No one expects great economic analysis from the Post, especially on its opinion page, but the conclusion of David M. Smirk’s piece on the euro crisis must have left millions scratching their heads. The column told readers:
“Inflation, of course, is a highly regressive ‘tax’ on already stagnating wages and salaries. No wonder European governments are dropping like flies.”
Actually, most wages follow in step with inflation, although some workers do see declines in real wages when inflation rises. However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.
Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit card debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.
The other strange part of this assertion is that inflation is the reason “European governments are dropping like flies.” Of course the euro zone has very low inflation right now, even though many economists advocate a higher rate of inflation. It therefore makes no sense that inflation is causing governments to fall.
The piece also bizarrely includes Mexico on a list of countries that have experienced a boom following a bout of austerity. Mexico’s economy has had very weak growth, especially for a developing country, over the last two decades.
Finally, the piece includes the assertion:
“some of the periphery countries in the area of fiscal policy have, to put it bluntly, a history of cooking the books. They deserve the bitter medicine [austerity].”
This is an interesting moral position. The vast majority of workers, students and retirees in countries like Greece and Spain who are suffering from unemployment, higher tuition and pension cuts had no idea that their leaders were cooking the books.
By contrast, highly paid global financial policy strategists like Mr. Smirk might have been expected to recognize the asset bubbles that were driving the U.S. and European economies. They should have warned political leaders and the public at large that these economies were moving into dangerous terrain. If someone “deserves” to suffer we might think the people responsible for reckless policies would be the most obvious candidates, not ordinary workers and retirees.
Addendum:
For the folks who think that inflation leads to lower wages, here is a series showing the average real (inflation adjusted) hourly compensation (wages plus benefits) and the rate of inflation.
These series give the basic story, although they are not perfect for reasons that you do not want to hear about. If you can see a negative relationship (i.e. higher inflation leads to lower real wage growth) you have better eyesight than me.
No one expects great economic analysis from the Post, especially on its opinion page, but the conclusion of David M. Smirk’s piece on the euro crisis must have left millions scratching their heads. The column told readers:
“Inflation, of course, is a highly regressive ‘tax’ on already stagnating wages and salaries. No wonder European governments are dropping like flies.”
Actually, most wages follow in step with inflation, although some workers do see declines in real wages when inflation rises. However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.
Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit card debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.
The other strange part of this assertion is that inflation is the reason “European governments are dropping like flies.” Of course the euro zone has very low inflation right now, even though many economists advocate a higher rate of inflation. It therefore makes no sense that inflation is causing governments to fall.
The piece also bizarrely includes Mexico on a list of countries that have experienced a boom following a bout of austerity. Mexico’s economy has had very weak growth, especially for a developing country, over the last two decades.
Finally, the piece includes the assertion:
“some of the periphery countries in the area of fiscal policy have, to put it bluntly, a history of cooking the books. They deserve the bitter medicine [austerity].”
This is an interesting moral position. The vast majority of workers, students and retirees in countries like Greece and Spain who are suffering from unemployment, higher tuition and pension cuts had no idea that their leaders were cooking the books.
By contrast, highly paid global financial policy strategists like Mr. Smirk might have been expected to recognize the asset bubbles that were driving the U.S. and European economies. They should have warned political leaders and the public at large that these economies were moving into dangerous terrain. If someone “deserves” to suffer we might think the people responsible for reckless policies would be the most obvious candidates, not ordinary workers and retirees.
Addendum:
For the folks who think that inflation leads to lower wages, here is a series showing the average real (inflation adjusted) hourly compensation (wages plus benefits) and the rate of inflation.
These series give the basic story, although they are not perfect for reasons that you do not want to hear about. If you can see a negative relationship (i.e. higher inflation leads to lower real wage growth) you have better eyesight than me.
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Readers will no doubt be asking if Japan can be saved from the Washington Post after reading Fred Hiatt’s column titled (in the print edition) “Can Japan Save Itself?” The column slams readers with large masses of inaccuracy that pass for conventional wisdom in Washington.
The fun begins in the second paragraph which tells readers:
“Much of Europe has spent itself into near-bankruptcy.”
This is of course not true. While Greece and Portugal did have serious pre-crisis deficit problems, Europe’s real problem was that the European Central Bank was building the Maginot Line against inflation and ignoring the massive asset bubbles and resulting imbalances that would eventually lead to the economic crisis in 2008. If we had seen the same budget paths not accompanied by the economic crisis, governments would have relatively little difficulty dealing with their fiscal problems.
The next sentence tells readers that:
“In Washington, Simpson-Bowles has come and gone.”
Actually, Simpson-Bowles never came. The co-chairs’ report did not get the votes needed to be approved as a report of the commission. As folks outside Washington say, the Moment of Truth is a lie.
Then we get Japan’s big crisis. Japan’s debt to GDP ratio is 230 percent of GDP. While this is indeed a huge number, its interest burden last year was less than 1.0 percent of its GDP. This is because its short-term interest rate is near zero and even its 10-year bond rate is just 1.0 percent.
Japan’s major problem is not its debt, but rather a lack of demand. It still has not found a way to make up the demand lost from the collapse of its stock and housing bubble in 1989-1990. The proposal to double the value added tax from 5 percent to 10 percent, which Hiatt applauds, would go in the wrong direction.
This tax increase would reduce demand, lowering growth and decreasing employment. If Hiatt knows a way that this tax increase could boost growth he would probably win a Nobel prize in economics if he shared it with readers.
The piece also referred to Japan negotiating a “free-trade” agreement with the United States. This is wrong. Japan is negotiating a “trade” agreement with the United States. It cannot accurately be called a “free-trade” agreement since it will almost certainly result in an increase in some forms of protectionism, most notably patent and copyright protection.
Readers will no doubt be asking if Japan can be saved from the Washington Post after reading Fred Hiatt’s column titled (in the print edition) “Can Japan Save Itself?” The column slams readers with large masses of inaccuracy that pass for conventional wisdom in Washington.
The fun begins in the second paragraph which tells readers:
“Much of Europe has spent itself into near-bankruptcy.”
This is of course not true. While Greece and Portugal did have serious pre-crisis deficit problems, Europe’s real problem was that the European Central Bank was building the Maginot Line against inflation and ignoring the massive asset bubbles and resulting imbalances that would eventually lead to the economic crisis in 2008. If we had seen the same budget paths not accompanied by the economic crisis, governments would have relatively little difficulty dealing with their fiscal problems.
The next sentence tells readers that:
“In Washington, Simpson-Bowles has come and gone.”
Actually, Simpson-Bowles never came. The co-chairs’ report did not get the votes needed to be approved as a report of the commission. As folks outside Washington say, the Moment of Truth is a lie.
Then we get Japan’s big crisis. Japan’s debt to GDP ratio is 230 percent of GDP. While this is indeed a huge number, its interest burden last year was less than 1.0 percent of its GDP. This is because its short-term interest rate is near zero and even its 10-year bond rate is just 1.0 percent.
Japan’s major problem is not its debt, but rather a lack of demand. It still has not found a way to make up the demand lost from the collapse of its stock and housing bubble in 1989-1990. The proposal to double the value added tax from 5 percent to 10 percent, which Hiatt applauds, would go in the wrong direction.
This tax increase would reduce demand, lowering growth and decreasing employment. If Hiatt knows a way that this tax increase could boost growth he would probably win a Nobel prize in economics if he shared it with readers.
The piece also referred to Japan negotiating a “free-trade” agreement with the United States. This is wrong. Japan is negotiating a “trade” agreement with the United States. It cannot accurately be called a “free-trade” agreement since it will almost certainly result in an increase in some forms of protectionism, most notably patent and copyright protection.
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It seems that the NYT disapproves of the decision by Argentine president Cristina Kirchner to nationalize YPF, the country’s major oil company. At least that would be the impression of an article on reactions to this decision.
The article begins by telling us about a “fiery” speech in which Ms. Kirchner justified her decision to nationalize the company, which is currently owned by Repsol, a Spanish oil company. The piece concludes with a critical comment from Daniel Altman, who is identified as “an expert on Argentina’s economy at the Stern School of Business at New York University.” Altman is probably better known as a former New York Times business reporter, who did not specialize in coverage of Latin America.
In between the article gives us the views of many people who do not approve of the decision, although the article does point out that the company was just privatized back in the 90s and also that most other Latin American countries with substantial energy resources have a state owned oil company.
The article includes a bizarre paragraph telling readers:
“Yet in Brazil, where Petrobras’s achievement of energy independence and huge offshore oil discoveries have made it a model for oil companies in other developing nations, the YPF expropriation served as an opportunity to draw important contrasts with the situation in Argentina.
“As recently as 2000, Brazil still relied on oil imports from Argentina to meet energy needs, buying about 74,000 barrels of a day from its neighbor.
“Now the tables are turned. Petrobras, through its acquisition of Perez Companc, an independent Argentine oil company, has aggressively expanded in Argentina to the point where concerns have emerged here as to Petrobras’s exposure if Mrs. Kirchner opts to expand her nationalizations.”
It is not clear what “important contrasts” readers are expected to draw from this comparison. The piece seems to be describing the operations of a highly successful state-owned oil company which appears to be gaining ground at the expense of the privately-owned company in Argentina. This would be exactly the sort of argument that someone would make to justify the nationalization of YPF, although it is not clear if this is the conclusion the reader is expected to reach.
The reality is that there are examples of successful state-run companies, as this article shows. There are also many examples of poorly run government enterprises, just as there are many examples of poorly run private companies.
Whether or not Argentina will be able to improve the operation of YPF if it carries through the nationalization of the company remains to be seen. While there is evidence that might shed insight on this question, the article does not present any.
It seems that the NYT disapproves of the decision by Argentine president Cristina Kirchner to nationalize YPF, the country’s major oil company. At least that would be the impression of an article on reactions to this decision.
The article begins by telling us about a “fiery” speech in which Ms. Kirchner justified her decision to nationalize the company, which is currently owned by Repsol, a Spanish oil company. The piece concludes with a critical comment from Daniel Altman, who is identified as “an expert on Argentina’s economy at the Stern School of Business at New York University.” Altman is probably better known as a former New York Times business reporter, who did not specialize in coverage of Latin America.
In between the article gives us the views of many people who do not approve of the decision, although the article does point out that the company was just privatized back in the 90s and also that most other Latin American countries with substantial energy resources have a state owned oil company.
The article includes a bizarre paragraph telling readers:
“Yet in Brazil, where Petrobras’s achievement of energy independence and huge offshore oil discoveries have made it a model for oil companies in other developing nations, the YPF expropriation served as an opportunity to draw important contrasts with the situation in Argentina.
“As recently as 2000, Brazil still relied on oil imports from Argentina to meet energy needs, buying about 74,000 barrels of a day from its neighbor.
“Now the tables are turned. Petrobras, through its acquisition of Perez Companc, an independent Argentine oil company, has aggressively expanded in Argentina to the point where concerns have emerged here as to Petrobras’s exposure if Mrs. Kirchner opts to expand her nationalizations.”
It is not clear what “important contrasts” readers are expected to draw from this comparison. The piece seems to be describing the operations of a highly successful state-owned oil company which appears to be gaining ground at the expense of the privately-owned company in Argentina. This would be exactly the sort of argument that someone would make to justify the nationalization of YPF, although it is not clear if this is the conclusion the reader is expected to reach.
The reality is that there are examples of successful state-run companies, as this article shows. There are also many examples of poorly run government enterprises, just as there are many examples of poorly run private companies.
Whether or not Argentina will be able to improve the operation of YPF if it carries through the nationalization of the company remains to be seen. While there is evidence that might shed insight on this question, the article does not present any.
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Remarkably this fact did not appear in a Washington Post article discussing U.S. trade with China, which did find room to tell readers that:
“But U.S. exports to China, whose growing affluence has increased the appetite for American goods, are now reaching record levels.“
While it is true that exports to China have reached a record high, this is true of imports as well, if we compare the same months of 2012 with the corresponding months of 2011. (In other words, we are controlling for seasonal effects.) The failure to note the record level of imports is especially surprising since our imports from China matter much more than out exports to China.
We are importing goods and services from China at the rate of more than $400 billion a year, whereas our exports are just a bit over $100 billion a year. This means that imports have close to four times the impact in reducing growth and employment as exports have in the opposite direction.
In discussing the issue of the relative value of the dollar and the Chinese currency it would have been useful to point out that important interests in the United States do not want to see China increase the value of the yuan. For example, Walmart has devoted considerable resources to developing a low-cost supply chain in China and other developing countries. This gives it an enormous advantage over its competitors.
Walmart is not anxious to have this advantage eroded by an increase in the value of the yuan relative to the dollar. The same is true of many companies that have established manufacturing operations in China for the purpose of exporting goods back to the United States and other countries.
This means that the debate over the relative value of the yuan and the dollar is not simply a debate between China and the United States. It is also a debate that pits different groups in the United States against each other.
Remarkably this fact did not appear in a Washington Post article discussing U.S. trade with China, which did find room to tell readers that:
“But U.S. exports to China, whose growing affluence has increased the appetite for American goods, are now reaching record levels.“
While it is true that exports to China have reached a record high, this is true of imports as well, if we compare the same months of 2012 with the corresponding months of 2011. (In other words, we are controlling for seasonal effects.) The failure to note the record level of imports is especially surprising since our imports from China matter much more than out exports to China.
We are importing goods and services from China at the rate of more than $400 billion a year, whereas our exports are just a bit over $100 billion a year. This means that imports have close to four times the impact in reducing growth and employment as exports have in the opposite direction.
In discussing the issue of the relative value of the dollar and the Chinese currency it would have been useful to point out that important interests in the United States do not want to see China increase the value of the yuan. For example, Walmart has devoted considerable resources to developing a low-cost supply chain in China and other developing countries. This gives it an enormous advantage over its competitors.
Walmart is not anxious to have this advantage eroded by an increase in the value of the yuan relative to the dollar. The same is true of many companies that have established manufacturing operations in China for the purpose of exporting goods back to the United States and other countries.
This means that the debate over the relative value of the yuan and the dollar is not simply a debate between China and the United States. It is also a debate that pits different groups in the United States against each other.
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I would make fun of the part of this Thomas Friedman column that calls for cutting entitlements to put the budget on a sustainable footing (the problem is not “entitlements,” the problem is a broken health care system that raises the cost of public sector health care programs like Medicare and Medicaid), but I don’t believe this piece is genuine. Yesterday, Atrios proclaimed Thomas Friedman the “Wanker of the Decade,” referring to the first decade of his blog’s existence.
I suspect some sort of side arrangement. Friedman is clearly trying to publicize this designation by writing exactly the sort of inane centrist, above-the-political-fray column that earned him this award. He can’t fool me.
I would make fun of the part of this Thomas Friedman column that calls for cutting entitlements to put the budget on a sustainable footing (the problem is not “entitlements,” the problem is a broken health care system that raises the cost of public sector health care programs like Medicare and Medicaid), but I don’t believe this piece is genuine. Yesterday, Atrios proclaimed Thomas Friedman the “Wanker of the Decade,” referring to the first decade of his blog’s existence.
I suspect some sort of side arrangement. Friedman is clearly trying to publicize this designation by writing exactly the sort of inane centrist, above-the-political-fray column that earned him this award. He can’t fool me.
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The Federal Reserve Board’s data on industrial production are often badly misinterpreted. The error occurs for two reasons. First, there are often large revisions to the monthly data and second, the aggregate index is often moved by large changes in mining or utility output.
The data for March released yesterday gave us examples of both. Therefore the NYT missed the story when it gave us the ominous news that:
“A Federal Reserve report showed American industrial output was flat for a second consecutive month in March, held back by a 0.2 percent drop in manufacturing.”
While the manufacturing index did show a 0.2 percent decline in March, its February reading was revised up by 0.5 percent. Therefore the March reading stood 0.3 percent from the advanced report for February and 0.6 percent above the February level. The reason that the industrial production index as a whole was flat over this period was a decline in mining output of approximately 3.8 percent.
The Federal Reserve Board’s data on industrial production are often badly misinterpreted. The error occurs for two reasons. First, there are often large revisions to the monthly data and second, the aggregate index is often moved by large changes in mining or utility output.
The data for March released yesterday gave us examples of both. Therefore the NYT missed the story when it gave us the ominous news that:
“A Federal Reserve report showed American industrial output was flat for a second consecutive month in March, held back by a 0.2 percent drop in manufacturing.”
While the manufacturing index did show a 0.2 percent decline in March, its February reading was revised up by 0.5 percent. Therefore the March reading stood 0.3 percent from the advanced report for February and 0.6 percent above the February level. The reason that the industrial production index as a whole was flat over this period was a decline in mining output of approximately 3.8 percent.
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Is today Tuesday? Some people say it is and others say it isn’t. It’s just so hard to decide.
That is pretty much what NPR told us about President Obama’s record in turning around the economy this morning. It cited Alan Blinder, an economist who has served in past Democratic administrations, saying that President Obama’s policies helped the economy. It then cited Douglas Holtz-Eakin, who served in the Bush administration and was the chief economic advisor to John McCain saying that his policies harmed the economy.
It would have been helpful to give us the assessment of neutral observers such as the Congressional Budget Office. It also would have been helpful to try to evaluate the claims of the Romney campaign that the stimulus harmed the economy.
NPR reported that the Romney campaign said:
“The president made the recession worse, the statement says, ‘by pursuing a series of disastrous, partisan policies that created uncertainty, discouraged investment and stifled job creation.'”
There is a simple claim that can be evaluated here. The Romney campaign says that investment would have been higher had it not been for Obama’s actions. This can be evaluated by comparing the path of investment with what might have been predicted absent the bad policies from President Obama.
Investment in equipment and software is currently close to 7.5 percent of GDP. It was 7.9 percent before the downturn in 2007. Given the huge amounts of excess capacity in large sectors of the economy, it is difficult to envision a scenario in which investment would have been much higher than it is today. If the Romney campaign is to be taken seriously in this claim then it should have to present some evidence that would establish its counter-factual as being credible. On it’s face, it is not.
This piece also included a very misleading assertion from Holtz-Eakin. Referring to Holtz-Eakin the piece reported:
“He says any president would have acted to stop the economic free fall in 2009. The issue, he says, is the quality of the president’s responses.”
Actually, the free fall begin in September of 2008. President Bush did nothing to stop the free fall in the last four months of his presidency. Perhaps he would have eventually taken some action to boost the economy had he been in office longer, but given President Bush’s track record it is far from clear that any president would have taken action to stop the free fall.
Is today Tuesday? Some people say it is and others say it isn’t. It’s just so hard to decide.
That is pretty much what NPR told us about President Obama’s record in turning around the economy this morning. It cited Alan Blinder, an economist who has served in past Democratic administrations, saying that President Obama’s policies helped the economy. It then cited Douglas Holtz-Eakin, who served in the Bush administration and was the chief economic advisor to John McCain saying that his policies harmed the economy.
It would have been helpful to give us the assessment of neutral observers such as the Congressional Budget Office. It also would have been helpful to try to evaluate the claims of the Romney campaign that the stimulus harmed the economy.
NPR reported that the Romney campaign said:
“The president made the recession worse, the statement says, ‘by pursuing a series of disastrous, partisan policies that created uncertainty, discouraged investment and stifled job creation.'”
There is a simple claim that can be evaluated here. The Romney campaign says that investment would have been higher had it not been for Obama’s actions. This can be evaluated by comparing the path of investment with what might have been predicted absent the bad policies from President Obama.
Investment in equipment and software is currently close to 7.5 percent of GDP. It was 7.9 percent before the downturn in 2007. Given the huge amounts of excess capacity in large sectors of the economy, it is difficult to envision a scenario in which investment would have been much higher than it is today. If the Romney campaign is to be taken seriously in this claim then it should have to present some evidence that would establish its counter-factual as being credible. On it’s face, it is not.
This piece also included a very misleading assertion from Holtz-Eakin. Referring to Holtz-Eakin the piece reported:
“He says any president would have acted to stop the economic free fall in 2009. The issue, he says, is the quality of the president’s responses.”
Actually, the free fall begin in September of 2008. President Bush did nothing to stop the free fall in the last four months of his presidency. Perhaps he would have eventually taken some action to boost the economy had he been in office longer, but given President Bush’s track record it is far from clear that any president would have taken action to stop the free fall.
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[Note: Adam Ozimek wrote to tell me that the headline, “4 politically controversial issues where all economists agree,” was not his. Without this headline, the blogpost is not especially objectionable.]
Megan MaCardle turned over her blog to Adam Ozimek to spread some misinformation about NAFTA and trade policy. Ozimek headlines the piece, “4 politically controversial issues where all economists agree.” While I’m pretty comfortable with three of the four, the claim that all economists agree that, “the benefits of free trade and NAFTA far outweigh the costs” is highly misleading.
First, NAFTA was not about free trade. First and foremost, it was about reducing barriers that made U.S. companies reluctant to invest in Mexico. This meant prohibiting Mexico from expropriating factories and outlawing any restrictions on the repatriation of profits to the United States.
The agreement did little to loosen the obstacles facing highly-educated professionals in Mexico, like doctors and lawyers, from working in the United States. If the agreement had freed up trade in this area, it could have led to gains to consumers in the tens of billions of dollars a year.
In other areas, like patents and copyrights, NAFTA increased protection by extending the length and scope of these government granted monopolies. Mexico was forced to develop a U.S. type patent system for prescription drugs which led to considerably higher drug prices.
It is easy to see why someone who might in general support free trade would oppose NAFTA. The winners are the businesses that are in a position to take advantage of access to cheap labor in Mexico. The losers are the manufacturing workers in the United States who will now have to accept lower wages or lose their job.
It is entirely possible that an economist could agree that NAFTA did lead to net gains to the country as a whole, even if most people end up as losers (e.g. every worker loses $100 in wages, but Mitt Romney’s clique pocketed an additional $50 billion in profit). In this case, she might say the policy was bad in spite of the net gains. (Several of the economists questioned raised exactly this concern.)
The higher costs imposed by higher prices for drugs and other products in Mexico could mean that a full assessment of costs would show Mexico to be a net loser from NAFTA. While tariffs are rarely more than 20-30 percent of a product’s price, patents can raise the price of a drug by several hundred or even several thousand percent. The cost to Mexico’s consumers in the form of higher drug prices can easily outstrip the small gains that showed up elsewhere. Of course this will lead to higher profits to U.S. drug companies.
Given the predicted distribution of gains, it is entirely possible that a fully informed economist could believe that the losses from NAFTA to the poor and middle class easily swamp the gains to the rich and for that reason oppose the policy. This is not bad economics as the discussion seems to imply.
Or, to put in terms that even an economist could understand, suppose there was a trade deal that completely opened up doctors, lawyers, and economists to international competition, but maintained the protection for everyone else, and hugely increased the protection for autoworkers. It is entirely possible that many economists would oppose this deal. They certainly would not call it a “free trade” agreement.
There is one final point worth making about this exercise. The line “all economists agree” carries much less weight these days because almost the entire economics profession somehow failed to see the $8 trillion housing bubble, the collapse of which wrecked the economy. Tens of millions of people continue to suffer with the loss of their jobs, their homes, and/or their savings as a result of this incredible incompetence.
In the wake of this momentous failure it is understandable that the public would be reluctant to take the advice of economists on economic policy. (Best question to ask an economist: when did you stop being wrong about the economy?) This is unfortunate, since economists really have learned some things from their studies that may not be apparent to everyone.
However, economists will have to earn back the public’s trust. As long as economists pay no price in their careers for even the most disastrous failures, this may prove difficult. After all, if there are no consequences to getting things wrong, why would the public believe that economists will get things right? That is a point on which all economists should agree.
[Note: Adam Ozimek wrote to tell me that the headline, “4 politically controversial issues where all economists agree,” was not his. Without this headline, the blogpost is not especially objectionable.]
Megan MaCardle turned over her blog to Adam Ozimek to spread some misinformation about NAFTA and trade policy. Ozimek headlines the piece, “4 politically controversial issues where all economists agree.” While I’m pretty comfortable with three of the four, the claim that all economists agree that, “the benefits of free trade and NAFTA far outweigh the costs” is highly misleading.
First, NAFTA was not about free trade. First and foremost, it was about reducing barriers that made U.S. companies reluctant to invest in Mexico. This meant prohibiting Mexico from expropriating factories and outlawing any restrictions on the repatriation of profits to the United States.
The agreement did little to loosen the obstacles facing highly-educated professionals in Mexico, like doctors and lawyers, from working in the United States. If the agreement had freed up trade in this area, it could have led to gains to consumers in the tens of billions of dollars a year.
In other areas, like patents and copyrights, NAFTA increased protection by extending the length and scope of these government granted monopolies. Mexico was forced to develop a U.S. type patent system for prescription drugs which led to considerably higher drug prices.
It is easy to see why someone who might in general support free trade would oppose NAFTA. The winners are the businesses that are in a position to take advantage of access to cheap labor in Mexico. The losers are the manufacturing workers in the United States who will now have to accept lower wages or lose their job.
It is entirely possible that an economist could agree that NAFTA did lead to net gains to the country as a whole, even if most people end up as losers (e.g. every worker loses $100 in wages, but Mitt Romney’s clique pocketed an additional $50 billion in profit). In this case, she might say the policy was bad in spite of the net gains. (Several of the economists questioned raised exactly this concern.)
The higher costs imposed by higher prices for drugs and other products in Mexico could mean that a full assessment of costs would show Mexico to be a net loser from NAFTA. While tariffs are rarely more than 20-30 percent of a product’s price, patents can raise the price of a drug by several hundred or even several thousand percent. The cost to Mexico’s consumers in the form of higher drug prices can easily outstrip the small gains that showed up elsewhere. Of course this will lead to higher profits to U.S. drug companies.
Given the predicted distribution of gains, it is entirely possible that a fully informed economist could believe that the losses from NAFTA to the poor and middle class easily swamp the gains to the rich and for that reason oppose the policy. This is not bad economics as the discussion seems to imply.
Or, to put in terms that even an economist could understand, suppose there was a trade deal that completely opened up doctors, lawyers, and economists to international competition, but maintained the protection for everyone else, and hugely increased the protection for autoworkers. It is entirely possible that many economists would oppose this deal. They certainly would not call it a “free trade” agreement.
There is one final point worth making about this exercise. The line “all economists agree” carries much less weight these days because almost the entire economics profession somehow failed to see the $8 trillion housing bubble, the collapse of which wrecked the economy. Tens of millions of people continue to suffer with the loss of their jobs, their homes, and/or their savings as a result of this incredible incompetence.
In the wake of this momentous failure it is understandable that the public would be reluctant to take the advice of economists on economic policy. (Best question to ask an economist: when did you stop being wrong about the economy?) This is unfortunate, since economists really have learned some things from their studies that may not be apparent to everyone.
However, economists will have to earn back the public’s trust. As long as economists pay no price in their careers for even the most disastrous failures, this may prove difficult. After all, if there are no consequences to getting things wrong, why would the public believe that economists will get things right? That is a point on which all economists should agree.
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The Washington Post did the obligatory waste-a-word to increase inaccuracy routine when it referred to a “free-trade” agreement with Colombia in a front page news story. The agreement includes a number of provisions that increase the strength of patent and copyright protection in Colombia which will raise the price of drugs and other products above their free market level. This will have the effect of dampening growth, in addition to making health care more costly for people in Colombia.
There is no reason that the Post should call this pact a “free-trade” agreement. Its proponents like to embrace this term because it gives the pact a more favorable image, however it would be more accurate to simply call it a “trade” agreement.
In discussing this agreement, Morning Edition referred to the $1 billion in additional exports that the United States is projected to get as a result of the agreement. The number of jobs in the economy depends on net exports (exports minus imports). If jobs just depended only on exports, then we could increase employment by having car parts in the United States exported to Mexico to be assembled there, and then imported back as a finished car into the United States.
The history has been that the trade deficits have increased with countries with whom we have signed trade agreements. If that pattern holds with Colombia, the trade deal will be a net job loser, even if our exports increase. It would have been helpful if Morning Edition had clarified this arithmetic for listeners who might have been deceived by the way in which the Obama administration has sold the agreement.
It is also worth pointing out that an increase in exports of $1 billion would correspond to just 10,000 jobs, even if there is no increase in imports. If the economy is generating 200,000 jobs a month, this is equivalent to a day and half of job creation.
The Washington Post did the obligatory waste-a-word to increase inaccuracy routine when it referred to a “free-trade” agreement with Colombia in a front page news story. The agreement includes a number of provisions that increase the strength of patent and copyright protection in Colombia which will raise the price of drugs and other products above their free market level. This will have the effect of dampening growth, in addition to making health care more costly for people in Colombia.
There is no reason that the Post should call this pact a “free-trade” agreement. Its proponents like to embrace this term because it gives the pact a more favorable image, however it would be more accurate to simply call it a “trade” agreement.
In discussing this agreement, Morning Edition referred to the $1 billion in additional exports that the United States is projected to get as a result of the agreement. The number of jobs in the economy depends on net exports (exports minus imports). If jobs just depended only on exports, then we could increase employment by having car parts in the United States exported to Mexico to be assembled there, and then imported back as a finished car into the United States.
The history has been that the trade deficits have increased with countries with whom we have signed trade agreements. If that pattern holds with Colombia, the trade deal will be a net job loser, even if our exports increase. It would have been helpful if Morning Edition had clarified this arithmetic for listeners who might have been deceived by the way in which the Obama administration has sold the agreement.
It is also worth pointing out that an increase in exports of $1 billion would correspond to just 10,000 jobs, even if there is no increase in imports. If the economy is generating 200,000 jobs a month, this is equivalent to a day and half of job creation.
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