David Leonhardt has an interesting piece that asks whether currency values should still be an important issue between the United States and China, suggesting that China’s appropriation of U.S. technology and intellectual products should be a more important issue. There is an important class aspect to this question that the piece overlooks.
From the standpoint of manufacturing workers and those whose wages might be affected by an increased demand for manufacturing workers (e.g. those without college degrees), the lower the value of the dollar against the Chinese currency the better. For this group, it matters little that China may not pay Microsoft the fees that it is claiming. In fact, it could very well be beneficial to these workers if China does not respect U.S. intellectual property claims since it will mean that they can buy products produced in China at a lower cost.
The situation is of course the opposite with the highly educated workers who will likely get increased pay if China adopts a strong intellectual property system. The shareholders of the affected companies will benefit as well.
This disparity in interests is undoubtedly central in the Obama administration’s negotiations with China. It understands that the more it can get in terms of enforcement of intellectual property claims, the less it will get in terms of appreciation of China’s currency. There also is the very real market consideration that if China is paying more in royalties and licensing fees to the United States, then its currency will have a lower value than would otherwise be the case, disadvantaging U.S. manufacturing workers.
David Leonhardt has an interesting piece that asks whether currency values should still be an important issue between the United States and China, suggesting that China’s appropriation of U.S. technology and intellectual products should be a more important issue. There is an important class aspect to this question that the piece overlooks.
From the standpoint of manufacturing workers and those whose wages might be affected by an increased demand for manufacturing workers (e.g. those without college degrees), the lower the value of the dollar against the Chinese currency the better. For this group, it matters little that China may not pay Microsoft the fees that it is claiming. In fact, it could very well be beneficial to these workers if China does not respect U.S. intellectual property claims since it will mean that they can buy products produced in China at a lower cost.
The situation is of course the opposite with the highly educated workers who will likely get increased pay if China adopts a strong intellectual property system. The shareholders of the affected companies will benefit as well.
This disparity in interests is undoubtedly central in the Obama administration’s negotiations with China. It understands that the more it can get in terms of enforcement of intellectual property claims, the less it will get in terms of appreciation of China’s currency. There also is the very real market consideration that if China is paying more in royalties and licensing fees to the United States, then its currency will have a lower value than would otherwise be the case, disadvantaging U.S. manufacturing workers.
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The NYT had an article on the response in the UK to warnings from Moody’s that it may downgrade the country’s debt because of the country’s week economy. It is worth noting that it has been roughly 20 months since the Conservative-led UK government first began to implement its austerity program. President Obama saw a resounding electoral defeat in November of 2010, 20 months after Congress passed his stimulus program.
The NYT had an article on the response in the UK to warnings from Moody’s that it may downgrade the country’s debt because of the country’s week economy. It is worth noting that it has been roughly 20 months since the Conservative-led UK government first began to implement its austerity program. President Obama saw a resounding electoral defeat in November of 2010, 20 months after Congress passed his stimulus program.
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Japan’s central bank took the extraordinary move of targeting a higher rate of inflation, setting a 1.0 percent inflation target. This should have been front page news.
The idea of a central bank setting an inflation target above its current level, in the hope of raising inflationary expectations, dates back to a paper by Paul Krugman in the late 90s. (Federal Reserve Board Chairman Ben Bernanke endorsed the same policy when he was still a professor at Princeton.) The logic is that if the central bank can credibly commit itself to a higher inflation target then the commitment could create self-fulfilling expectations. Businesses would invest and consumers would spend based on the expectation of higher inflation, which would mean a lower real interest rate. The increased business activity would then lead the inflation targeted by the bank.
This decision by the Japanese central bank will provide an opportunity to test whether such targeting can work. If it proves successful, it may lead to more pressure on other central banks (like the Fed) to go this route.
Japan’s central bank took the extraordinary move of targeting a higher rate of inflation, setting a 1.0 percent inflation target. This should have been front page news.
The idea of a central bank setting an inflation target above its current level, in the hope of raising inflationary expectations, dates back to a paper by Paul Krugman in the late 90s. (Federal Reserve Board Chairman Ben Bernanke endorsed the same policy when he was still a professor at Princeton.) The logic is that if the central bank can credibly commit itself to a higher inflation target then the commitment could create self-fulfilling expectations. Businesses would invest and consumers would spend based on the expectation of higher inflation, which would mean a lower real interest rate. The increased business activity would then lead the inflation targeted by the bank.
This decision by the Japanese central bank will provide an opportunity to test whether such targeting can work. If it proves successful, it may lead to more pressure on other central banks (like the Fed) to go this route.
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A Washington Post article on the problems of restructuring of Greece’s debt discussed factors that affect country’s ability to carry debt. It neglected to mention the issue of whether it borrows in currency it issues. If a country is like the United States or Japan, and borrows almost entirely in its own currency, then it would only default on its debt as a political decision (e.g. it refuses to extend a debt ceiling, authorizing the debt to be paid).
Since it issues its own currency, it can always issue the currency needed to finance its debt. There markets seem to understand this point very well. The countries that issue debt in their own currency (e.g. Sweden, Denmark, the UK) consistently enjoy lower interest rates on their debt than countries with comparable debt burdens who do not have their own currency.
A Washington Post article on the problems of restructuring of Greece’s debt discussed factors that affect country’s ability to carry debt. It neglected to mention the issue of whether it borrows in currency it issues. If a country is like the United States or Japan, and borrows almost entirely in its own currency, then it would only default on its debt as a political decision (e.g. it refuses to extend a debt ceiling, authorizing the debt to be paid).
Since it issues its own currency, it can always issue the currency needed to finance its debt. There markets seem to understand this point very well. The countries that issue debt in their own currency (e.g. Sweden, Denmark, the UK) consistently enjoy lower interest rates on their debt than countries with comparable debt burdens who do not have their own currency.
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In an editorial on President Obama’s proposed bank tax, the Washington Post claimed that the country made a profit on its TARP loans. This claim is only true if we consider the interest on a below market loan to be a profit.
The TARP involved loans of hundreds of billions of dollars to banks at interest rates that were far below what they would have been forced to make in the market at the time. The Fed lent far more money to the banks through its special lending facilities.
The access to trillions of dollars of loans at below market interest rates in the middle of a financial crisis was enormously valuable to the banks allowing many to survive that would have otherwise have been insolvent. Arguably, this was the best policy for the economy, since it prevented a full-scale financial collapse that would have led to an even larger economic downturn and more unemployment. However it is absurd to pretend that the taxpayers did not give large subsidies to the banks through these bailouts.
[Addendum: The subhead for this editorial is “Why should banks have to pay for the auto industry bailout?” On this topic, Gary Burtless calls attention to the sentence, “If Treasury faces paper losses on TARP now, it is due in large part to the bailouts of insurance giant AIG, General Motors and General Motors’ erstwhile finance unit, now known as Ally Bank.”
AIG is of course not part of the auto industry. There also is a very specific reason that it needed a government bailout. It had issued hundreds of billions of dollars worth of credit default swaps that it would not have been able to pay off, without the bailout.
And, guess who owned the credit default swaps? Yep, it was the banks.
In an editorial on President Obama’s proposed bank tax, the Washington Post claimed that the country made a profit on its TARP loans. This claim is only true if we consider the interest on a below market loan to be a profit.
The TARP involved loans of hundreds of billions of dollars to banks at interest rates that were far below what they would have been forced to make in the market at the time. The Fed lent far more money to the banks through its special lending facilities.
The access to trillions of dollars of loans at below market interest rates in the middle of a financial crisis was enormously valuable to the banks allowing many to survive that would have otherwise have been insolvent. Arguably, this was the best policy for the economy, since it prevented a full-scale financial collapse that would have led to an even larger economic downturn and more unemployment. However it is absurd to pretend that the taxpayers did not give large subsidies to the banks through these bailouts.
[Addendum: The subhead for this editorial is “Why should banks have to pay for the auto industry bailout?” On this topic, Gary Burtless calls attention to the sentence, “If Treasury faces paper losses on TARP now, it is due in large part to the bailouts of insurance giant AIG, General Motors and General Motors’ erstwhile finance unit, now known as Ally Bank.”
AIG is of course not part of the auto industry. There also is a very specific reason that it needed a government bailout. It had issued hundreds of billions of dollars worth of credit default swaps that it would not have been able to pay off, without the bailout.
And, guess who owned the credit default swaps? Yep, it was the banks.
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In his Economix post today Casey Mulligan asks the question of whether unemployment benefits on net create jobs. He tells readers that:
“Even if unemployment insurance did not discourage a single person from working, the net effect of the program on hiring can be positive or negative, depending on the labor intensity of the goods and services that the unemployed buy, compared with the labor intensity of the goods and services that those who pay for unemployment do not buy.”
There is a problem in this story and it has to do with timing. The people who pay for unemployment insurance (UI) are in fact the same as the people who receive it. It is paid for as deduction from wages. The issue is not a difference in consumption patterns between the payers and receivers, the issue is the timing of the benefits.
At the point in a business cycle where large numbers of people are receiving benefits (like now) the UI system will be running a deficit. This allows unemployed workers to receive benefits, which they will overwhelmingly spend, without an offsetting current payment from other workers. This means that there is no matching deduction from the demand of workers who are still employed.
Over time, there may be offsetting increases in the contribution for unemployment insurance, depending on whether the program is financed in a way that ensures that it is a self-financed system. (We can also have a Ricardian equivalence story whereby other taxes would be increased to make up a shortfall in the UI system.) That can lead to lower consumption at future times.
However, there is not a plausble story whereby workers would reduce consumption today by an amount equal to the additional spending allowed by the payment of unemployment benefits. Therefore we don’t have to investigate the relative labor intensity of the items purchased by UI beneficiaries and non-beneficiaries as Mulligan suggests.
In his Economix post today Casey Mulligan asks the question of whether unemployment benefits on net create jobs. He tells readers that:
“Even if unemployment insurance did not discourage a single person from working, the net effect of the program on hiring can be positive or negative, depending on the labor intensity of the goods and services that the unemployed buy, compared with the labor intensity of the goods and services that those who pay for unemployment do not buy.”
There is a problem in this story and it has to do with timing. The people who pay for unemployment insurance (UI) are in fact the same as the people who receive it. It is paid for as deduction from wages. The issue is not a difference in consumption patterns between the payers and receivers, the issue is the timing of the benefits.
At the point in a business cycle where large numbers of people are receiving benefits (like now) the UI system will be running a deficit. This allows unemployed workers to receive benefits, which they will overwhelmingly spend, without an offsetting current payment from other workers. This means that there is no matching deduction from the demand of workers who are still employed.
Over time, there may be offsetting increases in the contribution for unemployment insurance, depending on whether the program is financed in a way that ensures that it is a self-financed system. (We can also have a Ricardian equivalence story whereby other taxes would be increased to make up a shortfall in the UI system.) That can lead to lower consumption at future times.
However, there is not a plausble story whereby workers would reduce consumption today by an amount equal to the additional spending allowed by the payment of unemployment benefits. Therefore we don’t have to investigate the relative labor intensity of the items purchased by UI beneficiaries and non-beneficiaries as Mulligan suggests.
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Ezra Klein’s WonkBlog has an interesting piece asking whether Greece is going to have the dubious honor of having the largest economic downturn in modern history. The piece quotes Uri Dadush, a former World Bank official, who predicts a decline of 25-30 percent, which would beat both Argentina’s 20 percent decline in 1998 to 2002 and Latvia’s 24 percent decline in the current crisis.
The piece is a bit sloppy on one point, saying that Argentina’s decline followed the default on its debt in December of 2001. Actually, the vast majority of the decline preceded the default. Argentina’s economy had already contracted by more than 16 percent by the time of the default. It shrank by around 5 percent following the default before turning around in the second half of 2002.
Source: International Monetary Fund.
This matters in the current context since many people are asking what alternatives Greece has to following the austerity path being demanded by the IMF, the ECB, and the EU. While there are reasons that a default would be more difficult in Greece’s case than Argentina’s (most importantly Argentina had its own currency), the post-default experience of Argentina suggests that it probably chose the better route.
Ezra Klein’s WonkBlog has an interesting piece asking whether Greece is going to have the dubious honor of having the largest economic downturn in modern history. The piece quotes Uri Dadush, a former World Bank official, who predicts a decline of 25-30 percent, which would beat both Argentina’s 20 percent decline in 1998 to 2002 and Latvia’s 24 percent decline in the current crisis.
The piece is a bit sloppy on one point, saying that Argentina’s decline followed the default on its debt in December of 2001. Actually, the vast majority of the decline preceded the default. Argentina’s economy had already contracted by more than 16 percent by the time of the default. It shrank by around 5 percent following the default before turning around in the second half of 2002.
Source: International Monetary Fund.
This matters in the current context since many people are asking what alternatives Greece has to following the austerity path being demanded by the IMF, the ECB, and the EU. While there are reasons that a default would be more difficult in Greece’s case than Argentina’s (most importantly Argentina had its own currency), the post-default experience of Argentina suggests that it probably chose the better route.
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David Brooks is upset that liberal economists keep harping on the loss of middle class jobs as the main factor behind the disruption of working class families and communities. In expressing his anger he creates a caricature, since there probably is no economist who would claim that the problems of working class people are exclusively their poor employment prospects.
Bad economic prospects lead to a variety of ills that cannot be simply reversed when the economy turns around. This is why many of us left-wing economic types are angry with the Brooks types who think it is just fine if we wait until 2020 to get back to normal levels of employment.
Brooks also has an interesting theory on the loss of skills. He tells readers:
“The American social fabric is now so depleted that even if manufacturing jobs miraculously came back we still would not be producing enough stable, skilled workers to fill them.”
Five years ago we had two million more people employed in manufacturing than we do today. Has the social fabric become so depleted in this period that these people or others could now not fill these jobs if they came back? If Brooks really thinks that the ill effects of unemployment are that extreme he should be screaming for more stimulus in every column.
David Brooks is upset that liberal economists keep harping on the loss of middle class jobs as the main factor behind the disruption of working class families and communities. In expressing his anger he creates a caricature, since there probably is no economist who would claim that the problems of working class people are exclusively their poor employment prospects.
Bad economic prospects lead to a variety of ills that cannot be simply reversed when the economy turns around. This is why many of us left-wing economic types are angry with the Brooks types who think it is just fine if we wait until 2020 to get back to normal levels of employment.
Brooks also has an interesting theory on the loss of skills. He tells readers:
“The American social fabric is now so depleted that even if manufacturing jobs miraculously came back we still would not be producing enough stable, skilled workers to fill them.”
Five years ago we had two million more people employed in manufacturing than we do today. Has the social fabric become so depleted in this period that these people or others could now not fill these jobs if they came back? If Brooks really thinks that the ill effects of unemployment are that extreme he should be screaming for more stimulus in every column.
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Andrew Ross Sorkin has a lengthy discussion of the complexities of the Volcker rule, which bans proprietary trading by banks that hold government guaranteed deposits. The point of the rule is that banks should not be taking risks with taxpayers’ money.
While Sorkin ultimately comes down in favor of the rule, he neglects to point out that until 1999 there was a much stricter rule in the form of the Glass Steagall separation between commercial and investment banking. Up to that point, investment banks like Goldman Sachs and Merill Lynch could do whatever trading they wanted. In principle they were not putting government money at risk, since they did not enjoy protection from the Fed and the FDIC. These banks also made large profits.
If banks now find the Volcker rule to be too onerous, as they claim, then there is no obvious reason they could not just separate their investment banking and commerical banking divisions so that they are again independent companies. It is certainly understandable that the banks would prefer to be able to gamble with taxpayers money (who wouldn’t?), but they really don’t have much of a case.
btw, Sorkin begins his piece with a paean to Volcker:
“It is hard to disagree with Paul A Volcker.
“But I will.
“On Monday, Mr. Volcker, the former Federal Reserve chairman who almost single-handedly rescued the United States from the stagflation crisis of the late 1970s.”
Whether or not one agrees with the interest rate policies that Volcker used to slow inflation, which gave us double digit unemployment, it is a bit hard to describe Volcker as uniquely talented. All wealthy countries saw a sharp decline in their inflation rates at the beginning of the 80s. This suggests that Mr. Volcker’s skills were not needed to bring inflation down.
Andrew Ross Sorkin has a lengthy discussion of the complexities of the Volcker rule, which bans proprietary trading by banks that hold government guaranteed deposits. The point of the rule is that banks should not be taking risks with taxpayers’ money.
While Sorkin ultimately comes down in favor of the rule, he neglects to point out that until 1999 there was a much stricter rule in the form of the Glass Steagall separation between commercial and investment banking. Up to that point, investment banks like Goldman Sachs and Merill Lynch could do whatever trading they wanted. In principle they were not putting government money at risk, since they did not enjoy protection from the Fed and the FDIC. These banks also made large profits.
If banks now find the Volcker rule to be too onerous, as they claim, then there is no obvious reason they could not just separate their investment banking and commerical banking divisions so that they are again independent companies. It is certainly understandable that the banks would prefer to be able to gamble with taxpayers money (who wouldn’t?), but they really don’t have much of a case.
btw, Sorkin begins his piece with a paean to Volcker:
“It is hard to disagree with Paul A Volcker.
“But I will.
“On Monday, Mr. Volcker, the former Federal Reserve chairman who almost single-handedly rescued the United States from the stagflation crisis of the late 1970s.”
Whether or not one agrees with the interest rate policies that Volcker used to slow inflation, which gave us double digit unemployment, it is a bit hard to describe Volcker as uniquely talented. All wealthy countries saw a sharp decline in their inflation rates at the beginning of the 80s. This suggests that Mr. Volcker’s skills were not needed to bring inflation down.
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Those familiar with economics know that government deficits can help sustain demand in a downturn, keeping GDP from falling and unemployment from rising as much as would otherwise be the case. This could mean that it would be desirable to have large deficits in response to a steep downturn like the one we have seen following the collapse of the housing bubble.
But the NYT doesn’t buy it. A news story on President Obama’s 2013 budget told readers:
“The one charge the White House has no defense against is that with the new budget, Mr. Obama has broken his 2009 promise to cut the deficit in half in his first term. The deficit that year was a record $1.4 trillion. The deficit in fiscal 2012 will total $1.3 trillion.”
The economic downturn was far more severe than what President Obama’s advisers (like most economists) assumed when he made this promise. President Obama and his advisers certainly can be blamed for failing to recognize the severity of the damage that would be caused by the collapse of the housing bubble, even as late as 2009, however most people might consider the worse than expected downturn, kind of a like or a war or enormous natural disaster, to be a pretty good defense here.
Those familiar with economics know that government deficits can help sustain demand in a downturn, keeping GDP from falling and unemployment from rising as much as would otherwise be the case. This could mean that it would be desirable to have large deficits in response to a steep downturn like the one we have seen following the collapse of the housing bubble.
But the NYT doesn’t buy it. A news story on President Obama’s 2013 budget told readers:
“The one charge the White House has no defense against is that with the new budget, Mr. Obama has broken his 2009 promise to cut the deficit in half in his first term. The deficit that year was a record $1.4 trillion. The deficit in fiscal 2012 will total $1.3 trillion.”
The economic downturn was far more severe than what President Obama’s advisers (like most economists) assumed when he made this promise. President Obama and his advisers certainly can be blamed for failing to recognize the severity of the damage that would be caused by the collapse of the housing bubble, even as late as 2009, however most people might consider the worse than expected downturn, kind of a like or a war or enormous natural disaster, to be a pretty good defense here.
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