The second paragraph of a NYT news story on the cuts in military spending implied by the budget agreement from last summer told readers:
“On Jan. 2, national security is set to receive a heavy blow if Congress fails to intervene. That is when a 10-year, $600 billion, across-the-board spending cut is to hit the Pentagon, equal to roughly 8 percent of its current budget.”
While the size of these cuts is not in dispute, it is far from clear that they would constitute a “heavy blow” to national security. Even if the cuts were fully implemented, the United States would still be spending considerably more as a share of GDP on the military in 2022 than it did in 2000, before the September 11th attacks.
It is also worth noting that there is nothing that happens on January 2 that locks in the scheduled cuts for a decade. If Congress determined in 2017 or 2018, or even some time earlier, that our defense was in jeopardy then it would presumably vote to increase spending to meet the perceived threat.
The second paragraph of a NYT news story on the cuts in military spending implied by the budget agreement from last summer told readers:
“On Jan. 2, national security is set to receive a heavy blow if Congress fails to intervene. That is when a 10-year, $600 billion, across-the-board spending cut is to hit the Pentagon, equal to roughly 8 percent of its current budget.”
While the size of these cuts is not in dispute, it is far from clear that they would constitute a “heavy blow” to national security. Even if the cuts were fully implemented, the United States would still be spending considerably more as a share of GDP on the military in 2022 than it did in 2000, before the September 11th attacks.
It is also worth noting that there is nothing that happens on January 2 that locks in the scheduled cuts for a decade. If Congress determined in 2017 or 2018, or even some time earlier, that our defense was in jeopardy then it would presumably vote to increase spending to meet the perceived threat.
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It told readers that:
“The [recent economic] developments are casting a shadow over the Obama campaign’s hopes that the president will have the wind of a robust economic recovery at his back for his re-election run.”
If President Obama’s campaign ever had hopes that he would have the “wind of a robust economic recovery at his back” then they are seriously delusional. The best quarter of growth in the last year and a half was just 3.0 percent. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential.
The growth rate of potential GDP is roughly 2.5 percent annually. This means that if the economy sustained a 3.0 percent growth rate, then it would make up the gap between potential output and actual output at the rate of 0.5 percent a year. At this pace it would reach potential GDP in 12 years, or 2024.
That can hardly be called a “robust economic recovery.” The growth rate following prior severe recessions ran as high as 7-8 percent. That would be a robust economic recovery.
It told readers that:
“The [recent economic] developments are casting a shadow over the Obama campaign’s hopes that the president will have the wind of a robust economic recovery at his back for his re-election run.”
If President Obama’s campaign ever had hopes that he would have the “wind of a robust economic recovery at his back” then they are seriously delusional. The best quarter of growth in the last year and a half was just 3.0 percent. According to the Congressional Budget Office, the economy is operating at about 6 percent below its potential.
The growth rate of potential GDP is roughly 2.5 percent annually. This means that if the economy sustained a 3.0 percent growth rate, then it would make up the gap between potential output and actual output at the rate of 0.5 percent a year. At this pace it would reach potential GDP in 12 years, or 2024.
That can hardly be called a “robust economic recovery.” The growth rate following prior severe recessions ran as high as 7-8 percent. That would be a robust economic recovery.
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In a column noting the bind in which the euro zone countries fund themselves, Robert Samuelson told readers that:
“Softening today’s austerity would require more borrowing. Who would lend? The ECB? Historically, excessive lending by central banks risks high inflation, though many economists discount that now.”
Given the massive amounts of excess capacity in the euro zone it is difficult to see how additional lending in the euro zone would lead to inflation. The context in which central bank lending led to inflation has typically been when an economy was near its capacity and a central bank continued to lend to keep interest rates down. That is clearly not the situation today.
Furthermore, the euro zone countries should welcome a modest increase in the rate of inflation. The key problem facing the euro zone is the uncompetitiveness of the peripheral economies. The cost of goods and services produced in Spain and Italy is much higher than the goods and services produced in Germany and the Netherlands.
If the euro survives, this gap has to be closed by having lower inflation in the peripheral countries. That would mean deflation if the inflation rate remains low in the core countries. Deflation is very difficult to bring about and will be very costly for the economies affected.
On the other hand, if inflation rises to 4-5 percent in the core countries, then the peripheral countries can regain competitiveness by keeping their inflation rate in a 1-2 percent range. This would be the most painless solution to the euro crisis. Unfortunately, the European Central Bank seems unable to even conceive of this policy path.
In a column noting the bind in which the euro zone countries fund themselves, Robert Samuelson told readers that:
“Softening today’s austerity would require more borrowing. Who would lend? The ECB? Historically, excessive lending by central banks risks high inflation, though many economists discount that now.”
Given the massive amounts of excess capacity in the euro zone it is difficult to see how additional lending in the euro zone would lead to inflation. The context in which central bank lending led to inflation has typically been when an economy was near its capacity and a central bank continued to lend to keep interest rates down. That is clearly not the situation today.
Furthermore, the euro zone countries should welcome a modest increase in the rate of inflation. The key problem facing the euro zone is the uncompetitiveness of the peripheral economies. The cost of goods and services produced in Spain and Italy is much higher than the goods and services produced in Germany and the Netherlands.
If the euro survives, this gap has to be closed by having lower inflation in the peripheral countries. That would mean deflation if the inflation rate remains low in the core countries. Deflation is very difficult to bring about and will be very costly for the economies affected.
On the other hand, if inflation rises to 4-5 percent in the core countries, then the peripheral countries can regain competitiveness by keeping their inflation rate in a 1-2 percent range. This would be the most painless solution to the euro crisis. Unfortunately, the European Central Bank seems unable to even conceive of this policy path.
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For some reason Fred Hiatt thinks (or at least says) that Democrats are opposed to cutting the excessive payments that our health care system makes to many providers. In yet another column bemoaning the budget deficit, Hiatt told readers:
“Revenue will have to go up, and the rising arc of health care and pension spending will have to be bent down. Democrats hate the latter, Republicans hate the former, and voters don’t like either.”
While Democrats and Republicans (the voters, if not the politicians) hate the idea of cutting Social Security, it is not obvious that either group is opposed to eliminating the enormous waste in our health care system. The United States pays more than twice as much per person for its health care than other wealthy countries. If health care costs in the United States were comparable to those in other wealthy countries we would be looking at long-term budget surpluses not deficits. Fixing our health care system would seem an obvious way to go address the projections of large long-term deficits.
Remarkably, Hiatt never mentions that large deficits that the country is currently experiencing are entirely the result of the economic collapse in 2008. Prior to the collapse the country was experiencing modest deficits and was projected to continue to see modest deficits for the foreseeable future.
This column also wrongly refers to a report of the Bowles-Simpson commission. In fact, the commission did not issue a report because no proposal received support of the necessary majority to be approved by the commission. The report to which the column refers is simply the report of the co-chairs, former senator Alan Simpson and former Morgan Stanley director Erskine Bowles.
For some reason Fred Hiatt thinks (or at least says) that Democrats are opposed to cutting the excessive payments that our health care system makes to many providers. In yet another column bemoaning the budget deficit, Hiatt told readers:
“Revenue will have to go up, and the rising arc of health care and pension spending will have to be bent down. Democrats hate the latter, Republicans hate the former, and voters don’t like either.”
While Democrats and Republicans (the voters, if not the politicians) hate the idea of cutting Social Security, it is not obvious that either group is opposed to eliminating the enormous waste in our health care system. The United States pays more than twice as much per person for its health care than other wealthy countries. If health care costs in the United States were comparable to those in other wealthy countries we would be looking at long-term budget surpluses not deficits. Fixing our health care system would seem an obvious way to go address the projections of large long-term deficits.
Remarkably, Hiatt never mentions that large deficits that the country is currently experiencing are entirely the result of the economic collapse in 2008. Prior to the collapse the country was experiencing modest deficits and was projected to continue to see modest deficits for the foreseeable future.
This column also wrongly refers to a report of the Bowles-Simpson commission. In fact, the commission did not issue a report because no proposal received support of the necessary majority to be approved by the commission. The report to which the column refers is simply the report of the co-chairs, former senator Alan Simpson and former Morgan Stanley director Erskine Bowles.
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Thanks to everyone for the nice comments. For anyone wondering, I did not use my vacation to hobnob with the one percent. My wife and I had a great time helping to care for dogs at Best Friends Animal Sanctuary. Now, back to work.
Thanks to everyone for the nice comments. For anyone wondering, I did not use my vacation to hobnob with the one percent. My wife and I had a great time helping to care for dogs at Best Friends Animal Sanctuary. Now, back to work.
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The Washington Post still can’t figure out who is on first in the euro crisis. It once again referred to debt-troubled countries as “profligate.” Of course, the debt-burdened countries were not especially profligate. Italy’s debt to GDP ratio had been falling before the crisis. Ireland and Spain had large budget surpluses. So the issue is not these countries were profligate, the issue is that these countries got hit badly by the collapse of housing bubbles across Europe.
This piece also misrepresents German unemployment, telling readers that it is 6.7 percent. This is the official German rate. This rate includes people who are working part-time as unemployed. The OECD harmonized unemployment rate for Germany, which is calculated using methodology comparable to the U.S. methodology, is 5.6 percent.
The Washington Post still can’t figure out who is on first in the euro crisis. It once again referred to debt-troubled countries as “profligate.” Of course, the debt-burdened countries were not especially profligate. Italy’s debt to GDP ratio had been falling before the crisis. Ireland and Spain had large budget surpluses. So the issue is not these countries were profligate, the issue is that these countries got hit badly by the collapse of housing bubbles across Europe.
This piece also misrepresents German unemployment, telling readers that it is 6.7 percent. This is the official German rate. This rate includes people who are working part-time as unemployed. The OECD harmonized unemployment rate for Germany, which is calculated using methodology comparable to the U.S. methodology, is 5.6 percent.
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Andrew Ross Sorkin seems to be very proud of himself for having figured out that Glass-Steagall would not have prevented the economic crisis that hit the economy in 2007 and is still causing tens of millions of people to be out of work or underemployed today. He is of course right, except most of us knew this 4 years ago.
The crisis, which is an “economic crisis” not a “financial crisis” was caused by the collapse of an $8 trillion housing bubble. This bubble was driving the economy by sparking both a construction boom and a consumption boom. When house prices came back down to earth, these sources of demand evaporated and there was nothing to replace them. It’s a fairly simple story for those of us who learned arithmetic back in third grade.
Glass-Steagall played no direct role in the crisis or the buildup to it. Nonetheless, it does get to heart of one of the big unnecessary freebies that the government gives to the financial sector. The point of the law was that if you held government-guaranteed deposits then there should be restraints on the sort of risks you can take.
It is understandable that the spoiled brats who run big banks on Wall Street think that they should be able to get handouts from the government with no strings attached, but that is not the way a market economy is supposed to work. If the banks don’t want the government’s guarantees for its deposits, no one is forcing them to take the guarantee. But, if they take the guarantee, then they don’t get to take big risks like Jamie Dimon’s big bet.
This tradeoff is pretty straightforward. Even an NYT business columnist should be able to figure it out.
Andrew Ross Sorkin seems to be very proud of himself for having figured out that Glass-Steagall would not have prevented the economic crisis that hit the economy in 2007 and is still causing tens of millions of people to be out of work or underemployed today. He is of course right, except most of us knew this 4 years ago.
The crisis, which is an “economic crisis” not a “financial crisis” was caused by the collapse of an $8 trillion housing bubble. This bubble was driving the economy by sparking both a construction boom and a consumption boom. When house prices came back down to earth, these sources of demand evaporated and there was nothing to replace them. It’s a fairly simple story for those of us who learned arithmetic back in third grade.
Glass-Steagall played no direct role in the crisis or the buildup to it. Nonetheless, it does get to heart of one of the big unnecessary freebies that the government gives to the financial sector. The point of the law was that if you held government-guaranteed deposits then there should be restraints on the sort of risks you can take.
It is understandable that the spoiled brats who run big banks on Wall Street think that they should be able to get handouts from the government with no strings attached, but that is not the way a market economy is supposed to work. If the banks don’t want the government’s guarantees for its deposits, no one is forcing them to take the guarantee. But, if they take the guarantee, then they don’t get to take big risks like Jamie Dimon’s big bet.
This tradeoff is pretty straightforward. Even an NYT business columnist should be able to figure it out.
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It’s clear that the impact of private equity on the economy is going to be one of the central issues in the presidential race given Mitt Romney’s boasts about his performance as one of the partners in Bain Capital. President Obama and others have pointed out that private equity firms often leave large numbers of laid-off workers and bankrupt companies in their wake.
To counter this image, David Brooks picked up the cause. He used his column to tell readers that private equity firms turned around the economy, getting inefficient firms up to speed and raising overall growth.
At the most basic level, the facts don’t fit Brooks’ story. If he wants to credit private equity with turning around the economy then we should have seen the turnaround in productivity growth in the 80s (or at least the beginning) when leveraged buyouts first became a major feature of the U.S. economy. Instead, we had to wait until the mid-90s, long after private equity was well established.
As a practical matter, turning around failing firms is only one way in which private equity companies make money. The most common way they make money is by gaming the tax system. This is done first and foremost by loading companies up with debt. Interest payments on debt, unlike interest payments to shareholders, are tax deductible. By reducing target companies’ tax liabilities, private equity firms can make large profits even if they don’t do anything to turn around the company.
Private equity companies can also benefit from other forms of financial engineering. They may also be effective at the Facebook trick, over-hyping companies when they issue IPOs, selling them off to suckered investors at an above-market price. While there are undoubtedly cases where private equity actually does turn around failing companies, this seems to be the exception as my colleague Eileen Appelbaum is discovering.
If Governor Romney’s record at Bain in turning around companies is better than the record for the industry as a whole then presumably he could release a full list of the companies taken over under his watch and indicate what happened to them subsequent to their takeover. If he opts not to make this information public, then it is likely that the record is not a good one.
It’s clear that the impact of private equity on the economy is going to be one of the central issues in the presidential race given Mitt Romney’s boasts about his performance as one of the partners in Bain Capital. President Obama and others have pointed out that private equity firms often leave large numbers of laid-off workers and bankrupt companies in their wake.
To counter this image, David Brooks picked up the cause. He used his column to tell readers that private equity firms turned around the economy, getting inefficient firms up to speed and raising overall growth.
At the most basic level, the facts don’t fit Brooks’ story. If he wants to credit private equity with turning around the economy then we should have seen the turnaround in productivity growth in the 80s (or at least the beginning) when leveraged buyouts first became a major feature of the U.S. economy. Instead, we had to wait until the mid-90s, long after private equity was well established.
As a practical matter, turning around failing firms is only one way in which private equity companies make money. The most common way they make money is by gaming the tax system. This is done first and foremost by loading companies up with debt. Interest payments on debt, unlike interest payments to shareholders, are tax deductible. By reducing target companies’ tax liabilities, private equity firms can make large profits even if they don’t do anything to turn around the company.
Private equity companies can also benefit from other forms of financial engineering. They may also be effective at the Facebook trick, over-hyping companies when they issue IPOs, selling them off to suckered investors at an above-market price. While there are undoubtedly cases where private equity actually does turn around failing companies, this seems to be the exception as my colleague Eileen Appelbaum is discovering.
If Governor Romney’s record at Bain in turning around companies is better than the record for the industry as a whole then presumably he could release a full list of the companies taken over under his watch and indicate what happened to them subsequent to their takeover. If he opts not to make this information public, then it is likely that the record is not a good one.
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It’s vacation time, folks. Beat the Press will be on vacation until Monday, June 4. Until then, don’t believe anything you read in the newspaper.
It’s vacation time, folks. Beat the Press will be on vacation until Monday, June 4. Until then, don’t believe anything you read in the newspaper.
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The NYT had an article on efforts to raise the minimum wage in New York state. At one point the piece gives the views of Russell Sykes, a senior fellow at the Empire Center for New York State Policy, who is identified as an opponent of a higher minimum wage. According to the article, Sykes argued that:
“raising the minimum wage would not be helpful to most poor families. The earned-income tax credit was more beneficial to them, he said, and an increase in the minimum wage could make some families ineligible for the credit.”
If a higher minimum wage makes a low-income family ineligible for the earned income tax credit (EITC) it is due to the fact that it has raised their income above the level where they qualify for the EITC. It seems a bit strange to argue that low-income family is hurt by raising their income. The highest EITC rate is 45 percent, meaning that a worker at below the peak (in 2010, $12,549 for a single parent with three children) would get an additional 45 cents for each additional dollar of earnings. If a higher minimum wage raises a worker’s income from a point below this level, it is actually increasing the amount of money they get through the EITC, possibly by as much as 45 percent of the increase in the minimum wage.
The EITC then plateaus, meaning that additional earnings neither add to or subtract from the size of the tax credit. For income above $16,450 the EITC is phased out at the rate of 21 cents on the dollar. This means that in a worst case scenario, a worker may lose 21 cents from the EITC for every dollar in additional pay they get as a result of a minimum wage hike.
[This is corrected from an earlier version. Thanks to Robert Salzberg for calling attention to my error.]
The NYT had an article on efforts to raise the minimum wage in New York state. At one point the piece gives the views of Russell Sykes, a senior fellow at the Empire Center for New York State Policy, who is identified as an opponent of a higher minimum wage. According to the article, Sykes argued that:
“raising the minimum wage would not be helpful to most poor families. The earned-income tax credit was more beneficial to them, he said, and an increase in the minimum wage could make some families ineligible for the credit.”
If a higher minimum wage makes a low-income family ineligible for the earned income tax credit (EITC) it is due to the fact that it has raised their income above the level where they qualify for the EITC. It seems a bit strange to argue that low-income family is hurt by raising their income. The highest EITC rate is 45 percent, meaning that a worker at below the peak (in 2010, $12,549 for a single parent with three children) would get an additional 45 cents for each additional dollar of earnings. If a higher minimum wage raises a worker’s income from a point below this level, it is actually increasing the amount of money they get through the EITC, possibly by as much as 45 percent of the increase in the minimum wage.
The EITC then plateaus, meaning that additional earnings neither add to or subtract from the size of the tax credit. For income above $16,450 the EITC is phased out at the rate of 21 cents on the dollar. This means that in a worst case scenario, a worker may lose 21 cents from the EITC for every dollar in additional pay they get as a result of a minimum wage hike.
[This is corrected from an earlier version. Thanks to Robert Salzberg for calling attention to my error.]
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