficit is somehow China’s fault.”
Actually, he will have no problem at all making the case that the U.S. trade deficit is the result of an over-valued dollar, which China helps to sustain by buying hundreds of billions of dollars of government bonds.
In a system of floating exchange rates, like the one we are supposed to have, trade imbalances are corrected through a decline in the value of the currencies of deficit nations, like the United States. The mechanism is that more dollars are being supplied to buy imports than are needed to purchase imports from the United States. This leads to an excess supply of dollars, which then causes the dollar to fall in value against other currencies. In a system of floating exchange rates an excess supply of dollars is supposed lead the dollar to fall in the same way that an excess supply of shoes is expected to cause the price of shoes to fall.
A lower valued dollar makes imports more expensive for people in the United States leading people to buy fewer imports. It also makes exports cheaper for people living in other countries, leading them to buy more U.S. exports. This process then continues until the trade balance adjusts.
By explicit policy China is preventing this process of adjustment. It has an explicit policy of pegging its currency against the dollar. This means that it buys as many dollars as necessary to maintain the peg. (This is done in broad daylight, it is not a mysterious process of “manipulation” that is done in secret.)
Therefore Geithner would have no problem at all making the case that America’s trade deficit is China’s fault, this is exactly what textbook economics maintains. (He likely will not want to make this case, since many media accounts have suggested that Geithner is more interested in directly pressing issues that will help businesses in the United States rather than addressing the trade imbalance, which would benefit millions of workers.)
It is also worth noting that standard economic theory predicts that fast growing developing countries like China will have a trade deficit, while slower growing wealthy countries like the United States will have a trade surplus. The argument is that capital is relatively scarce and gets a better return in China than in the United States. This means that the U.S. should be lending vast amounts of money to China, not the other way around.
Eduardo Porter told readers in his Economic Scene column that because China’s trade surplus overall has fallen, Treasury Secretary Timothy Geithner:
“will have a harder time making the case that America’s trade deficit is somehow China’s fault.”
Actually, he will have no problem at all making the case that the U.S. trade deficit is the result of an over-valued dollar, which China helps to sustain by buying hundreds of billions of dollars of government bonds.
In a system of floating exchange rates, like the one we are supposed to have, trade imbalances are corrected through a decline in the value of the currencies of deficit nations, like the United States. The mechanism is that more dollars are being supplied to buy imports than are needed to purchase imports from the United States. This leads to an excess supply of dollars, which then causes the dollar to fall in value against other currencies. In a system of floating exchange rates an excess supply of dollars is supposed lead the dollar to fall in the same way that an excess supply of shoes is expected to cause the price of shoes to fall.
A lower valued dollar makes imports more expensive for people in the United States leading people to buy fewer imports. It also makes exports cheaper for people living in other countries, leading them to buy more U.S. exports. This process then continues until the trade balance adjusts.
By explicit policy China is preventing this process of adjustment. It has an explicit policy of pegging its currency against the dollar. This means that it buys as many dollars as necessary to maintain the peg. (This is done in broad daylight, it is not a mysterious process of “manipulation” that is done in secret.)
Therefore Geithner would have no problem at all making the case that America’s trade deficit is China’s fault, this is exactly what textbook economics maintains. (He likely will not want to make this case, since many media accounts have suggested that Geithner is more interested in directly pressing issues that will help businesses in the United States rather than addressing the trade imbalance, which would benefit millions of workers.)
It is also worth noting that standard economic theory predicts that fast growing developing countries like China will have a trade deficit, while slower growing wealthy countries like the United States will have a trade surplus. The argument is that capital is relatively scarce and gets a better return in China than in the United States. This means that the U.S. should be lending vast amounts of money to China, not the other way around.
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In reference to the high unemployment rate in Spain the Post told readers:
“The recession also is expected to force down wages and prices and, over time, make Spanish exports more competitive and the country more attractive to investors and tourists.”
Actually there are few, if any, examples of countries where high unemployment led to this process of falling wages and prices that in turn restored competitiveness. Wages tend to be very sticky downward, which is why prices in countries across the euro zone, even those with double-digit unemployment, continue to rise.
It’s also not clear these economies would benefit even if they did have deflation. This would make real interest rates higher (borrowers would have to repay loans in money that is worth more than what they borrowed) and also increase the interest burden for homeowners with mortgages and other debtors.
Many economists have made these points. It is therefore misleading readers to imply that there is a simple story whereby Spain’s high unemployment is a step in a process toward restoring prosperity.
In reference to the high unemployment rate in Spain the Post told readers:
“The recession also is expected to force down wages and prices and, over time, make Spanish exports more competitive and the country more attractive to investors and tourists.”
Actually there are few, if any, examples of countries where high unemployment led to this process of falling wages and prices that in turn restored competitiveness. Wages tend to be very sticky downward, which is why prices in countries across the euro zone, even those with double-digit unemployment, continue to rise.
It’s also not clear these economies would benefit even if they did have deflation. This would make real interest rates higher (borrowers would have to repay loans in money that is worth more than what they borrowed) and also increase the interest burden for homeowners with mortgages and other debtors.
Many economists have made these points. It is therefore misleading readers to imply that there is a simple story whereby Spain’s high unemployment is a step in a process toward restoring prosperity.
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That’s what he says in his column today. This seems more than a bit fantastic given the run-up in prices to $150 a barrel in 2008 followed by a plunge to less than $40. Most of these movements might be attributable to growth and then recession in the real economy, but it would require a story of incredibly inelastic supply and demand to fully explain these movements by the fundamentals of the market. There is research (here [link corrected] and here) that shows the opposite of Samuelson’s assertion.
That’s what he says in his column today. This seems more than a bit fantastic given the run-up in prices to $150 a barrel in 2008 followed by a plunge to less than $40. Most of these movements might be attributable to growth and then recession in the real economy, but it would require a story of incredibly inelastic supply and demand to fully explain these movements by the fundamentals of the market. There is research (here [link corrected] and here) that shows the opposite of Samuelson’s assertion.
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That fact should have mentioned prominently in an NYT article discussing the debate over the adoption of the European Union’s stability pact by Ireland. The pact only places restrictions on deficits and debt in the public sector.
However Ireland had no problem with debt or deficits in the public sector, it was running budget surpluses until the crisis hit and it had a very low ratio of debt to GDP. Ireland’s problem was the buildup of massive private sector debt, which fueled an enormous housing bubble.
Unfortunately, the European Union has no proposals to do anything to prevent the sort of asset bubbles, the collapse of which has led to the current crisis. The European Central Bank (ECB), the obvious institution to carry this responsibility, insists that its only job is to target 2.0 percent inflation.
This means that the ECB will consider its job well done even if an outhouse in Ireland costs $50 million euros or there is 50 percent unemployment, as long as the inflation rate is 2.0 percent. This situation should have been made clear to readers.
That fact should have mentioned prominently in an NYT article discussing the debate over the adoption of the European Union’s stability pact by Ireland. The pact only places restrictions on deficits and debt in the public sector.
However Ireland had no problem with debt or deficits in the public sector, it was running budget surpluses until the crisis hit and it had a very low ratio of debt to GDP. Ireland’s problem was the buildup of massive private sector debt, which fueled an enormous housing bubble.
Unfortunately, the European Union has no proposals to do anything to prevent the sort of asset bubbles, the collapse of which has led to the current crisis. The European Central Bank (ECB), the obvious institution to carry this responsibility, insists that its only job is to target 2.0 percent inflation.
This means that the ECB will consider its job well done even if an outhouse in Ireland costs $50 million euros or there is 50 percent unemployment, as long as the inflation rate is 2.0 percent. This situation should have been made clear to readers.
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Actually, they did not do this (as far as I know), but if the government ever asserted that its motive in locking up journalists was to promote freedom of the press, presumably the NYT would not just take this assertion at face value. This is why readers must be scratching their heads over the assertion that:
“Aiming to ease budgetary pressure and spur growth, Prime Minister Mario Monti of Italy has announced cuts to state spending by the end of the year.”
Of course budget cuts will typically lead to slower growth, not faster growth. In a downturn, an economy needs demand. If the government reduces demand there is no obvious source of demand to replace it, which means that there will be less overall demand in the economy and therefore less growth.
Budget cuts across the euro zone have pushed the area back into recession. There is no reason to believe that further cuts will somehow boost growth.
Actually, they did not do this (as far as I know), but if the government ever asserted that its motive in locking up journalists was to promote freedom of the press, presumably the NYT would not just take this assertion at face value. This is why readers must be scratching their heads over the assertion that:
“Aiming to ease budgetary pressure and spur growth, Prime Minister Mario Monti of Italy has announced cuts to state spending by the end of the year.”
Of course budget cuts will typically lead to slower growth, not faster growth. In a downturn, an economy needs demand. If the government reduces demand there is no obvious source of demand to replace it, which means that there will be less overall demand in the economy and therefore less growth.
Budget cuts across the euro zone have pushed the area back into recession. There is no reason to believe that further cuts will somehow boost growth.
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That would have been an appropriate headline for a Washington Post article that essentially told readers that Treasury Secretary Timothy Geithner would focus on issues that matter to business in his discussions with Chinese leaders. The most important issue for workers in dealing with China is a drop in the value of the dollar relative to yuan.
This would reduce the price of U.S. exports to people living in China and make imports from China more expensive. This would lead to more exports and fewer imports. Also, many other countries would likely follow the lead of China if it were to raise the value of its currency relative to the dollar. This would improve the U.S. trade balance overall. Economists agree that if the United States is to achieve full employment without large budget deficits or negative private savings, as we saw during the housing bubble years, this sort of adjustment is essential.
However the Post bizarrely told readers:
“chief among the bright spots, according to the Treasury chief and many observers, has been progress toward closing the yawning trade deficit between the two countries. U.S. exports to China have almost doubled since the beginning of Obama’s term.”
Actually, there has been zero progress towards closing the “yawning trade deficit.” The U.S. trade deficit with China in the first two months of 2012 was $45.4 billion, from $42.1 billion in 2011. This puts the U.S. on a path toward having yet another record trade deficit with China.
The piece then tells us in the passive voice [thanks Aloysius]:
“Even the issue of getting China to stop pegging its currency to the dollar — a major source of tension a few years ago — has receded somewhat, as the value of China’s yuan has moderately increased against the U.S. dollar.”
Actually, the issue doesn’t recede. Officials make a decision to de-emphasize it, which appears to be the case here.
The article then tells readers:
“U.S. business leaders view this round of talks as a prime opportunity. Advocates of reform within the Chinese government are speaking up, they said, and the mood is positive following the recent visit to the United States of future leader Xi Jinping.
‘No other country presents China’s particular mix of opportunities and challenges,’ Geithner said last week in a speech to the Commonwealth Club in San Francisco. The Obama administration, he said, has made “significant progress” on its goals.
U.S.-China Business Council President John Frisbie said American companies are hoping the Chinese will agree to open discussions on a bilateral investment treaty that would allow foreign investors to take full ownership of Chinese firms.”
I think that my headline much more accurately conveys the gist of the information presented in the article. Maybe the Post will correct the headline in its on-line version.
That would have been an appropriate headline for a Washington Post article that essentially told readers that Treasury Secretary Timothy Geithner would focus on issues that matter to business in his discussions with Chinese leaders. The most important issue for workers in dealing with China is a drop in the value of the dollar relative to yuan.
This would reduce the price of U.S. exports to people living in China and make imports from China more expensive. This would lead to more exports and fewer imports. Also, many other countries would likely follow the lead of China if it were to raise the value of its currency relative to the dollar. This would improve the U.S. trade balance overall. Economists agree that if the United States is to achieve full employment without large budget deficits or negative private savings, as we saw during the housing bubble years, this sort of adjustment is essential.
However the Post bizarrely told readers:
“chief among the bright spots, according to the Treasury chief and many observers, has been progress toward closing the yawning trade deficit between the two countries. U.S. exports to China have almost doubled since the beginning of Obama’s term.”
Actually, there has been zero progress towards closing the “yawning trade deficit.” The U.S. trade deficit with China in the first two months of 2012 was $45.4 billion, from $42.1 billion in 2011. This puts the U.S. on a path toward having yet another record trade deficit with China.
The piece then tells us in the passive voice [thanks Aloysius]:
“Even the issue of getting China to stop pegging its currency to the dollar — a major source of tension a few years ago — has receded somewhat, as the value of China’s yuan has moderately increased against the U.S. dollar.”
Actually, the issue doesn’t recede. Officials make a decision to de-emphasize it, which appears to be the case here.
The article then tells readers:
“U.S. business leaders view this round of talks as a prime opportunity. Advocates of reform within the Chinese government are speaking up, they said, and the mood is positive following the recent visit to the United States of future leader Xi Jinping.
‘No other country presents China’s particular mix of opportunities and challenges,’ Geithner said last week in a speech to the Commonwealth Club in San Francisco. The Obama administration, he said, has made “significant progress” on its goals.
U.S.-China Business Council President John Frisbie said American companies are hoping the Chinese will agree to open discussions on a bilateral investment treaty that would allow foreign investors to take full ownership of Chinese firms.”
I think that my headline much more accurately conveys the gist of the information presented in the article. Maybe the Post will correct the headline in its on-line version.
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Every quarter the Census Bureau puts out data on vacancy rates and homeownership. For some reason, this release is almost always ignored.
This is unfortunate because it often contains very useful information on the housing market. One of the reasons that I could be so sure that we were seeing a bubble when house prices started diverging sharply from historic trends was that the vacancy rate was reaching record levels as early as 2002. As we learn in advanced economics, excess supply is supposed to lead to lower prices, not higher prices.
Anyhow, yesterday’s release deserved special attention. It had both good news and bad news. The good news was that vacancy rates declined sharply from both the fourth quarter and the year ago levels. The rental vacancy rate fell by 0.9 percentage points from its year ago level, while the vacancy rate for ownership units fell by 0.4 percentage points. The levels are still much higher than normal, but this was by far the biggest quarterly drop since the recession.
The bad news was that the homeownership rate also plunged. It fell by 1.0 percentage point from its year ago level to 65.4 percent. This is 3.6 percentage points from its bubble peak and the lowest level since the first quarter of 1997. The homeownership rate for African Americans fell by 1.7 percentage points from its year ago level to 43.1 percent. That’s the lowest level since the 4th quarter of 1995.
By age group, the homeownership rate for households headed by someone between ages 45-54 was down 1.8 percentage points from its year ago level to 71.3 percent. For the 35-44 age group it was down by 3.0 percentage points to 61.4 percent. This suggests that a unusually large number of near retirees will reach retirement without any equity in a home as an asset. Perhaps the younger group will be able to make up their loss, but the current economic picture does not make this look likely.
Anyhow, this release was big news that warranted some attention. The data are sometimes erratic, and these numbers may be partially reversed in next quarter’s data, but the trends indicated in the release are a big deal.
Every quarter the Census Bureau puts out data on vacancy rates and homeownership. For some reason, this release is almost always ignored.
This is unfortunate because it often contains very useful information on the housing market. One of the reasons that I could be so sure that we were seeing a bubble when house prices started diverging sharply from historic trends was that the vacancy rate was reaching record levels as early as 2002. As we learn in advanced economics, excess supply is supposed to lead to lower prices, not higher prices.
Anyhow, yesterday’s release deserved special attention. It had both good news and bad news. The good news was that vacancy rates declined sharply from both the fourth quarter and the year ago levels. The rental vacancy rate fell by 0.9 percentage points from its year ago level, while the vacancy rate for ownership units fell by 0.4 percentage points. The levels are still much higher than normal, but this was by far the biggest quarterly drop since the recession.
The bad news was that the homeownership rate also plunged. It fell by 1.0 percentage point from its year ago level to 65.4 percent. This is 3.6 percentage points from its bubble peak and the lowest level since the first quarter of 1997. The homeownership rate for African Americans fell by 1.7 percentage points from its year ago level to 43.1 percent. That’s the lowest level since the 4th quarter of 1995.
By age group, the homeownership rate for households headed by someone between ages 45-54 was down 1.8 percentage points from its year ago level to 71.3 percent. For the 35-44 age group it was down by 3.0 percentage points to 61.4 percent. This suggests that a unusually large number of near retirees will reach retirement without any equity in a home as an asset. Perhaps the younger group will be able to make up their loss, but the current economic picture does not make this look likely.
Anyhow, this release was big news that warranted some attention. The data are sometimes erratic, and these numbers may be partially reversed in next quarter’s data, but the trends indicated in the release are a big deal.
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Robert Samuelson somehow concludes that the rich don’t have disproportionate influence on policy because the top quintile pays almost 70 percent of federal taxes. It is difficult to understand the logic of this one.
The rich don’t just lobby for lower taxes, they also lobby for rules that redistribute before tax income upward. For example, patent monopolies on prescription drugs redistribute roughly $270 billion a year from the public as a whole to drug companies in the form of higher drug prices. Protectionist restrictions on foreign doctors practicing in the United States has pushed the average pay of doctors to around $250,000. This amounts to a transfer of close to $100 billion a year compared to a situation in which doctors were subject to the same sort of market competition as auto workers or dish washers.
The government also provides enormous subsidies to the super-rich in the form of too big to fail insurance for financial companies and one-sided labor laws that impose harsh restrictions on union-side violations but wrist slaps for employer side. There are many other ways in which the rich use lobbyists to ensure that income gets redistributed upward. It is understandable that they would like the public to only focus on taxes, but that is obviously a sidebar.
Robert Samuelson somehow concludes that the rich don’t have disproportionate influence on policy because the top quintile pays almost 70 percent of federal taxes. It is difficult to understand the logic of this one.
The rich don’t just lobby for lower taxes, they also lobby for rules that redistribute before tax income upward. For example, patent monopolies on prescription drugs redistribute roughly $270 billion a year from the public as a whole to drug companies in the form of higher drug prices. Protectionist restrictions on foreign doctors practicing in the United States has pushed the average pay of doctors to around $250,000. This amounts to a transfer of close to $100 billion a year compared to a situation in which doctors were subject to the same sort of market competition as auto workers or dish washers.
The government also provides enormous subsidies to the super-rich in the form of too big to fail insurance for financial companies and one-sided labor laws that impose harsh restrictions on union-side violations but wrist slaps for employer side. There are many other ways in which the rich use lobbyists to ensure that income gets redistributed upward. It is understandable that they would like the public to only focus on taxes, but that is obviously a sidebar.
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