A NYT article on President Obama’s proposals for increasing the tax credits for buying cars powered by alternative fuels concluded by quoting President Obama’s statements that gas prices are determined by the world market and will be little affected by increased U.S. production of oil. This is also something that happens to be true.
U.S. oil production is around 9 percent of world production. Even very large increases in U.S. production would have only a minimal effect on world oil prices, and therefore a minimal effect on the price of gas in the United States. The NYT should tell readers this and not leave it as a he said/she said proposition on which reasonable people can differ. It isn’t.
It would also be helpful if the NYT put the numbers in this piece in some context. For example, the $1 billion that President Obama proposed to spend to help cities build infrastructure for vehicles powered by alternative fuels would be equal to approximately 0.03 percent of federal spending if it were done in a single year, which seems unlikely. (The article is not clear on the time-frame of the spending proposals it mentions.)
Such context is important since many readers may not realize that these proposals will have very little consequence for the budget or the deficit.
[Addendum: The Washington Post commits the same sins.]
A NYT article on President Obama’s proposals for increasing the tax credits for buying cars powered by alternative fuels concluded by quoting President Obama’s statements that gas prices are determined by the world market and will be little affected by increased U.S. production of oil. This is also something that happens to be true.
U.S. oil production is around 9 percent of world production. Even very large increases in U.S. production would have only a minimal effect on world oil prices, and therefore a minimal effect on the price of gas in the United States. The NYT should tell readers this and not leave it as a he said/she said proposition on which reasonable people can differ. It isn’t.
It would also be helpful if the NYT put the numbers in this piece in some context. For example, the $1 billion that President Obama proposed to spend to help cities build infrastructure for vehicles powered by alternative fuels would be equal to approximately 0.03 percent of federal spending if it were done in a single year, which seems unlikely. (The article is not clear on the time-frame of the spending proposals it mentions.)
Such context is important since many readers may not realize that these proposals will have very little consequence for the budget or the deficit.
[Addendum: The Washington Post commits the same sins.]
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It would be a big step forward if we could. Kathleen Madigan tells readers that the Fed is going to have to start worrying about inflation since unit labor costs have exceeded the core inflation rate in the last two quarters. This is shown very nicely in the graph accompanying the blog note.
Of course this graph also shows unit labor costs running way below core inflation all through 2009 and 2010. This means that companies had huge increases in profit margins over this period. It might be painful for folks at the WSJ to hear this, but there is nothing natural about the huge increases in profit margins in 2009 and 2010 and there is no reason to expect such high margins to persist forever.
If the Fed were working exclusively for the owners of corporations, then they might try to clamp down on any reduction in unemployment that could allow workers to have enough bargaining power to make up some of the ground lost in 2009 and 2010. However, if the Fed has an eye to the broader economy, the fact that corporations may not be able to sustain record profit margins indefinitely would not be a major concern.
[Thanks to Joe Seydl for calling this one to my attention.]
It would be a big step forward if we could. Kathleen Madigan tells readers that the Fed is going to have to start worrying about inflation since unit labor costs have exceeded the core inflation rate in the last two quarters. This is shown very nicely in the graph accompanying the blog note.
Of course this graph also shows unit labor costs running way below core inflation all through 2009 and 2010. This means that companies had huge increases in profit margins over this period. It might be painful for folks at the WSJ to hear this, but there is nothing natural about the huge increases in profit margins in 2009 and 2010 and there is no reason to expect such high margins to persist forever.
If the Fed were working exclusively for the owners of corporations, then they might try to clamp down on any reduction in unemployment that could allow workers to have enough bargaining power to make up some of the ground lost in 2009 and 2010. However, if the Fed has an eye to the broader economy, the fact that corporations may not be able to sustain record profit margins indefinitely would not be a major concern.
[Thanks to Joe Seydl for calling this one to my attention.]
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Tennessee Senator Bob Corker had an oped in the Washington Post complaining about the budget deficit. He concluded the piece by quoting Morgan Stanley director Erskine Bowles comment that the deficit is leading to “the most predictable economic crisis in history.”
This is not true. There are many countries that have sustained debt to GDP levels of more than twice projected for the United States ten years from now. Japan currently has a debt to GDP ratio of more than 200 percent and can still borrow long-term in financial markets at interest rates close to 1 percent. Financial markets show no concern whatsoever about the financial situation of the United States, with the yield on the 30-year Treasury bond just over 3 percent.
In fact, the most predictable economic crisis in history was the crisis that would result from the collapse of the $8 trillion housing bubble. This led to both the current downturn and the large deficits that Senator Corker and Mr. Bowles find so upsetting. Of course both of them failed to see that crisis coming.
Tennessee Senator Bob Corker had an oped in the Washington Post complaining about the budget deficit. He concluded the piece by quoting Morgan Stanley director Erskine Bowles comment that the deficit is leading to “the most predictable economic crisis in history.”
This is not true. There are many countries that have sustained debt to GDP levels of more than twice projected for the United States ten years from now. Japan currently has a debt to GDP ratio of more than 200 percent and can still borrow long-term in financial markets at interest rates close to 1 percent. Financial markets show no concern whatsoever about the financial situation of the United States, with the yield on the 30-year Treasury bond just over 3 percent.
In fact, the most predictable economic crisis in history was the crisis that would result from the collapse of the $8 trillion housing bubble. This led to both the current downturn and the large deficits that Senator Corker and Mr. Bowles find so upsetting. Of course both of them failed to see that crisis coming.
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Yes, he did. His paean to the late James Q. Wilson is titled, “the rediscovery of character.” It is a discussion of how Wilson touted the importance of values to a country that Brooks believes lacks them.
In the middle of the piece he tells readers:
“Every generation has an incentive to spend on itself, but none ran up huge deficits until the current one. Some sort of moral norms prevented them.”
Of course the reason that the country is running up huge deficits at the moment is that private sector spending has collapsed. Prior to the collapse of the economy in 2008, deficits were relatively small with the debt to GDP ratio actually declining.
The large government filled the demand gap created by the lack of private sector spending. If we did not have this spending, then millions of additional workers would be unemployed. They would be unable to properly care for their children.
It is hard to see the moral norms that tells us this situation would be good. There are certainly people who think it is more important to have a balanced budget than workers have jobs and that their kids have a decent education, health care, nutrition, and housing.
This balanced budget view seems more obviously attributable to a misunderstanding of the economy. However, if Brooks wants to claim that the worship over balanced budgets over a decent society and a healthy economy is a moral norm, then we should be happy that this norm does not carry quite as much weight as it used to.
Yes, he did. His paean to the late James Q. Wilson is titled, “the rediscovery of character.” It is a discussion of how Wilson touted the importance of values to a country that Brooks believes lacks them.
In the middle of the piece he tells readers:
“Every generation has an incentive to spend on itself, but none ran up huge deficits until the current one. Some sort of moral norms prevented them.”
Of course the reason that the country is running up huge deficits at the moment is that private sector spending has collapsed. Prior to the collapse of the economy in 2008, deficits were relatively small with the debt to GDP ratio actually declining.
The large government filled the demand gap created by the lack of private sector spending. If we did not have this spending, then millions of additional workers would be unemployed. They would be unable to properly care for their children.
It is hard to see the moral norms that tells us this situation would be good. There are certainly people who think it is more important to have a balanced budget than workers have jobs and that their kids have a decent education, health care, nutrition, and housing.
This balanced budget view seems more obviously attributable to a misunderstanding of the economy. However, if Brooks wants to claim that the worship over balanced budgets over a decent society and a healthy economy is a moral norm, then we should be happy that this norm does not carry quite as much weight as it used to.
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The Washington Post had a front page fluff piece on the IMF of the sort that would be expected in a paid advertisement. The 5th paragraph tells readers:
“Over the decades since its creation after World War II, the IMF has taken responsibility for ensuring the health of the global economy. The agency has repeatedly rescued teetering governments and restored confidence to panicked markets by coupling its unrivaled expertise with money provided by member countries, most prominently the United States.”
The evidence does not fit this picture well. The IMF had enormous sway in determining economic policy in developing countries in the decades of the 80s and the 90s, especially in Latin America where many countries were following the Washington Consensus neo-liberal model. This led to two decades of dismal economic growth and weak progress on social indicators like health care and education measures.
The “rescue” of East Asia following its financial crisis was especially onerous. As a result of the harsh conditions imposed on the countries of the region, developing countries began accumulating massive amounts of reserves in order to ensure that they would never be forced to deal with the IMF.
This meant running huge trade surpluses, especially wiith the United States. That created the fundamental imbalance of the last decade that was associated with the housing bubble. Instead of rich countries lending money to poor countries, poor countries were lending massive amounts of money to the United States in order to keep up the value of the dollar and sustain their trade surpluses. Lacking productive investment outlets, this money was used to fuel the housing bubble.
Rather than being seen as an agency that looks after the health of the world economy, the IMF is better understood as the agent of a creditors’ cartel, getting as much money as possible back for private creditors. This is the only plausible way to understand its dealings with Argentina during its crisis in 1998-2002.
The IMF imposed ever more onerous conditions on the country, pushing it into a depression. When the government finally broke with the IMF because it could no longer meet these conditions, the IMF did everything it could to sabotage its recovery. This included issuing tremendously pessimistic growth projections that could discourage private investment. Nonetheless, Argentina’s economy grew rapidly, as it quickly regained the ground lost in the recession.
The article also concealed the IMF’s repeated errors in dealing with the current crisis in Greece and the Eurozone telling readers at one point:
“But the prognosis for the bailout was getting grimmer. At the IMF, assumptions about Greece’s prospects were tumbling. Spending cuts by the Athens government were weakening economic activity, pushing the country into a deeper recession than expected. The wider European economy was slowing, denying Greece the lift anticipated from trading with its neighbors.” [emphasis added]
The poor performance of Greece was entirely expected by many analysts. It was a predictable result of large cutbacks in government spending coupled by similar moves to austerity in its major trading partners.
Greece’s fundamental problem is that its economy has become uncompetitive with northern Europe leading to a huge current account deficit. This can only be corrected by having prices in Greece fall relative to prices in Northern European countries.
This can be accomplished either by having prices in Greece fall, or prices in Northern Europe rise more rapidly. The former is very difficult to accomplish, while the latter could be done relatively easily if the European Central Bank would just allow a somewhat rate of inflation (e.g. 3-4 percent for the Eurozone as a whole). The IMF has refused to ever state this obvious truth, even though its chief economist, Olivier Blanchard has made exactly this sort of argument in an IMF paper. In short, the IMF is pursuing a policy in Greece that almost certainly cannot succeed because it is continuing to defer to the powerful economic and political interests in Europe, rather than applying sound economic reasoning.
It is also worth mentioning that IMF economists can retire in their early 50s with 6-figure pensions. This likely undermines their authority when insisting that countries cut back pensions that average less than 1000 dollars a month.
The Washington Post had a front page fluff piece on the IMF of the sort that would be expected in a paid advertisement. The 5th paragraph tells readers:
“Over the decades since its creation after World War II, the IMF has taken responsibility for ensuring the health of the global economy. The agency has repeatedly rescued teetering governments and restored confidence to panicked markets by coupling its unrivaled expertise with money provided by member countries, most prominently the United States.”
The evidence does not fit this picture well. The IMF had enormous sway in determining economic policy in developing countries in the decades of the 80s and the 90s, especially in Latin America where many countries were following the Washington Consensus neo-liberal model. This led to two decades of dismal economic growth and weak progress on social indicators like health care and education measures.
The “rescue” of East Asia following its financial crisis was especially onerous. As a result of the harsh conditions imposed on the countries of the region, developing countries began accumulating massive amounts of reserves in order to ensure that they would never be forced to deal with the IMF.
This meant running huge trade surpluses, especially wiith the United States. That created the fundamental imbalance of the last decade that was associated with the housing bubble. Instead of rich countries lending money to poor countries, poor countries were lending massive amounts of money to the United States in order to keep up the value of the dollar and sustain their trade surpluses. Lacking productive investment outlets, this money was used to fuel the housing bubble.
Rather than being seen as an agency that looks after the health of the world economy, the IMF is better understood as the agent of a creditors’ cartel, getting as much money as possible back for private creditors. This is the only plausible way to understand its dealings with Argentina during its crisis in 1998-2002.
The IMF imposed ever more onerous conditions on the country, pushing it into a depression. When the government finally broke with the IMF because it could no longer meet these conditions, the IMF did everything it could to sabotage its recovery. This included issuing tremendously pessimistic growth projections that could discourage private investment. Nonetheless, Argentina’s economy grew rapidly, as it quickly regained the ground lost in the recession.
The article also concealed the IMF’s repeated errors in dealing with the current crisis in Greece and the Eurozone telling readers at one point:
“But the prognosis for the bailout was getting grimmer. At the IMF, assumptions about Greece’s prospects were tumbling. Spending cuts by the Athens government were weakening economic activity, pushing the country into a deeper recession than expected. The wider European economy was slowing, denying Greece the lift anticipated from trading with its neighbors.” [emphasis added]
The poor performance of Greece was entirely expected by many analysts. It was a predictable result of large cutbacks in government spending coupled by similar moves to austerity in its major trading partners.
Greece’s fundamental problem is that its economy has become uncompetitive with northern Europe leading to a huge current account deficit. This can only be corrected by having prices in Greece fall relative to prices in Northern European countries.
This can be accomplished either by having prices in Greece fall, or prices in Northern Europe rise more rapidly. The former is very difficult to accomplish, while the latter could be done relatively easily if the European Central Bank would just allow a somewhat rate of inflation (e.g. 3-4 percent for the Eurozone as a whole). The IMF has refused to ever state this obvious truth, even though its chief economist, Olivier Blanchard has made exactly this sort of argument in an IMF paper. In short, the IMF is pursuing a policy in Greece that almost certainly cannot succeed because it is continuing to defer to the powerful economic and political interests in Europe, rather than applying sound economic reasoning.
It is also worth mentioning that IMF economists can retire in their early 50s with 6-figure pensions. This likely undermines their authority when insisting that countries cut back pensions that average less than 1000 dollars a month.
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In an article on the debate over offshore drilling, the NYT told readers:
“while candidates have sparred over the reasons for rising prices, there is little disagreement over the call for more drilling, onshore and offshore.”
The NYT should have also told readers that there is almost no disagreement among economists that drilling everywhere all the time offshore will have almost no impact on the price of gas in the United States. The reason is that we have a world market for oil. The additional oil that might come from offshore drilling is a drop in the bucket in a world oil market of almost 90 million barrels a day.
It is unlikely that drivers would even notice the difference between a policy where we told the oil industry that it could drill wherever it wants and pay no attention to the number of people it kills in the process or the resulting damage to the environment and local economies and a policy where we banned all new offshore drilling. Over the next 2 years the difference would be virtually non-existent and even after 10 years it is unlikely to change the price of gas by more than 2-3 percent.
The media should point out this fact to readers and that politicians who claim otherwise either do not understand the oil market or are being dishonest. It also would have been worth reminding readers that politicians of both parties receive large campaign contributions from the oil industry.
In an article on the debate over offshore drilling, the NYT told readers:
“while candidates have sparred over the reasons for rising prices, there is little disagreement over the call for more drilling, onshore and offshore.”
The NYT should have also told readers that there is almost no disagreement among economists that drilling everywhere all the time offshore will have almost no impact on the price of gas in the United States. The reason is that we have a world market for oil. The additional oil that might come from offshore drilling is a drop in the bucket in a world oil market of almost 90 million barrels a day.
It is unlikely that drivers would even notice the difference between a policy where we told the oil industry that it could drill wherever it wants and pay no attention to the number of people it kills in the process or the resulting damage to the environment and local economies and a policy where we banned all new offshore drilling. Over the next 2 years the difference would be virtually non-existent and even after 10 years it is unlikely to change the price of gas by more than 2-3 percent.
The media should point out this fact to readers and that politicians who claim otherwise either do not understand the oil market or are being dishonest. It also would have been worth reminding readers that politicians of both parties receive large campaign contributions from the oil industry.
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The link between job growth and economic growth is one of the most solid relationships that you will find in economics. The reason is that it is almost definitional.
If we hold the length of the average work year constant (it doesn’t change quickly — although perhaps it should), then the rate of economic growth is equal to the rate of productivity growth plus the rate of job growth. (Yes, there is a multiplicative element here for serious nerds, but it doesn’t matter for what we are talking about.) This means that if the economy grows more rapidly, then we will see more rapid job growth, unless productivity just surges for some reason.
Faster productivity growth is in general good news. This means that we are getting richer, producing more in each hour of work. We can adjust to this either by further boosting demand or by shortening workweeks or providing longer vacations.
However as a practical matter, we don’t just see booms in productivity growth. There are erratic movements in productivity around business cycles, however periods of greater than trend productivity growth are inevitably offset by slower than trend productivity growth, as for example happened when productivity surged in 2009 only to be followed by slower growth in 2010 and 2011.
In short, the link between economic growth and job growth is rock solid. That means the Walter Kiechel was spewing nonsense in the Washington Post when he criticized Governor Romney’s plan to create jobs by getting the economy going:
“Savvy consultants also know that the data indicate a sneakier problem with ‘just get the economy going again’ as an answer to unemployment. As you can read, for example, in a 100-page report from the McKinsey Global Institute, the link between economic recovery and job creation in the United States has been growing weaker for at least the past 20 years. While employment was harder hit in the most recent recession, the recoveries after the 1990 and 2001 downturns also featured slower rates of job growth than the historical norm. As the report states, ‘In the years from 2000 to 2007, the United States recorded its weakest employment growth for any comparable period since the Great Depression.’ And that was during a Republican administration, one hell-bent on reducing unnecessary regulation and further kneecapping unions.”
There is good reason to question whether Governor Romney’s tax cutting and business friendly regulation strategy will lead to strong economic growth. But if it did, there is little doubt that it would create jobs.
The link between job growth and economic growth is one of the most solid relationships that you will find in economics. The reason is that it is almost definitional.
If we hold the length of the average work year constant (it doesn’t change quickly — although perhaps it should), then the rate of economic growth is equal to the rate of productivity growth plus the rate of job growth. (Yes, there is a multiplicative element here for serious nerds, but it doesn’t matter for what we are talking about.) This means that if the economy grows more rapidly, then we will see more rapid job growth, unless productivity just surges for some reason.
Faster productivity growth is in general good news. This means that we are getting richer, producing more in each hour of work. We can adjust to this either by further boosting demand or by shortening workweeks or providing longer vacations.
However as a practical matter, we don’t just see booms in productivity growth. There are erratic movements in productivity around business cycles, however periods of greater than trend productivity growth are inevitably offset by slower than trend productivity growth, as for example happened when productivity surged in 2009 only to be followed by slower growth in 2010 and 2011.
In short, the link between economic growth and job growth is rock solid. That means the Walter Kiechel was spewing nonsense in the Washington Post when he criticized Governor Romney’s plan to create jobs by getting the economy going:
“Savvy consultants also know that the data indicate a sneakier problem with ‘just get the economy going again’ as an answer to unemployment. As you can read, for example, in a 100-page report from the McKinsey Global Institute, the link between economic recovery and job creation in the United States has been growing weaker for at least the past 20 years. While employment was harder hit in the most recent recession, the recoveries after the 1990 and 2001 downturns also featured slower rates of job growth than the historical norm. As the report states, ‘In the years from 2000 to 2007, the United States recorded its weakest employment growth for any comparable period since the Great Depression.’ And that was during a Republican administration, one hell-bent on reducing unnecessary regulation and further kneecapping unions.”
There is good reason to question whether Governor Romney’s tax cutting and business friendly regulation strategy will lead to strong economic growth. But if it did, there is little doubt that it would create jobs.
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The Washington Post had a major story on the front page of its business section about the dilemma that Ohioans face over allowing fracking. After all, most believe that it will create jobs, but they also believe that it will damage the environment. That is really a tough call.
It would have helped if the paper had devoted a paragraph or two to putting some numbers behind this tradeoff. While it is difficult to put numbers on the environment side, in large part because the industry has worked hard to conceal evidence, it is not very hard to put numbers on the jobs side.
Based on the experience in Pennsylvania, it is likely that fracking would create less than 10,000 jobs in Ohio. While this is not altogether trivial, it would make up only about 3 percent of the 320,000 jobs lost since the recession began. This information would have been useful to people trying to assess the relative importance of the economic benefits and environmental risks.
The Washington Post had a major story on the front page of its business section about the dilemma that Ohioans face over allowing fracking. After all, most believe that it will create jobs, but they also believe that it will damage the environment. That is really a tough call.
It would have helped if the paper had devoted a paragraph or two to putting some numbers behind this tradeoff. While it is difficult to put numbers on the environment side, in large part because the industry has worked hard to conceal evidence, it is not very hard to put numbers on the jobs side.
Based on the experience in Pennsylvania, it is likely that fracking would create less than 10,000 jobs in Ohio. While this is not altogether trivial, it would make up only about 3 percent of the 320,000 jobs lost since the recession began. This information would have been useful to people trying to assess the relative importance of the economic benefits and environmental risks.
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Washington Post business columnist Steven Pearlstein often has thoughtful things to say about the economy; not today. He has one of those charming “pox on both your houses” pieces in which he even-handedly denounces the left and the right.
The denunciation of the right is fine. Complaints about economic harm from high taxes and over-regulation are utter nonsense as we all know. (We have low taxes and business-friendly regulation already.) It’s the attacks on the left that defy arithmetic and logic.
He begins the piece by touting the economy’s 3 percent growth rate in the fourth quarter and recent job creating pace of 200,000 a month. Then he tells readers:
“There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more.”
Okay, let’s assume that the growth rate remains ate 3.0 percent, which is somewhat higher than most forecasts. Currently the economy is operating at about 6 percent below its potential. Potential growth is around 2.5 percent annually according to the Congressional Budget Office. This means that we will make up our shortfall at the rate of 0.5 percentage points annually. That puts 2024 as the year when we again reach potential GDP.
Taking the jobs side of the picture, the economy is currently down by around 10 million jobs from where it would be had we continued on our pre-recession job growth trend. We have to create roughly 100,000 jobs a month to keep pace with the growth of the labor force. This means that if we create 200,000 jobs a month, then we are cutting into this shortfall at the rate of 100,000 jobs a month. That gets back to full employment in 100 months or 8 and a half years.
Hey, who can call this a depression?
The substance is perhaps even more irksome than Pearlstein’s arithmetic problems. He complains:
“It is true, for example, that with additional borrowing and spending, we could rehire laid-off teachers and police officers. That would certainly boost employment in the short term, reduce class sizes and make us all feel safer. But the reality is that, even if the economy were to improve as a result, it would be many years before tax revenues return to where they were at the height of the bubble. At some point, spending by state and local governments will have to be brought down to match the level of taxes that their voters are willing to pay. The notion that once unemployment falls below 6 percent everyone will join hands and finally put the fiscal house in order — well, that’s nothing more than political fantasy.”
If Pearlstein ever paid any attention to the people who is criticizing, he would know that they advocate federal support for these services at the state and local level. The federal government can of course borrow very cheaply and cover the cost of this aid when the economy is in a downturn. When the unemployment rate returns to more normal levels, contrary to what Pearlstein seems to imply here, state and local governments will have the necessary tax revenue to pay for these services. (That is not true everywhere, but there are always growing and declining regions of the country.)
Pearlstein then goes on to trumpet spending on improving infrastructure, education, and research and development, all investments that will have long-term payoffs. Maybe there is someone on the left who does not support aggressive spending in these areas, but I challenge Pearlstein to find this person.
Finally, it is incredible that in a piece focused on the need to restructure the economy, Pearlstein does not once mention the value of the dollar. The fundamental imbalance in the U.S. economy is its large trade deficit. This will only be corrected by a sharp decline in the value of the dollar against the currencies of our trading partners, something that Pearlstein has written about frequently in other columns.
It certainly would have been worth mentioning this point here. When the dollar does fall to more competitive levels, the United States stands to gain 4-5 million manufacturing jobs. This will have an enormous impact on re-balancing the U.S. economy.
Washington Post business columnist Steven Pearlstein often has thoughtful things to say about the economy; not today. He has one of those charming “pox on both your houses” pieces in which he even-handedly denounces the left and the right.
The denunciation of the right is fine. Complaints about economic harm from high taxes and over-regulation are utter nonsense as we all know. (We have low taxes and business-friendly regulation already.) It’s the attacks on the left that defy arithmetic and logic.
He begins the piece by touting the economy’s 3 percent growth rate in the fourth quarter and recent job creating pace of 200,000 a month. Then he tells readers:
“There are some on the left who also cling to the view that the economy is stuck in a depression — lest it undermine their critique about the woeful inadequacy of fiscal stimulus and the desperate need for more.”
Okay, let’s assume that the growth rate remains ate 3.0 percent, which is somewhat higher than most forecasts. Currently the economy is operating at about 6 percent below its potential. Potential growth is around 2.5 percent annually according to the Congressional Budget Office. This means that we will make up our shortfall at the rate of 0.5 percentage points annually. That puts 2024 as the year when we again reach potential GDP.
Taking the jobs side of the picture, the economy is currently down by around 10 million jobs from where it would be had we continued on our pre-recession job growth trend. We have to create roughly 100,000 jobs a month to keep pace with the growth of the labor force. This means that if we create 200,000 jobs a month, then we are cutting into this shortfall at the rate of 100,000 jobs a month. That gets back to full employment in 100 months or 8 and a half years.
Hey, who can call this a depression?
The substance is perhaps even more irksome than Pearlstein’s arithmetic problems. He complains:
“It is true, for example, that with additional borrowing and spending, we could rehire laid-off teachers and police officers. That would certainly boost employment in the short term, reduce class sizes and make us all feel safer. But the reality is that, even if the economy were to improve as a result, it would be many years before tax revenues return to where they were at the height of the bubble. At some point, spending by state and local governments will have to be brought down to match the level of taxes that their voters are willing to pay. The notion that once unemployment falls below 6 percent everyone will join hands and finally put the fiscal house in order — well, that’s nothing more than political fantasy.”
If Pearlstein ever paid any attention to the people who is criticizing, he would know that they advocate federal support for these services at the state and local level. The federal government can of course borrow very cheaply and cover the cost of this aid when the economy is in a downturn. When the unemployment rate returns to more normal levels, contrary to what Pearlstein seems to imply here, state and local governments will have the necessary tax revenue to pay for these services. (That is not true everywhere, but there are always growing and declining regions of the country.)
Pearlstein then goes on to trumpet spending on improving infrastructure, education, and research and development, all investments that will have long-term payoffs. Maybe there is someone on the left who does not support aggressive spending in these areas, but I challenge Pearlstein to find this person.
Finally, it is incredible that in a piece focused on the need to restructure the economy, Pearlstein does not once mention the value of the dollar. The fundamental imbalance in the U.S. economy is its large trade deficit. This will only be corrected by a sharp decline in the value of the dollar against the currencies of our trading partners, something that Pearlstein has written about frequently in other columns.
It certainly would have been worth mentioning this point here. When the dollar does fall to more competitive levels, the United States stands to gain 4-5 million manufacturing jobs. This will have an enormous impact on re-balancing the U.S. economy.
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The NYT had an article comparing the relative success of Germany’s economy compared with France. It notes that Germany has a considerably lower unemployment rate and stronger growth.
The article highlights France’s stronger labor market protections as a factor explaining the different outcomes. In this vein, the article includes a quote from a German official that, “the French work to live and the Germans live to work.”
The data suggest otherwise. In 2009, the most recent year for which data is available, the average German worker put in 10 percent fewer hours than the average French worker, according to the OECD.
It seems more likely that the difference in economic outcomes is attributable to the better training received by German workers as well as the greater labor-management cooperation in the workplace in Germany. These factors are mentioned in the article, but are given considerably less attention that the differences in labor market protections.
[Addendum: I chose 2009 because it was the last year for which data is available from the OECD, it is not cherry-picking. I am the hugest fan of anywhere of Kurzarbeit, German’s short-work program, but that is not the explanation for why the average work year is shorter in Germany than in France. In 2008, the OECD reports that the average French worker put in 1560 hours compared to 1426 in Germany. In 2007, it was 1556 hours in France compared to 1430 hours in Germany. In short, the gap between the length of the average work year in France and the average work year in Germany predates the recession. The story that the French work less is an invention of the NYT, it does not correspond to the world.]
The NYT had an article comparing the relative success of Germany’s economy compared with France. It notes that Germany has a considerably lower unemployment rate and stronger growth.
The article highlights France’s stronger labor market protections as a factor explaining the different outcomes. In this vein, the article includes a quote from a German official that, “the French work to live and the Germans live to work.”
The data suggest otherwise. In 2009, the most recent year for which data is available, the average German worker put in 10 percent fewer hours than the average French worker, according to the OECD.
It seems more likely that the difference in economic outcomes is attributable to the better training received by German workers as well as the greater labor-management cooperation in the workplace in Germany. These factors are mentioned in the article, but are given considerably less attention that the differences in labor market protections.
[Addendum: I chose 2009 because it was the last year for which data is available from the OECD, it is not cherry-picking. I am the hugest fan of anywhere of Kurzarbeit, German’s short-work program, but that is not the explanation for why the average work year is shorter in Germany than in France. In 2008, the OECD reports that the average French worker put in 1560 hours compared to 1426 in Germany. In 2007, it was 1556 hours in France compared to 1430 hours in Germany. In short, the gap between the length of the average work year in France and the average work year in Germany predates the recession. The story that the French work less is an invention of the NYT, it does not correspond to the world.]
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