The NYT ran a profile of House Republican Budget Committee Chairman Paul Ryan today. It misrepresented some important features of Representative Ryan’s budget plan.
For example, while it told readers that the plan would, “reduce domestic federal spending to its smallest share of the economy since World War II.” it failed to point out that it would essentially eliminate all areas of the federal government, except Social Security, Medicare and other health care spending, and the military.
The Congressional Budget Office analysis of the Ryan budget, which was done under his direction, shows all non-health care, non-Security Security spending shrinking to 4.5 percent of GDP by 2040 and to 3.75 percent of GDP by 2050. The military budget is currently over 4.0 percent of GDP and has never been less than 3.0 percent of GDP since the start of the Cold War.
Assuming that Ryan keeps military spending in its historic range (he has indicated that he would), this implies the elimination of almost the whole federal government. His budget would leave no room for federal support of education, roads, bridges and other infrastructure, the federal court system, the Food and Drug Administration, the national park system and everything else associated with the federal government. It would have been useful to point this fact out to readers in a lengthy piece that attempted to give readers a sense of Representative Ryan’s vision.
The piece was also misleading when it told readers that:
“he has proposed collapsing today’s six personal income tax rates into two, 10 percent and 25 percent.”
The number of tax brackets is trivial. The more important feature of Representative Ryan’s tax plan is that it would reduce the tax rate faced by the wealthy from 39.6 percent under current law to 25.0 percent. This implies an enormous tax cut for the wealthiest people in the country.
If this tax cut is offset by eliminating tax breaks, as Representative Ryan claims would be the case, then it would imply large increases on middle class families through the elimination of tax breaks such as the mortgage interest deduction and the deduction for employer provided health insurance.
It would have useful to tell readers that Representative Ryan wants to finance large tax cuts for the wealthy with big tax increases on the middle class. That is presumably an important part of his philosophy.
The NYT ran a profile of House Republican Budget Committee Chairman Paul Ryan today. It misrepresented some important features of Representative Ryan’s budget plan.
For example, while it told readers that the plan would, “reduce domestic federal spending to its smallest share of the economy since World War II.” it failed to point out that it would essentially eliminate all areas of the federal government, except Social Security, Medicare and other health care spending, and the military.
The Congressional Budget Office analysis of the Ryan budget, which was done under his direction, shows all non-health care, non-Security Security spending shrinking to 4.5 percent of GDP by 2040 and to 3.75 percent of GDP by 2050. The military budget is currently over 4.0 percent of GDP and has never been less than 3.0 percent of GDP since the start of the Cold War.
Assuming that Ryan keeps military spending in its historic range (he has indicated that he would), this implies the elimination of almost the whole federal government. His budget would leave no room for federal support of education, roads, bridges and other infrastructure, the federal court system, the Food and Drug Administration, the national park system and everything else associated with the federal government. It would have been useful to point this fact out to readers in a lengthy piece that attempted to give readers a sense of Representative Ryan’s vision.
The piece was also misleading when it told readers that:
“he has proposed collapsing today’s six personal income tax rates into two, 10 percent and 25 percent.”
The number of tax brackets is trivial. The more important feature of Representative Ryan’s tax plan is that it would reduce the tax rate faced by the wealthy from 39.6 percent under current law to 25.0 percent. This implies an enormous tax cut for the wealthiest people in the country.
If this tax cut is offset by eliminating tax breaks, as Representative Ryan claims would be the case, then it would imply large increases on middle class families through the elimination of tax breaks such as the mortgage interest deduction and the deduction for employer provided health insurance.
It would have useful to tell readers that Representative Ryan wants to finance large tax cuts for the wealthy with big tax increases on the middle class. That is presumably an important part of his philosophy.
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The Washington Post was a strong supporter of NAFTA at the time the deal was approved. It continues to be a strong defender of the pact nearly two decades later. It has repeatedly shown itself willing to make up facts or just ignore them to push its pro-NAFTA line.
An example of the former occurred in December of 2007 when its lead editorial criticized the leading Democratic presidential candidates for saying that they would renegotiate NAFTA. The editorial told readers that not only had NAFTA been good for the U.S., it had been great for Mexico:
“Mexico’s gross domestic product, now more than $875 billion, has more than quadrupled since 1987.”
For those keeping score, the actual increase was 83 percent.
Today the Post is again touting the praises of its beautiful baby. Its lead editorial noted the decline in illegal immigration from Mexico to the United States. It told readers:
“Migration plummeted after 2005 because of reduced U.S. demand for labor and the slowing of Mexican population growth — but also because NAFTA started to pay off in the form of dynamic new export industries in Mexico such as automobile manufacturing. Analysts suggest the gap in wages between the United States and its southern neighbor, while still wide, has narrowed to the point where staying home is economically rational for a growing number of Mexican workers.
NAFTA encouraged both the United States and Mexico to make optimal use of their scarce resources. In the short run, this shifted jobs and income within each society and between them. This inherently disruptive process doubtless caused Mexicans who lost out to seek opportunity in the United States.
But over time, NAFTA helped make Mexico more efficient and, hence, wealthier. It formed part of a broader restructuring that has transformed Mexico from the underdeveloped, authoritarian country it was 30 years ago to the increasingly middle-class democracy it is now.
The gross domestic product per capita in Mexico was $12,400 in 2010, up about 21 percent in real terms since 1980.”
Wow, that really sounds great. Now let’s take a quick look at what the IMF has to say about Mexico’s situation. The graph below shows per capita income growth in Mexico from 1980 to 2011, compared with Argentina, Brazil, Chile, and the United States.
Source: International Monetary Fund.
Mexico’s 23.5 percent per capita growth over this period puts it dead last among this group. Its growth is almost one-thrid less than Brazil’s 32.9 percent and less than half of Argentina’s 52.7 percent.
Interestingly, its per capita growth is also just a bit more than one-third of the 66.3 percent growth in the U.S. over this period. That might raise questions about the extent to which the wage gap has closed over this period. Of course there has been a substantial upward redistribution of income in the United States over this period (partly due to trade deals like NAFTA), so some closing of the wage gap is plausible. On the other hand, Mexico stands out among Latin American countries in having substantial upward redistribution itself in the last decade, so it’s not clear that ordinary workers received much benefit from even the country’s limited growth.
Of course many factors affect Mexico’s growth and it may not be fair to attribute much of its economic troubles to NAFTA. However no one can look at the data and seriously tout Mexico’s strong growth and transformation. It clearly is a laggard, no matter how vigorously the Post might argue otherwise.
The Washington Post was a strong supporter of NAFTA at the time the deal was approved. It continues to be a strong defender of the pact nearly two decades later. It has repeatedly shown itself willing to make up facts or just ignore them to push its pro-NAFTA line.
An example of the former occurred in December of 2007 when its lead editorial criticized the leading Democratic presidential candidates for saying that they would renegotiate NAFTA. The editorial told readers that not only had NAFTA been good for the U.S., it had been great for Mexico:
“Mexico’s gross domestic product, now more than $875 billion, has more than quadrupled since 1987.”
For those keeping score, the actual increase was 83 percent.
Today the Post is again touting the praises of its beautiful baby. Its lead editorial noted the decline in illegal immigration from Mexico to the United States. It told readers:
“Migration plummeted after 2005 because of reduced U.S. demand for labor and the slowing of Mexican population growth — but also because NAFTA started to pay off in the form of dynamic new export industries in Mexico such as automobile manufacturing. Analysts suggest the gap in wages between the United States and its southern neighbor, while still wide, has narrowed to the point where staying home is economically rational for a growing number of Mexican workers.
NAFTA encouraged both the United States and Mexico to make optimal use of their scarce resources. In the short run, this shifted jobs and income within each society and between them. This inherently disruptive process doubtless caused Mexicans who lost out to seek opportunity in the United States.
But over time, NAFTA helped make Mexico more efficient and, hence, wealthier. It formed part of a broader restructuring that has transformed Mexico from the underdeveloped, authoritarian country it was 30 years ago to the increasingly middle-class democracy it is now.
The gross domestic product per capita in Mexico was $12,400 in 2010, up about 21 percent in real terms since 1980.”
Wow, that really sounds great. Now let’s take a quick look at what the IMF has to say about Mexico’s situation. The graph below shows per capita income growth in Mexico from 1980 to 2011, compared with Argentina, Brazil, Chile, and the United States.
Source: International Monetary Fund.
Mexico’s 23.5 percent per capita growth over this period puts it dead last among this group. Its growth is almost one-thrid less than Brazil’s 32.9 percent and less than half of Argentina’s 52.7 percent.
Interestingly, its per capita growth is also just a bit more than one-third of the 66.3 percent growth in the U.S. over this period. That might raise questions about the extent to which the wage gap has closed over this period. Of course there has been a substantial upward redistribution of income in the United States over this period (partly due to trade deals like NAFTA), so some closing of the wage gap is plausible. On the other hand, Mexico stands out among Latin American countries in having substantial upward redistribution itself in the last decade, so it’s not clear that ordinary workers received much benefit from even the country’s limited growth.
Of course many factors affect Mexico’s growth and it may not be fair to attribute much of its economic troubles to NAFTA. However no one can look at the data and seriously tout Mexico’s strong growth and transformation. It clearly is a laggard, no matter how vigorously the Post might argue otherwise.
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The Washington Post has a practice of running a story ever month or so about Japan facing a demographic nightmare because its population is living longer. The idea is that this will impoverish the nation’s youth, imposing a crushing burden for caring of the elderly. Of course those who know arithmetic know better.
This month’s feature began by telling readers:
“The ominous demographics of this aging nation have long been seen by Japanese as a distant concern, not a present-day one. But that mind-set is being called into question by a prime minister who says that a crisis requiring immediate sacrifices has already begun.
In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund Japan’s soaring social security costs.
And the potential tax hike is only a sneak preview of the burdens to come as Japan grows into the world’s grayest society, a nation where two decades from now seniors will outnumber children 15 and younger by nearly 4 to 1.
Economists and government officials say that Japan, in the coming years, will probably raise the retirement age, again increase taxes and trim spending on everything from education to defense, all to care for its elderly.
Young Japanese — those entering the workforce amid two decades of stagnation — will face the greatest burden: They will earn less in real terms than their parents, pay higher pension premiums, receive fewer social services and, eventually, retire with a less-generous pension package.”
Okay, let’s unpack this one a bit. First, by every measure Japan’s economy is operating far below its potential capacity. Why on earth does it need tax increases to pay for anything right now? This makes zero sense.
Japan can simply continue doing what it has been doing, running large deficits and having it central bank finance them by buying up government bonds.
Is there a problem with this? Japan has been seeing deflation for much of the last two decades. The interest rate on 10-year government bonds is hovering near 1.0 percent.
If Prime Minister Noda is arguing that the country needs to raise taxes he either does not understand economics or has a hidden agenda that the Post article did not discuss. In the current economic situation it is quite obvious that there is no need whatsoever to raise taxes. A tax increase would actually hurt the economy by reducing demand and employment.
Let’s consider the longer term issue. According to OECD data, productivity growth in Japan has been increasing at the rate of 1.8 percent a year over the last two decades. If this continues, output per worker will be 150 percent higher in 2050 than it was in 2000.
If the ratio of workers to retirees falls roughly 3 to 1 over this period to roughly 1 to 1, as the article tells us, and the pension system provides Japan’s workers with a pension equal to 50 percent of the income of the average worker (Social Security benefits equal 40 percent of the average wage) then the after Social Security tax wage will be roughly 80 percent higher in 2050 than it is today.
If we look at the issue more closely, this almost certainly understates the likely gains. First, as the work force shrinks productivity growth is likely to accelerate. This would occur for two reasons. First, the least productive jobs (e.g. the midnight shift at the 7-11) will simply go unfilled, thereby raising average productivity.
The other reason is that a smaller population will reduce pressure on the natural environment and infrastructure. If the population declines by 50 percent, then the share of the population who will be able to live in houses with ocean views will double. Also traffic jams will be much less serious, trains will be less crowded and people will have to spend much less time commuting. Some of these gains are likely not to be included in official statistics since they are not designed to pick up these sorts of quality improvements.
Also, it is likely that the share of the population that is employed will increase. This will be both true among the under 65 population, as more women enter the workforce, and also many healthy older Japanese may decide to work later in life. If Japan can achieve that same employment to population ratio among its age 16-64 population as Iceland has today, this pace of productivity growth would allow after-tax living standards to double over the years from 2000-2050.
Finally, the issue about trimming spending on education may seem less of a concern when we remember that the whole story is that number of children in Japan is plummeting. Why wouldn’t Japan trim spending in education. In short, this means that the tax increases needed to fund a larger population of retirees will be in part offset by the lower taxes needed to support a smaller population of children.
In short, there is not really a plausible story whereby a declining population will cause future generations of Japanese to be poorer than the current generation. Of course inept economic management could well bring about this result, but that is a very different story.
The Washington Post has a practice of running a story ever month or so about Japan facing a demographic nightmare because its population is living longer. The idea is that this will impoverish the nation’s youth, imposing a crushing burden for caring of the elderly. Of course those who know arithmetic know better.
This month’s feature began by telling readers:
“The ominous demographics of this aging nation have long been seen by Japanese as a distant concern, not a present-day one. But that mind-set is being called into question by a prime minister who says that a crisis requiring immediate sacrifices has already begun.
In recent months, Prime Minister Yoshihiko Noda has staked his job and bet his support on a tax increase designed to fund Japan’s soaring social security costs.
And the potential tax hike is only a sneak preview of the burdens to come as Japan grows into the world’s grayest society, a nation where two decades from now seniors will outnumber children 15 and younger by nearly 4 to 1.
Economists and government officials say that Japan, in the coming years, will probably raise the retirement age, again increase taxes and trim spending on everything from education to defense, all to care for its elderly.
Young Japanese — those entering the workforce amid two decades of stagnation — will face the greatest burden: They will earn less in real terms than their parents, pay higher pension premiums, receive fewer social services and, eventually, retire with a less-generous pension package.”
Okay, let’s unpack this one a bit. First, by every measure Japan’s economy is operating far below its potential capacity. Why on earth does it need tax increases to pay for anything right now? This makes zero sense.
Japan can simply continue doing what it has been doing, running large deficits and having it central bank finance them by buying up government bonds.
Is there a problem with this? Japan has been seeing deflation for much of the last two decades. The interest rate on 10-year government bonds is hovering near 1.0 percent.
If Prime Minister Noda is arguing that the country needs to raise taxes he either does not understand economics or has a hidden agenda that the Post article did not discuss. In the current economic situation it is quite obvious that there is no need whatsoever to raise taxes. A tax increase would actually hurt the economy by reducing demand and employment.
Let’s consider the longer term issue. According to OECD data, productivity growth in Japan has been increasing at the rate of 1.8 percent a year over the last two decades. If this continues, output per worker will be 150 percent higher in 2050 than it was in 2000.
If the ratio of workers to retirees falls roughly 3 to 1 over this period to roughly 1 to 1, as the article tells us, and the pension system provides Japan’s workers with a pension equal to 50 percent of the income of the average worker (Social Security benefits equal 40 percent of the average wage) then the after Social Security tax wage will be roughly 80 percent higher in 2050 than it is today.
If we look at the issue more closely, this almost certainly understates the likely gains. First, as the work force shrinks productivity growth is likely to accelerate. This would occur for two reasons. First, the least productive jobs (e.g. the midnight shift at the 7-11) will simply go unfilled, thereby raising average productivity.
The other reason is that a smaller population will reduce pressure on the natural environment and infrastructure. If the population declines by 50 percent, then the share of the population who will be able to live in houses with ocean views will double. Also traffic jams will be much less serious, trains will be less crowded and people will have to spend much less time commuting. Some of these gains are likely not to be included in official statistics since they are not designed to pick up these sorts of quality improvements.
Also, it is likely that the share of the population that is employed will increase. This will be both true among the under 65 population, as more women enter the workforce, and also many healthy older Japanese may decide to work later in life. If Japan can achieve that same employment to population ratio among its age 16-64 population as Iceland has today, this pace of productivity growth would allow after-tax living standards to double over the years from 2000-2050.
Finally, the issue about trimming spending on education may seem less of a concern when we remember that the whole story is that number of children in Japan is plummeting. Why wouldn’t Japan trim spending in education. In short, this means that the tax increases needed to fund a larger population of retirees will be in part offset by the lower taxes needed to support a smaller population of children.
In short, there is not really a plausible story whereby a declining population will cause future generations of Japanese to be poorer than the current generation. Of course inept economic management could well bring about this result, but that is a very different story.
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That was the headline of a Washington Post article (March 13, 1935, p 22). The subhead was, “technological progress has been so rapid during the depression that welders and other experts, idle since 1929, are outmoded.” The first paragraph told readers:
“unemployment may run into the millions, but as the iron, steel, and metal-working industries improve, a scarcity of skilled workmen is developing, states the magazine Steel this week.”
This shows that technology might change rapidly, but economic reporting at the Washington Post doesn’t. Many of the stories it has written in the last two years about shortages of skilled workers in the midst of mass unemployment could have been plagiarized from this 1935 piece.
It is also striking that this piece, like much current economic reporting, relies exclusively on business sources. The article does not make any reference to any independent experts and of course, no one from a union or any workers’ organization.
(Thanks to Seth Ackerman for sending me this gem from the past.)
That was the headline of a Washington Post article (March 13, 1935, p 22). The subhead was, “technological progress has been so rapid during the depression that welders and other experts, idle since 1929, are outmoded.” The first paragraph told readers:
“unemployment may run into the millions, but as the iron, steel, and metal-working industries improve, a scarcity of skilled workmen is developing, states the magazine Steel this week.”
This shows that technology might change rapidly, but economic reporting at the Washington Post doesn’t. Many of the stories it has written in the last two years about shortages of skilled workers in the midst of mass unemployment could have been plagiarized from this 1935 piece.
It is also striking that this piece, like much current economic reporting, relies exclusively on business sources. The article does not make any reference to any independent experts and of course, no one from a union or any workers’ organization.
(Thanks to Seth Ackerman for sending me this gem from the past.)
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David Brooks is playing the “it’s all so confusing, we just can’t really know anything about economic policy” game. The point is to try to make it intellectually respectable to question whether stimulus spending can boost the economy.
This is important for the right, because the evidence from the austerity induced double-dip in the UK and euro zone is making it ever harder to deny that government spending can and does stimulate the economy just as the old textbook models predict. In the wake of this evidence, it is incredibly valuable that someone like Brooks, who can claim credibility by virtue of his perch on the NYT oped page, muddy the waters with this sort of “it’s all so confusing” piece.
The way to understand Brooks’ column, which is ostensibly about the difficulty of sorting out whether government policies work, but which is really about confusing the issue on stimulus, is to imagine that the topic was evolution or the orbit of the earth around the sun. If a person was committed to denying evolution they could easily point to all the mistakes that biologists had made over the years in constructing evolutionary paths. Similarly, one could deny that the earth orbits the sun by pointing to all the difficulties that astronomers encountered over the years in properly calculating its orbit. As Brooks would say, it’s all so confusing, it’s too bad that we don’t have some way to determine these issues.
Of course honest people know that we have ways to determine these issues and it has long been a settled issue that evolution explains the structure of the biological world and that the earth orbits the sun. Similarly, it is simply not true, as Brooks claims:
“Nearly 80 years later, it’s hard to know if the New Deal did much to end the Great Depression.”
Nor is it Brooks being honest in saying:
“Many esteemed and/or Nobel Prize-winning economists like Joseph Stiglitz, Larry Summers and Christina Romer argued that it would help lift the economy out of recession. ….
We went ahead and spent the roughly $800 billion. What have we learned?
For certain, nothing. The economists who supported the stimulus now argue the economy would have been worse off without it.”
At the time, Stiglitz, like most prominent progressive economists outside the administration, said as loudly as possible that the stimulus would not be large enough to lift the economy out of recession. (Here’s one of my pieces on the topic.) Romer also argued for the need for a much bigger stimulus in a private memo, which has been documented in memos that have since been made public. (Summers claims that he agreed with Romer’s position.)
To imply, as Brooks does, that events have somehow shown the advocates of stimulus as being wrong, or that there is even much grounds for questioning the argument for stimulus as its proponents laid it out at the time is an effort to muddy the waters pure and simple. There any number of studies that have shown the stimulus has worked pretty much as predicted, such as this one by the Congressional Budget Office and this one, using an entirely different methodology by two Dartmouth economists.
Of course there can be economists who are opposed to the idea that stimulus can work as an article of religious faith. Economic theory also predicts that for a large enough sum of money there will be economists who will say that the stimulus did not work regardless of what they actually believe to be true.
But the evidence on stimulus, like the evidence on evolution and the orbit of the earth, is not ambiguous. It is unfortunate that some people get paychecks for trying to mislead the public into thinking it is.
[btw, Brooks deserves a heaping dose of ridicule for this section:
“Businesses conduct hundreds of thousands of randomized trials each year. Pharmaceutical companies conduct thousands more. But government? Hardly any.”
If Brooks ever read the paper he writes for, he would know that the pharmaceutical industry routinely misrepresents the results of its studies to exaggerate the effectiveness of its drugs and conceal evidence of harmful side effects. Given its track record it is hard to difficult to believe that anyone could hold up the pharmaceutical industry as a model with a straight face.]
David Brooks is playing the “it’s all so confusing, we just can’t really know anything about economic policy” game. The point is to try to make it intellectually respectable to question whether stimulus spending can boost the economy.
This is important for the right, because the evidence from the austerity induced double-dip in the UK and euro zone is making it ever harder to deny that government spending can and does stimulate the economy just as the old textbook models predict. In the wake of this evidence, it is incredibly valuable that someone like Brooks, who can claim credibility by virtue of his perch on the NYT oped page, muddy the waters with this sort of “it’s all so confusing” piece.
The way to understand Brooks’ column, which is ostensibly about the difficulty of sorting out whether government policies work, but which is really about confusing the issue on stimulus, is to imagine that the topic was evolution or the orbit of the earth around the sun. If a person was committed to denying evolution they could easily point to all the mistakes that biologists had made over the years in constructing evolutionary paths. Similarly, one could deny that the earth orbits the sun by pointing to all the difficulties that astronomers encountered over the years in properly calculating its orbit. As Brooks would say, it’s all so confusing, it’s too bad that we don’t have some way to determine these issues.
Of course honest people know that we have ways to determine these issues and it has long been a settled issue that evolution explains the structure of the biological world and that the earth orbits the sun. Similarly, it is simply not true, as Brooks claims:
“Nearly 80 years later, it’s hard to know if the New Deal did much to end the Great Depression.”
Nor is it Brooks being honest in saying:
“Many esteemed and/or Nobel Prize-winning economists like Joseph Stiglitz, Larry Summers and Christina Romer argued that it would help lift the economy out of recession. ….
We went ahead and spent the roughly $800 billion. What have we learned?
For certain, nothing. The economists who supported the stimulus now argue the economy would have been worse off without it.”
At the time, Stiglitz, like most prominent progressive economists outside the administration, said as loudly as possible that the stimulus would not be large enough to lift the economy out of recession. (Here’s one of my pieces on the topic.) Romer also argued for the need for a much bigger stimulus in a private memo, which has been documented in memos that have since been made public. (Summers claims that he agreed with Romer’s position.)
To imply, as Brooks does, that events have somehow shown the advocates of stimulus as being wrong, or that there is even much grounds for questioning the argument for stimulus as its proponents laid it out at the time is an effort to muddy the waters pure and simple. There any number of studies that have shown the stimulus has worked pretty much as predicted, such as this one by the Congressional Budget Office and this one, using an entirely different methodology by two Dartmouth economists.
Of course there can be economists who are opposed to the idea that stimulus can work as an article of religious faith. Economic theory also predicts that for a large enough sum of money there will be economists who will say that the stimulus did not work regardless of what they actually believe to be true.
But the evidence on stimulus, like the evidence on evolution and the orbit of the earth, is not ambiguous. It is unfortunate that some people get paychecks for trying to mislead the public into thinking it is.
[btw, Brooks deserves a heaping dose of ridicule for this section:
“Businesses conduct hundreds of thousands of randomized trials each year. Pharmaceutical companies conduct thousands more. But government? Hardly any.”
If Brooks ever read the paper he writes for, he would know that the pharmaceutical industry routinely misrepresents the results of its studies to exaggerate the effectiveness of its drugs and conceal evidence of harmful side effects. Given its track record it is hard to difficult to believe that anyone could hold up the pharmaceutical industry as a model with a straight face.]
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Since folks have asked my thoughts (you had to ask?) on the Krugman-Bernanke debate, I will throw in my two cents. The question at hand is whether the Fed can plausible generate more inflation, and thereby lower real interest rates and reduce the unemployment rate by announcing a commitment to higher inflation rate over the near future. This could mean, for example, committing itself to 4 percent inflation over the next 5 years.
If this policy was successful, it would lead to lower real interest rates, which would in turn lead to more consumption and investment. Ideally we would also see a decline in th real value of the dollar, leading to more net exports, the essential long-term path to full employment.
My view is that this path would likely be successful, if the Fed were really committed to it. That means continually buying up vast amounts of assets if the inflation rate did not appear to be rising. This should ultimately freak enough investor types into thinking that Bernanke was sufficiently nuts that he could cause inflation. They would then hedge themselves against this risk by buying up all sorts of commodities to protect against inflation, which would then lead to inflation.
That looks like a pretty compelling story to me, but perhaps at least as important, I don’t see the downside. Bernanke’s obsession with the Fed’s inflation fighting credibility (like the ECB’s) is really pathetic. How much is this worth when you just wrecked an economy with your incompetence in protecting against asset bubbles?
Other things equal, it is better to have central banks that have some credibility in fighting inflation, but how does this compare against tens of millions of people in the U.S. and euro zone being unemployed? If the latter is such a small matter, would the inflation fighters volunteer to surrender their jobs so that some of the unemployed can work?
Finally, if buying up tons of assets will not cause inflation, then there is definitely no excuse not to do it. The Fed can hold $10 trillion in assets and pay the interest to the Treasury each year. Currently it is refunding about $80 billion a year to the Treasury from its interest in assets.
Suppose this was instead $400 billion a year or $4 trillion over a decade? That should make even the most ardent deficit hawk happy. There would be no deficit problem in that story, which would mean that we can freely spend on all sorts of things that can boost growth and help people. Tell me again that story about Fed credibility?
Since folks have asked my thoughts (you had to ask?) on the Krugman-Bernanke debate, I will throw in my two cents. The question at hand is whether the Fed can plausible generate more inflation, and thereby lower real interest rates and reduce the unemployment rate by announcing a commitment to higher inflation rate over the near future. This could mean, for example, committing itself to 4 percent inflation over the next 5 years.
If this policy was successful, it would lead to lower real interest rates, which would in turn lead to more consumption and investment. Ideally we would also see a decline in th real value of the dollar, leading to more net exports, the essential long-term path to full employment.
My view is that this path would likely be successful, if the Fed were really committed to it. That means continually buying up vast amounts of assets if the inflation rate did not appear to be rising. This should ultimately freak enough investor types into thinking that Bernanke was sufficiently nuts that he could cause inflation. They would then hedge themselves against this risk by buying up all sorts of commodities to protect against inflation, which would then lead to inflation.
That looks like a pretty compelling story to me, but perhaps at least as important, I don’t see the downside. Bernanke’s obsession with the Fed’s inflation fighting credibility (like the ECB’s) is really pathetic. How much is this worth when you just wrecked an economy with your incompetence in protecting against asset bubbles?
Other things equal, it is better to have central banks that have some credibility in fighting inflation, but how does this compare against tens of millions of people in the U.S. and euro zone being unemployed? If the latter is such a small matter, would the inflation fighters volunteer to surrender their jobs so that some of the unemployed can work?
Finally, if buying up tons of assets will not cause inflation, then there is definitely no excuse not to do it. The Fed can hold $10 trillion in assets and pay the interest to the Treasury each year. Currently it is refunding about $80 billion a year to the Treasury from its interest in assets.
Suppose this was instead $400 billion a year or $4 trillion over a decade? That should make even the most ardent deficit hawk happy. There would be no deficit problem in that story, which would mean that we can freely spend on all sorts of things that can boost growth and help people. Tell me again that story about Fed credibility?
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I’m shorting Morgan Stanley after reading the NYT column on China by Ruchir Sharma, the head of emerging market equities at Morgan Stanley Investment Management. The piece begins by telling readers:
“more than half of Americans think China is already the world’s leading economy — an astonishing misperception, given that China’s gross domestic product is still less than half of America’s.”
That is not what our friends at the IMF say. On a purchasing power parity basis, which assigns the same set of prices to goods and services produced in both countries, China is already almost 80 percent of the size of the U.S. economy. There is also some serious research suggesting that because of mis-measurement of prices in rural areas, China’s economy is already larger than the U.S. economy.
The piece then goes on to tell us:
“It is well known that developing nations hit a “middle-income trap,” and stop catching up to rich nations, when per-capita income reaches about $5,000 to $15,000 (in current dollars). The examples (Brazil, Mexico, Malaysia) are numerous.”
Huh? This is well-known to whom? This is a huge range (imagine per capita GDP in the U.S. tripled to $150,000 per person) that includes almost 70 countries. It makes a huge difference whether a country’s growth slows near the bottom of this range, where they are still relatively poor, as opposed to the top, where they are decidedly middle class.
Furthermore, countries enter this range with radically different growth paths. The speedy growers like China are the exception. More typically countries edge up into this range with modest growth rates. In the more typical case, there is not much room for a slowdown. Of course in some of the fast growers, like Malaysia, one of Sharma’s examples of a slowdown country, there is little evidence of a slowdown as they maintain rapid growth right through this range.
Then Sharma tells us that China passed his $5,000 mark last year. Actually the IMF says it was 2007, and if the understatement view is right, China hit this mark as early as 2005.
Next we get my favorite:
“In recent years China has accounted for nearly half of global growth in oil demand, and every 1 percent of G.D.P. growth in China added 10 to 30 percent to the price of oil.”
I’m still trying to figure this one out. China consumes a bit more than half as much oil as the U.S., but somehow if its GDP increases by 1 percent, the price of oil rises by 10-30 percent. How exactly does that work? If U.S. GDP rises by 1 percent, does the price of oil rise 20-60 percent.
Finally, we are told that:
“China’s slowdown is also opening the door to a revival in American manufacturing. China is suffering many symptoms typical of a maturing miracle economy, from a strengthening currency to rising wages, land prices and transport costs, while the United States has a weak currency, stagnant wages and a moribund property market. The dollar is near record lows (in inflation-adjusted terms) against many of its trading partners, including China.”
I understand the point about relative prices, but don’t we have a better export market if China is growing rapidly? What did I learn in my econ 101 class that was wrong, don’t fast-growing countries have more rapid import growth than slow-growing countries?
Perhaps there is something that made sense in this piece, but it’s not easy to find. It’s hard to understand how a piece so chock full of errors finds its way into the NYT oped page.
I’m shorting Morgan Stanley after reading the NYT column on China by Ruchir Sharma, the head of emerging market equities at Morgan Stanley Investment Management. The piece begins by telling readers:
“more than half of Americans think China is already the world’s leading economy — an astonishing misperception, given that China’s gross domestic product is still less than half of America’s.”
That is not what our friends at the IMF say. On a purchasing power parity basis, which assigns the same set of prices to goods and services produced in both countries, China is already almost 80 percent of the size of the U.S. economy. There is also some serious research suggesting that because of mis-measurement of prices in rural areas, China’s economy is already larger than the U.S. economy.
The piece then goes on to tell us:
“It is well known that developing nations hit a “middle-income trap,” and stop catching up to rich nations, when per-capita income reaches about $5,000 to $15,000 (in current dollars). The examples (Brazil, Mexico, Malaysia) are numerous.”
Huh? This is well-known to whom? This is a huge range (imagine per capita GDP in the U.S. tripled to $150,000 per person) that includes almost 70 countries. It makes a huge difference whether a country’s growth slows near the bottom of this range, where they are still relatively poor, as opposed to the top, where they are decidedly middle class.
Furthermore, countries enter this range with radically different growth paths. The speedy growers like China are the exception. More typically countries edge up into this range with modest growth rates. In the more typical case, there is not much room for a slowdown. Of course in some of the fast growers, like Malaysia, one of Sharma’s examples of a slowdown country, there is little evidence of a slowdown as they maintain rapid growth right through this range.
Then Sharma tells us that China passed his $5,000 mark last year. Actually the IMF says it was 2007, and if the understatement view is right, China hit this mark as early as 2005.
Next we get my favorite:
“In recent years China has accounted for nearly half of global growth in oil demand, and every 1 percent of G.D.P. growth in China added 10 to 30 percent to the price of oil.”
I’m still trying to figure this one out. China consumes a bit more than half as much oil as the U.S., but somehow if its GDP increases by 1 percent, the price of oil rises by 10-30 percent. How exactly does that work? If U.S. GDP rises by 1 percent, does the price of oil rise 20-60 percent.
Finally, we are told that:
“China’s slowdown is also opening the door to a revival in American manufacturing. China is suffering many symptoms typical of a maturing miracle economy, from a strengthening currency to rising wages, land prices and transport costs, while the United States has a weak currency, stagnant wages and a moribund property market. The dollar is near record lows (in inflation-adjusted terms) against many of its trading partners, including China.”
I understand the point about relative prices, but don’t we have a better export market if China is growing rapidly? What did I learn in my econ 101 class that was wrong, don’t fast-growing countries have more rapid import growth than slow-growing countries?
Perhaps there is something that made sense in this piece, but it’s not easy to find. It’s hard to understand how a piece so chock full of errors finds its way into the NYT oped page.
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Okay, I know that picking on George Will might seem like cheap fun, but as an oped columnist for the Washington Post we are supposed to take him seriously. Today Will is beating up on states that don’t follow his pro-rich prescriptions focusing on California and my home state of Illinois.
Let me start with my favorite Will line:
“From September through December 2008, the premium that investors demanded before they would buy California debt rather than U.S. Treasurys jumped from 24 to 271 basis points (100 points equals 1 percent). The bond market, the only remaining reality check for state politicians, must be allowed to work.”
Okay, boys and girls, can anyone think of anything that might have affected spreads in the bond market in the fall of 2008? (Hint: Federal Reserve Board Chairman Ben Bernanke and then Treasury Secretary Henry Paulson were running around screaming that the world was about to end.)
That’s right, we had the collapse of Lehman Brothers and a financial freeze-up. The yield on anything that wasn’t U.S. Treasury bonds soared in this period. In other words, Will’s statement here means absolutely nothing — but it is good enough for the Washington Post editorial page.
As far as the Illinois bashing, Will tells us that:
“The Illinois Policy Institute, a limited-government think tank, in a report cheekily titled “Another $54 Billion!?” argues that in addition to the $83 billion in pension underfunding the state acknowledges, there is $54 billion in unfunded retiree health liabilities over the next 30 years.”
Hmmm, $83 billion in unfunded liabilities? That sounds scaaaary. If the oped page imposed any standards on its writers it might have asked Will to express this number as a share of state income over this period, since no one (I mean no one) has any clue how large an expenditure $83 billion is for Illinois over the next 30 years. The answer is that it would be equal to around 0.7 percent of the state’s projected income over this period. That is not trivial, but not exactly the sort of expenditure that implies the immiseration of the population.
Projections of health care costs are highly uncertain. The one thing that we can say is that if protectionists like Will didn’t have such control over policy, we could save an incredible amount of money by purchasing more of our health care from the more efficient systems in other countries. The private health care system is a cesspool of waste and corruption. This raises costs for everyone, including public sector employers.
Will also tells us that it is unrealistic for Illinois to expect any segment of its pension fund investments to produce 8.5 percent yields. Obviously arithmetic was never Will’s strong suit.
Finally Will tells us:
“Illinois’ unemployment rate increased faster than any other state’s in 2011.”
That’s interesting. Let’s compare employment growth in Illinois in 2011 to employment growth in neighboring Wisconsin, which is run by a right-wing favorite: public sector union busting Scott Walker. Since January of 2011 Illinois has created 47,400 jobs, an increase in employment of a bit more than 0.8 percent. That’s not great, but not awful either.
Source: Bureau of Labor Statistics.
By contrast, Wisconsin lost 14,200 jobs over this period, or neary 0.5 percent of total employment.
Source: Bureau of Labor Statistics.
If the unemployment rate rose more in this period in Illinois than in Wisconsin than presumably it is because people in Illinois were out looking for work because the state was creating new jobs. By contrast, in Wisconsin workers probably gave up looking, knowing that there were no jobs available.
But the really fun part of the story is that Will had to be careful to specify that he was only talking about the unemployment rate in 2011. The reason is that Illinois’ unemployment rate has fallen by 0.9 percentage points since December of 2011 and is now 0.6 percentage points below its January 2011 level. Including this fact would be the honest thing to do, but hey, this is George Will and the Washington Post oped page.
Source: Bureau of Labor Statistics.
Okay, I know that picking on George Will might seem like cheap fun, but as an oped columnist for the Washington Post we are supposed to take him seriously. Today Will is beating up on states that don’t follow his pro-rich prescriptions focusing on California and my home state of Illinois.
Let me start with my favorite Will line:
“From September through December 2008, the premium that investors demanded before they would buy California debt rather than U.S. Treasurys jumped from 24 to 271 basis points (100 points equals 1 percent). The bond market, the only remaining reality check for state politicians, must be allowed to work.”
Okay, boys and girls, can anyone think of anything that might have affected spreads in the bond market in the fall of 2008? (Hint: Federal Reserve Board Chairman Ben Bernanke and then Treasury Secretary Henry Paulson were running around screaming that the world was about to end.)
That’s right, we had the collapse of Lehman Brothers and a financial freeze-up. The yield on anything that wasn’t U.S. Treasury bonds soared in this period. In other words, Will’s statement here means absolutely nothing — but it is good enough for the Washington Post editorial page.
As far as the Illinois bashing, Will tells us that:
“The Illinois Policy Institute, a limited-government think tank, in a report cheekily titled “Another $54 Billion!?” argues that in addition to the $83 billion in pension underfunding the state acknowledges, there is $54 billion in unfunded retiree health liabilities over the next 30 years.”
Hmmm, $83 billion in unfunded liabilities? That sounds scaaaary. If the oped page imposed any standards on its writers it might have asked Will to express this number as a share of state income over this period, since no one (I mean no one) has any clue how large an expenditure $83 billion is for Illinois over the next 30 years. The answer is that it would be equal to around 0.7 percent of the state’s projected income over this period. That is not trivial, but not exactly the sort of expenditure that implies the immiseration of the population.
Projections of health care costs are highly uncertain. The one thing that we can say is that if protectionists like Will didn’t have such control over policy, we could save an incredible amount of money by purchasing more of our health care from the more efficient systems in other countries. The private health care system is a cesspool of waste and corruption. This raises costs for everyone, including public sector employers.
Will also tells us that it is unrealistic for Illinois to expect any segment of its pension fund investments to produce 8.5 percent yields. Obviously arithmetic was never Will’s strong suit.
Finally Will tells us:
“Illinois’ unemployment rate increased faster than any other state’s in 2011.”
That’s interesting. Let’s compare employment growth in Illinois in 2011 to employment growth in neighboring Wisconsin, which is run by a right-wing favorite: public sector union busting Scott Walker. Since January of 2011 Illinois has created 47,400 jobs, an increase in employment of a bit more than 0.8 percent. That’s not great, but not awful either.
Source: Bureau of Labor Statistics.
By contrast, Wisconsin lost 14,200 jobs over this period, or neary 0.5 percent of total employment.
Source: Bureau of Labor Statistics.
If the unemployment rate rose more in this period in Illinois than in Wisconsin than presumably it is because people in Illinois were out looking for work because the state was creating new jobs. By contrast, in Wisconsin workers probably gave up looking, knowing that there were no jobs available.
But the really fun part of the story is that Will had to be careful to specify that he was only talking about the unemployment rate in 2011. The reason is that Illinois’ unemployment rate has fallen by 0.9 percentage points since December of 2011 and is now 0.6 percentage points below its January 2011 level. Including this fact would be the honest thing to do, but hey, this is George Will and the Washington Post oped page.
Source: Bureau of Labor Statistics.
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In reporting on the victory of in the first round of the French presidential elections the NYT noted Mr. Hollande’s opposition to further austerity measures. It then told readers:
“But while Mr. Sarkozy puts his emphasis more on spending cuts, reducing the tax burden on companies and liberalizing the labor market, Mr. Hollande has charted a traditional socialist path of public spending and job creation. That, some economists say, is likely to make matters worse, possibly sending financial markets into a tailspin that invites further chaos.
‘The real problem is the preference for public spending,’ said Nicolas Baverez, an economist and author. ‘The main candidates continue to believe that it is the state that creates jobs and that will innovate, and this is wrong. Public spending is 56.6 percent of gross domestic product, which is huge. And the increase in public spending and taxes is downsizing the private sector and private jobs.'”
While “some economists” do say things like this, other economists, including folks like Nobel Prize winner Paul Krugman, say that austerity as a way to control budget deficits is self defeating in the current economic situation. It reduces GDP, which in turn lowers tax collections and raises expenditures on items like unemployment benefits.
Rather than just telling readers what “some” economists say on the virtues of austerity, it would have been helpful to include the views of what some other economists say.
(Thanks to Josh Greenstein for calling this one to my attention.)
In reporting on the victory of in the first round of the French presidential elections the NYT noted Mr. Hollande’s opposition to further austerity measures. It then told readers:
“But while Mr. Sarkozy puts his emphasis more on spending cuts, reducing the tax burden on companies and liberalizing the labor market, Mr. Hollande has charted a traditional socialist path of public spending and job creation. That, some economists say, is likely to make matters worse, possibly sending financial markets into a tailspin that invites further chaos.
‘The real problem is the preference for public spending,’ said Nicolas Baverez, an economist and author. ‘The main candidates continue to believe that it is the state that creates jobs and that will innovate, and this is wrong. Public spending is 56.6 percent of gross domestic product, which is huge. And the increase in public spending and taxes is downsizing the private sector and private jobs.'”
While “some economists” do say things like this, other economists, including folks like Nobel Prize winner Paul Krugman, say that austerity as a way to control budget deficits is self defeating in the current economic situation. It reduces GDP, which in turn lowers tax collections and raises expenditures on items like unemployment benefits.
Rather than just telling readers what “some” economists say on the virtues of austerity, it would have been helpful to include the views of what some other economists say.
(Thanks to Josh Greenstein for calling this one to my attention.)
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With the release of the latest Social Security trustees report the scare stories have been coming fast and furious. In this vein, Marketplace radio had an interview with Olivia Mitchell, the head of the Pension Research Council. In this interview, Mitchell commented on the bonds held by the Social Security trust fund:
“If you take a narrow view, what you understand is that there’s a trust fund, which is supposed to be the piggy bank whereby if the funds run short, the Social Security Administration can go and claim these bonds. But if you take the broad view — which I do take — you have to understand that the money actually has been spent. And so what it means is we’ll either have to raise taxes, or cut expenditures, or issue more debt to be able to pay the scheduled benefits.”
Of course Professor Mitchell’s “broad view” would apply to any bonds issued by the federal government. For example, if Peter Peterson were to decide to cash in $1 billion in U.S. government bonds on their due date, the government would have to “raise taxes, or cut expenditures, or issue more debt” to be able to pay off Mr. Peterson’s bonds.
Ordinarily we would not say that this fact means that Peter Peterson does not actually have the $1 billion in wealth implied by his bonds. In fact, the government’s financial situation would probably never enter a discussion of Peter Peterson’s wealth. In the same vein, since Social Security has a separate account under the law, it is hard to see what relevance Professor Mitchell’s broad view has to the system’s finances.
With the release of the latest Social Security trustees report the scare stories have been coming fast and furious. In this vein, Marketplace radio had an interview with Olivia Mitchell, the head of the Pension Research Council. In this interview, Mitchell commented on the bonds held by the Social Security trust fund:
“If you take a narrow view, what you understand is that there’s a trust fund, which is supposed to be the piggy bank whereby if the funds run short, the Social Security Administration can go and claim these bonds. But if you take the broad view — which I do take — you have to understand that the money actually has been spent. And so what it means is we’ll either have to raise taxes, or cut expenditures, or issue more debt to be able to pay the scheduled benefits.”
Of course Professor Mitchell’s “broad view” would apply to any bonds issued by the federal government. For example, if Peter Peterson were to decide to cash in $1 billion in U.S. government bonds on their due date, the government would have to “raise taxes, or cut expenditures, or issue more debt” to be able to pay off Mr. Peterson’s bonds.
Ordinarily we would not say that this fact means that Peter Peterson does not actually have the $1 billion in wealth implied by his bonds. In fact, the government’s financial situation would probably never enter a discussion of Peter Peterson’s wealth. In the same vein, since Social Security has a separate account under the law, it is hard to see what relevance Professor Mitchell’s broad view has to the system’s finances.
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