Steve Rattner put his ignorance on public display again in a column in the NYT. He told readers that counting the savings projected in Medicare as a result of the cost controls in President Obama’s health care reform as lowering the budget deficit amounts to double-counting. There is a simple word for Rattner’s claim: wrong.
The logic is simple. The Medicare program is counted as part of the overall budget. (If Rattner has other information on this point, he could do a great service by sharing it with NYT readers.) However, part of Medicare (Part A, which covers hospital insurance and most other medical bills of seniors) is also required to be funded by the designated Medicare tax. Any savings in this portion of the program will improve the finances of the Medicare trust fund and also reduce overall expenditures, thereby leading to lower budget deficits.
This really is not rocket science. We finance some categories of transportation spending from the Highway Trust Fund, which relies on revenue from the gas tax. If we reduced this transportation spending it both frees up money in the trust fund and also reduces the budget deficit. There is no double-counting here, it is just counting pure and simple.
It is bizarre that this accusation of double-counting keeps coming up. It is wrong and does not belong in a serious newspaper.
(btw, health care costs in the United States are a huge problem. If the elites were not such ardent protectionists, they would be looking to have free trade in Medicare and health care more generally.)
Steve Rattner put his ignorance on public display again in a column in the NYT. He told readers that counting the savings projected in Medicare as a result of the cost controls in President Obama’s health care reform as lowering the budget deficit amounts to double-counting. There is a simple word for Rattner’s claim: wrong.
The logic is simple. The Medicare program is counted as part of the overall budget. (If Rattner has other information on this point, he could do a great service by sharing it with NYT readers.) However, part of Medicare (Part A, which covers hospital insurance and most other medical bills of seniors) is also required to be funded by the designated Medicare tax. Any savings in this portion of the program will improve the finances of the Medicare trust fund and also reduce overall expenditures, thereby leading to lower budget deficits.
This really is not rocket science. We finance some categories of transportation spending from the Highway Trust Fund, which relies on revenue from the gas tax. If we reduced this transportation spending it both frees up money in the trust fund and also reduces the budget deficit. There is no double-counting here, it is just counting pure and simple.
It is bizarre that this accusation of double-counting keeps coming up. It is wrong and does not belong in a serious newspaper.
(btw, health care costs in the United States are a huge problem. If the elites were not such ardent protectionists, they would be looking to have free trade in Medicare and health care more generally.)
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Today Ezra Klein is guilty of that standard Washington insider mistake of referring to a Bowles-Simpson commission report. In his column, he contrasts the tax increases proposed by the commission (along with increases advocated by others), with the pledges by Romney to raise taxes on no one and the pledge by President Obama to not raise taxes on anyone other than the top 2 percent.
Of course there was no Bowles-Simpson commission report. The by-laws clearly state:
“The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission.”
There was no vote taken on anything by December 1. (In fact there was never a formal vote.) And the report touted as being the commission report never had the support of more than 11 of the 18 members of the commission report.
Hence this report is accurately described as the report of the co-chairs, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. In other words, the “Moment of Truth” is a lie.
Today Ezra Klein is guilty of that standard Washington insider mistake of referring to a Bowles-Simpson commission report. In his column, he contrasts the tax increases proposed by the commission (along with increases advocated by others), with the pledges by Romney to raise taxes on no one and the pledge by President Obama to not raise taxes on anyone other than the top 2 percent.
Of course there was no Bowles-Simpson commission report. The by-laws clearly state:
“The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission.”
There was no vote taken on anything by December 1. (In fact there was never a formal vote.) And the report touted as being the commission report never had the support of more than 11 of the 18 members of the commission report.
Hence this report is accurately described as the report of the co-chairs, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. In other words, the “Moment of Truth” is a lie.
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There are plenty of reasons to bash President Obama and even more to bash the richest 1 percent of the income distribution, but it is possible to go off track. The Post did so today in citing a study that shows the top 1 percent got 93 percent of the income gains from 2009-2010.
This is highly misleading because the vast majority of these income gains were capital gains due to the rebound of the stock market following its collapse in 2008-2009. Using this same measure of income, the top 1 percent suffered 49 percent of the income losses in the recession.
While it is reasonable to include capital gains in a measure of income growth over a long-term (this is money that people have at their disposal), the short-term fluctuations give a very misleading measure of distribution of income. President Bush was not a hero to the bottom 99 percent because the stock market crashed under his watch and President Obama is not a sop for the rich because it recovered while he was in office. (Now bailing out Wall Street is a different matter.)
At one point in discussing Mitt Romney’s record as governor of Massachusetts, it tells readers:
“Average weekly wages for workers rose slightly more than they did nationally while Romney was in charge. In Massachusetts, wages went up 4.1 percent from 2002 to 2006, adjusting for inflation. Nationally, they rose 3.2 percent.”
Inflation in the Northeast was 1.9 percentage points higher over this period than for the nation as a whole. If the calculation of real wages used for this comparison simply used the nationwide inflation rate to measure the growth of real wages, then it would be seriously misleading. The regional CPI would imply that wage growth in Massachusetts lagged the nationwide average by roughly a percentage point, instead of exceeding it by 0.9 percentage points. (Of course, Romney’s ability to influence wage growth in a 4-year stint as governor would be very limited in any case.)
There are plenty of reasons to bash President Obama and even more to bash the richest 1 percent of the income distribution, but it is possible to go off track. The Post did so today in citing a study that shows the top 1 percent got 93 percent of the income gains from 2009-2010.
This is highly misleading because the vast majority of these income gains were capital gains due to the rebound of the stock market following its collapse in 2008-2009. Using this same measure of income, the top 1 percent suffered 49 percent of the income losses in the recession.
While it is reasonable to include capital gains in a measure of income growth over a long-term (this is money that people have at their disposal), the short-term fluctuations give a very misleading measure of distribution of income. President Bush was not a hero to the bottom 99 percent because the stock market crashed under his watch and President Obama is not a sop for the rich because it recovered while he was in office. (Now bailing out Wall Street is a different matter.)
At one point in discussing Mitt Romney’s record as governor of Massachusetts, it tells readers:
“Average weekly wages for workers rose slightly more than they did nationally while Romney was in charge. In Massachusetts, wages went up 4.1 percent from 2002 to 2006, adjusting for inflation. Nationally, they rose 3.2 percent.”
Inflation in the Northeast was 1.9 percentage points higher over this period than for the nation as a whole. If the calculation of real wages used for this comparison simply used the nationwide inflation rate to measure the growth of real wages, then it would be seriously misleading. The regional CPI would imply that wage growth in Massachusetts lagged the nationwide average by roughly a percentage point, instead of exceeding it by 0.9 percentage points. (Of course, Romney’s ability to influence wage growth in a 4-year stint as governor would be very limited in any case.)
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Robert Samuelson is the type of guy who stands there holding a fire extinguisher trying to figure out what to do as the house burns down. In his column today he ponders the euro zone crisis. He relies extensively on Jay Shambaugh, an economist at Georgetown, telling us that Shambaugh identifies three distinct crises:
“First, there’s a banking crisis. Banks have too little capital (a buffer against losses) and have a hard time raising funds. Next is the sovereign debt crisis. The high debts of many countries raise fears that, like Greece, they may default. And, finally, there’s an economic growth crisis. Low growth or slumps afflict most of the 17 countries using the euro.”
He continues:
“Each crisis aggravates the others. Because banks hold huge portfolios of government bonds, fears about the bonds’ values weaken the banks and threaten their failure. Weak banks in turn don’t provide ample business and consumer loans to increase economic growth. And feeble or nonexistent growth shrinks tax revenues and makes it harder for governments to service their debts. “
Wow, it sounds so hard. Now let’s imagine that the religious zealots running the European Central Bank (ECB) learned some economics and turned away from their low inflation cult. They could do something like what was recommended by Olivier Blanchard, the chief economist at the IMF. The ECB could target a higher rate of inflation, say 4.0 percent.
If it could convince the markets it was serious about this target — throwing out as many reserves as necessary to push inflation higher — it would address all three of these inter-related crises. Higher inflation would directly reduce the burden of sovereign debt.
If inflation averages 4.0 percent over the next five years instead of 2.0 percent (the current target), then GDP will be roughly 10 percent higher, reducing debt burdens proportionately. This means, for example, if Greece is looking at a debt to GDP ratio of 120 percent in five years with the current inflation target, its debt to GDP ratio would be 108 percent in the higher inflation scenario.
Higher inflation will also have the effect of lowering real interest rates and thereby boosting growth. If businesses know that they will be able to sell everything they produce for 20 percent more five years from now, it will give them more incentive to invest. Higher growth will also help to alleviate government deficits and debt burdens.
Finally, the loans on banks’ books are likely to look much better in a context where house prices have risen by 20 percent (this is moving in step with inflation — that is not a housing bubble) and economies are stronger. Stronger growth will also reduce corporate bankruptcies.
The problem really is not that difficult if the people holding the fire extinguishers would use them. Unfortunately, the ECB crew, like Samuelson, seems determined to focus on its inflation fighting even as the house burns down around them.
Addendum:
I am well aware of the ECB charter. This is not an excuse. I recently wrote a column comparing the ECB’s pursuit of 2.0 percent inflation with the Maginot Line that the French military constructed prior to World War II to defend against a German invasion.
The correct course for French generals assigned to construct the Maginot Line would be to tell their superiors that it would not be an adequate defense against a German invasion. (The Germans just walked around the Maginot Line and went through Belgium.) If their superiors refused to listen, then the appropriate response is to resign, not to commit more resources to building a barrier that was absolutely useless for its intended purpose.
Similarly, competent economists at the ECB should be saying that adhering to a 2.0 percent inflation target as the sole purpose of a central bank is grossly irresponsible economic policy. If the governments insist on acting like fools then they should be forced to find certified fools to do their job. No serious economist has any business working for the ECB at a time when its policies are leading to so much devastation across Europe.
Robert Samuelson is the type of guy who stands there holding a fire extinguisher trying to figure out what to do as the house burns down. In his column today he ponders the euro zone crisis. He relies extensively on Jay Shambaugh, an economist at Georgetown, telling us that Shambaugh identifies three distinct crises:
“First, there’s a banking crisis. Banks have too little capital (a buffer against losses) and have a hard time raising funds. Next is the sovereign debt crisis. The high debts of many countries raise fears that, like Greece, they may default. And, finally, there’s an economic growth crisis. Low growth or slumps afflict most of the 17 countries using the euro.”
He continues:
“Each crisis aggravates the others. Because banks hold huge portfolios of government bonds, fears about the bonds’ values weaken the banks and threaten their failure. Weak banks in turn don’t provide ample business and consumer loans to increase economic growth. And feeble or nonexistent growth shrinks tax revenues and makes it harder for governments to service their debts. “
Wow, it sounds so hard. Now let’s imagine that the religious zealots running the European Central Bank (ECB) learned some economics and turned away from their low inflation cult. They could do something like what was recommended by Olivier Blanchard, the chief economist at the IMF. The ECB could target a higher rate of inflation, say 4.0 percent.
If it could convince the markets it was serious about this target — throwing out as many reserves as necessary to push inflation higher — it would address all three of these inter-related crises. Higher inflation would directly reduce the burden of sovereign debt.
If inflation averages 4.0 percent over the next five years instead of 2.0 percent (the current target), then GDP will be roughly 10 percent higher, reducing debt burdens proportionately. This means, for example, if Greece is looking at a debt to GDP ratio of 120 percent in five years with the current inflation target, its debt to GDP ratio would be 108 percent in the higher inflation scenario.
Higher inflation will also have the effect of lowering real interest rates and thereby boosting growth. If businesses know that they will be able to sell everything they produce for 20 percent more five years from now, it will give them more incentive to invest. Higher growth will also help to alleviate government deficits and debt burdens.
Finally, the loans on banks’ books are likely to look much better in a context where house prices have risen by 20 percent (this is moving in step with inflation — that is not a housing bubble) and economies are stronger. Stronger growth will also reduce corporate bankruptcies.
The problem really is not that difficult if the people holding the fire extinguishers would use them. Unfortunately, the ECB crew, like Samuelson, seems determined to focus on its inflation fighting even as the house burns down around them.
Addendum:
I am well aware of the ECB charter. This is not an excuse. I recently wrote a column comparing the ECB’s pursuit of 2.0 percent inflation with the Maginot Line that the French military constructed prior to World War II to defend against a German invasion.
The correct course for French generals assigned to construct the Maginot Line would be to tell their superiors that it would not be an adequate defense against a German invasion. (The Germans just walked around the Maginot Line and went through Belgium.) If their superiors refused to listen, then the appropriate response is to resign, not to commit more resources to building a barrier that was absolutely useless for its intended purpose.
Similarly, competent economists at the ECB should be saying that adhering to a 2.0 percent inflation target as the sole purpose of a central bank is grossly irresponsible economic policy. If the governments insist on acting like fools then they should be forced to find certified fools to do their job. No serious economist has any business working for the ECB at a time when its policies are leading to so much devastation across Europe.
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The NYT wants readers to be sympathetic to countries that set themselves up as tax havens for corporations who would rather not pay their taxes. In a piece on the problems facing the Cypriot banking system the NYT told readers that the Cyprus does not want to turn to the European Union for a bailout of its banking system because:
“In return, the Union might demand that Cyprus raise its 10 percent tax on corporate profits, a crucial selling point and key to an economy based on financial and business services like accounting.”
This is a strange assertion. A bloated state bureaucracy can be called a key to an economy that is based on a bloated state bureaucracy. This is not a basis for healthy growth, just as being a tax haven is not in general a basis for healthy growth.
There is no obvious reason to be more sympathetic to a government that wants to maintain a country as a tax haven than there is to be sympathetic to a government that wants to maintain a bloated bureaucracy as a patronage system. Neither provide a platform for healthy sustainable growth.
The NYT wants readers to be sympathetic to countries that set themselves up as tax havens for corporations who would rather not pay their taxes. In a piece on the problems facing the Cypriot banking system the NYT told readers that the Cyprus does not want to turn to the European Union for a bailout of its banking system because:
“In return, the Union might demand that Cyprus raise its 10 percent tax on corporate profits, a crucial selling point and key to an economy based on financial and business services like accounting.”
This is a strange assertion. A bloated state bureaucracy can be called a key to an economy that is based on a bloated state bureaucracy. This is not a basis for healthy growth, just as being a tax haven is not in general a basis for healthy growth.
There is no obvious reason to be more sympathetic to a government that wants to maintain a country as a tax haven than there is to be sympathetic to a government that wants to maintain a bloated bureaucracy as a patronage system. Neither provide a platform for healthy sustainable growth.
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As I’ve complained in the past, the media frequently make too much of a single week’s data on unemployment claims. There will likely be some tendency to hype the fact that last week’s claims were reported today as 380,000 [corrected –thanks David G.], well above the consensus expectation of 355,000.
Before the exaggerations were on the positive side, today they are likely to be on the pessimistic side. Remember folks, it is just one week’s worth of data. The numbers are erratic and are subject to revision (almost always upward).
There is probably some reality to this rise for reasons I have written on in the past. The unusually good weather in the Northeast and Midwest meant that there was likely more employment in construction, restaurants, retail and other sectors in these months than would typically be the case. This means that there will be less hiring in spring than usual.
This shows up in the UI data because people who lose their jobs will have a more difficult time getting new jobs in April than would ordinarily be the case because the seasonal openings are not there. This is not a disaster — the economy is not in danger of sliding into a recession — it just means that job growth will likely be somewhat slower in the months ahead than it was in the winter months.
One more point. The number of claims reported for two weeks ago was revised up from 357,000 to 367,000. This means that it was not the lowest number of claims reported for four years.
As I’ve complained in the past, the media frequently make too much of a single week’s data on unemployment claims. There will likely be some tendency to hype the fact that last week’s claims were reported today as 380,000 [corrected –thanks David G.], well above the consensus expectation of 355,000.
Before the exaggerations were on the positive side, today they are likely to be on the pessimistic side. Remember folks, it is just one week’s worth of data. The numbers are erratic and are subject to revision (almost always upward).
There is probably some reality to this rise for reasons I have written on in the past. The unusually good weather in the Northeast and Midwest meant that there was likely more employment in construction, restaurants, retail and other sectors in these months than would typically be the case. This means that there will be less hiring in spring than usual.
This shows up in the UI data because people who lose their jobs will have a more difficult time getting new jobs in April than would ordinarily be the case because the seasonal openings are not there. This is not a disaster — the economy is not in danger of sliding into a recession — it just means that job growth will likely be somewhat slower in the months ahead than it was in the winter months.
One more point. The number of claims reported for two weeks ago was revised up from 357,000 to 367,000. This means that it was not the lowest number of claims reported for four years.
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After last month touting the fact that China’s trade surplus had plunged, the NYT reports that in March:
“Exports surged last month, helping to produce an unexpected trade surplus of $5.35 billion in March, according to government data released Tuesday.”
This one is getting really painful. If we do some deep investigative reporting and look at a chart accompanying the article we notice a sharp dip in exports every February which is followed by a big jump in March. Now we might think that China’s exports lose competitiveness in February and then regain them in March or alternatively we might think this has to do with the vacations around the Chinese New Year that cause most factories across the country to be closed for several days. I vote for the latter explanation, but hey, I’m no China expert.
It’s also worth taking issue with another assertion in the piece. At one points it cites Eswar Prasad, a former IMF official, telling readers:
“The I.M.F., the United States and other Western nations in recent years have periodically accused China of deliberately keeping its currency, the renminbi, weak as a way to stimulate exports.
“But shrinkage in China’s current-account surplus, notwithstanding the modest trade surplus in March, is making it harder for the I.M.F. and others to press for China to allow further appreciation of the renminbi.”
Actually, in standard trade theory, fast-growing developing countries are expected to run current account deficits. The logic is that capital can be better used in developing countries where it is relatively scarce than in comparatively slow-growing wealthy countries. This means that as long as China has any surplus on its current account there is a strong argument in standard economic theory that its currency is under-valued.
Also, this piece badly misrepresents the problem of inflation with China. Insofar as inflation is a growing problem for the government, as the article claims, this would be an argument for re-valuing the renminbi. A higher-valued renminbi would directly reduce inflation by making the goods that China imports less costly. So this would fit well with the logic that for both its own good and the good of its trading partners, China should increase the value of its currency.
After last month touting the fact that China’s trade surplus had plunged, the NYT reports that in March:
“Exports surged last month, helping to produce an unexpected trade surplus of $5.35 billion in March, according to government data released Tuesday.”
This one is getting really painful. If we do some deep investigative reporting and look at a chart accompanying the article we notice a sharp dip in exports every February which is followed by a big jump in March. Now we might think that China’s exports lose competitiveness in February and then regain them in March or alternatively we might think this has to do with the vacations around the Chinese New Year that cause most factories across the country to be closed for several days. I vote for the latter explanation, but hey, I’m no China expert.
It’s also worth taking issue with another assertion in the piece. At one points it cites Eswar Prasad, a former IMF official, telling readers:
“The I.M.F., the United States and other Western nations in recent years have periodically accused China of deliberately keeping its currency, the renminbi, weak as a way to stimulate exports.
“But shrinkage in China’s current-account surplus, notwithstanding the modest trade surplus in March, is making it harder for the I.M.F. and others to press for China to allow further appreciation of the renminbi.”
Actually, in standard trade theory, fast-growing developing countries are expected to run current account deficits. The logic is that capital can be better used in developing countries where it is relatively scarce than in comparatively slow-growing wealthy countries. This means that as long as China has any surplus on its current account there is a strong argument in standard economic theory that its currency is under-valued.
Also, this piece badly misrepresents the problem of inflation with China. Insofar as inflation is a growing problem for the government, as the article claims, this would be an argument for re-valuing the renminbi. A higher-valued renminbi would directly reduce inflation by making the goods that China imports less costly. So this would fit well with the logic that for both its own good and the good of its trading partners, China should increase the value of its currency.
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When David Brooks is not busy trying to destroy Social Security, he is often making grand pronouncements that make no obvious sense. Today he tells readers that the economy is being divided into an efficient globally competitive sector that has lots of productivity gains but few jobs and a moribund sector that is uncompetitive but has lots of jobs. The distinction is not especially new (or accurate), but Brooks adds the twist:
“Republicans often live in and love the efficient globalized sector and believe it should be a model for the entire society. They want to use private health care markets and choice-oriented education reforms to make society as dynamic, creative and efficient as Economy I. Democrats are more likely to live in and respect the values of the second sector. They emphasize the destructive side of Economy I streamlining — the huge profits at the top and the stagnant wages at the middle.”
Most unionized manufacturing workers fit squarely in the efficient globalized economy. So do the unionized workers in the telecom sector. These workers are overwhelmingly Democrats.
On the other, hand family farmers, who benefit from massive farm subsidies, live in the second sector. So do doctors and other highly paid professionals who depend on the government to protect them from foreign and domestic competition. The streamlining and huge profits that the Republicans admire, according to Brooks, often are attributable to massive public subsidies, such as the deduction for interest payments by private equity companies or patent monopolies granted drug companies.
Of course one of the most protected sectors of the economy is the financial industry where the traders and top executives of the large banks can earn tens of millions or even hundreds of millions of dollars a year thanks to “too big to fail” insurance provided by the government at no charge. This group had been more or less evenly split between Republicans and Democrats in 2008, but according to many accounts in the media now strongly favors the Republicans.
The only obvious logic to Brooks’ division is that supporters of the Democrats are more likely associated with government policies that benefit broad segments of the population. By contrast, supporters of the Republicans tend to favor policies that just benefit the wealthy.
When David Brooks is not busy trying to destroy Social Security, he is often making grand pronouncements that make no obvious sense. Today he tells readers that the economy is being divided into an efficient globally competitive sector that has lots of productivity gains but few jobs and a moribund sector that is uncompetitive but has lots of jobs. The distinction is not especially new (or accurate), but Brooks adds the twist:
“Republicans often live in and love the efficient globalized sector and believe it should be a model for the entire society. They want to use private health care markets and choice-oriented education reforms to make society as dynamic, creative and efficient as Economy I. Democrats are more likely to live in and respect the values of the second sector. They emphasize the destructive side of Economy I streamlining — the huge profits at the top and the stagnant wages at the middle.”
Most unionized manufacturing workers fit squarely in the efficient globalized economy. So do the unionized workers in the telecom sector. These workers are overwhelmingly Democrats.
On the other, hand family farmers, who benefit from massive farm subsidies, live in the second sector. So do doctors and other highly paid professionals who depend on the government to protect them from foreign and domestic competition. The streamlining and huge profits that the Republicans admire, according to Brooks, often are attributable to massive public subsidies, such as the deduction for interest payments by private equity companies or patent monopolies granted drug companies.
Of course one of the most protected sectors of the economy is the financial industry where the traders and top executives of the large banks can earn tens of millions or even hundreds of millions of dollars a year thanks to “too big to fail” insurance provided by the government at no charge. This group had been more or less evenly split between Republicans and Democrats in 2008, but according to many accounts in the media now strongly favors the Republicans.
The only obvious logic to Brooks’ division is that supporters of the Democrats are more likely associated with government policies that benefit broad segments of the population. By contrast, supporters of the Republicans tend to favor policies that just benefit the wealthy.
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I know, it isn’t really secret. The Commerce Department publishes data on the trade deficit every month, but given the extent to which it is ignored in economic policy discussions, as for example in this otherwise thoughtful NYT column, it might just as well be secret.
The basic story is incredibly simple. If we are buying more from abroad than we are selling, this means that we have negative national saving. If we have negative national saving, then either the public sector must have negative savings (i.e. a budget deficit) or the private sector must have negative saving (we are investing on net more than we households and corporations save) or both must have negative saving.
Currently the trade deficit is close to 4 percent of GDP at $580 billion. If we were near full employment, it would likely be close to 5 percent of GDP or $750 billion a year. (At higher levels of GDP the trade deficit increases, other things equal, because we would buy more imports.)
To offset this gap we must have a large budget deficit. Alternatively, we can have the situation like what we had in the housing bubble years of the last decade or the stock bubble years of the late 90s when private investment exceeded private saving.
In the last decade this was accomplished through the bubble-spurred housing boom and the near zero savings rate as people consumed based on their bubble-generated housing wealth. In the 90s we got negative private savings as gullible investors threw hundreds of billions of dollars into dot.garbage. Savings also fell to near zero in that period as households spent based on their ephemeral stock-bubble-generated wealth.
Those who do not focus on the trade deficit, but nonetheless want full employment, either want large budget deficits or the negative private savings story seen in the bubble years. They may not understand this fact, but just like 2+3 being equal to 5, it happens to be true. There is no way around it.
The key to reducing the trade deficit is of course getting the dollar down. That will make our goods more competitive internationally.
This all is really simple, but it does require thinking for a moment or two. Repeating the Washington conventional wisdom gets one nowhere. (Okay, I don’t mean that literally — it can get you a high paying important job.) People actually have to think about how the economy works in order to understand it.
(btw, one painful item in the NYT piece was the discussion of housing equity. It is not coming back and there is zero, nada, no reason for thinking it will. There is no story that passes the laugh test in which house prices will have any substantial appreciation from current levels. They are now near trend levels; why would they rise back to their bubble levels?)
I know, it isn’t really secret. The Commerce Department publishes data on the trade deficit every month, but given the extent to which it is ignored in economic policy discussions, as for example in this otherwise thoughtful NYT column, it might just as well be secret.
The basic story is incredibly simple. If we are buying more from abroad than we are selling, this means that we have negative national saving. If we have negative national saving, then either the public sector must have negative savings (i.e. a budget deficit) or the private sector must have negative saving (we are investing on net more than we households and corporations save) or both must have negative saving.
Currently the trade deficit is close to 4 percent of GDP at $580 billion. If we were near full employment, it would likely be close to 5 percent of GDP or $750 billion a year. (At higher levels of GDP the trade deficit increases, other things equal, because we would buy more imports.)
To offset this gap we must have a large budget deficit. Alternatively, we can have the situation like what we had in the housing bubble years of the last decade or the stock bubble years of the late 90s when private investment exceeded private saving.
In the last decade this was accomplished through the bubble-spurred housing boom and the near zero savings rate as people consumed based on their bubble-generated housing wealth. In the 90s we got negative private savings as gullible investors threw hundreds of billions of dollars into dot.garbage. Savings also fell to near zero in that period as households spent based on their ephemeral stock-bubble-generated wealth.
Those who do not focus on the trade deficit, but nonetheless want full employment, either want large budget deficits or the negative private savings story seen in the bubble years. They may not understand this fact, but just like 2+3 being equal to 5, it happens to be true. There is no way around it.
The key to reducing the trade deficit is of course getting the dollar down. That will make our goods more competitive internationally.
This all is really simple, but it does require thinking for a moment or two. Repeating the Washington conventional wisdom gets one nowhere. (Okay, I don’t mean that literally — it can get you a high paying important job.) People actually have to think about how the economy works in order to understand it.
(btw, one painful item in the NYT piece was the discussion of housing equity. It is not coming back and there is zero, nada, no reason for thinking it will. There is no story that passes the laugh test in which house prices will have any substantial appreciation from current levels. They are now near trend levels; why would they rise back to their bubble levels?)
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