In a column that repeats the usual Thomas Friedman line about all the barriers between countries coming down in the brave new world (while conveniently ignoring the barriers that protect highly paid professionals like doctors and lawyers, allowing them to earn far more than their counterparts elsewhere in the world), he approvingly quotes Michael Dell:
“‘I always remind people that 96 percent of our potential new customers today live outside of America.’ That’s the rest of the world. And if companies like Dell want to sell to them, he added, it needs to design and manufacture some parts of its products in their countries.”
The statement Friedman attributes to Dell implies the exact opposite of his “world is flat” story. Dell is saying that he must design and manufacture a portion of the products he sells in the countries he sells them. This implies that there are political barriers to complete mobility, which would mean that Dell could manufacture and design his products wherever it is cheapest to do, regardless of where he sells them.
Friedman’s quote from Dell indicates that protectionist restrictions are still an important reality in the world. Presumably the logical response would be to either try to reduce these barriers in other countries or to adjust our trade policies to ensure that they work best for the United States in a world that is clearly not flat.
In a column that repeats the usual Thomas Friedman line about all the barriers between countries coming down in the brave new world (while conveniently ignoring the barriers that protect highly paid professionals like doctors and lawyers, allowing them to earn far more than their counterparts elsewhere in the world), he approvingly quotes Michael Dell:
“‘I always remind people that 96 percent of our potential new customers today live outside of America.’ That’s the rest of the world. And if companies like Dell want to sell to them, he added, it needs to design and manufacture some parts of its products in their countries.”
The statement Friedman attributes to Dell implies the exact opposite of his “world is flat” story. Dell is saying that he must design and manufacture a portion of the products he sells in the countries he sells them. This implies that there are political barriers to complete mobility, which would mean that Dell could manufacture and design his products wherever it is cheapest to do, regardless of where he sells them.
Friedman’s quote from Dell indicates that protectionist restrictions are still an important reality in the world. Presumably the logical response would be to either try to reduce these barriers in other countries or to adjust our trade policies to ensure that they work best for the United States in a world that is clearly not flat.
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The Washington Post reminded readers why it is known as Fox on 15th Street when it referred to an agreement among European leaders that it said would “limit the perennial budget deficits that are the root of the crisis.”
Both parts of this statement are demonstrably false. Of the five countries now facing an imminent debt crisis, only Greece and Portugal had consistent deficit problems prior to the economic collapse in 2008. Italy had a declining ratio of debt to GDP and Spain and Ireland were running budget surpluses.
The root of the crisis was a speculative bubble in the real estate markets in Spain, Ireland and much of the rest of Europe. With few exceptions, the people who profited from this bubble and the people in policy positions who let it go unchecked are still in the same positions as they were before the crisis. Like the Post, many of them are trying to shift blame to profligate government spending.
The Washington Post reminded readers why it is known as Fox on 15th Street when it referred to an agreement among European leaders that it said would “limit the perennial budget deficits that are the root of the crisis.”
Both parts of this statement are demonstrably false. Of the five countries now facing an imminent debt crisis, only Greece and Portugal had consistent deficit problems prior to the economic collapse in 2008. Italy had a declining ratio of debt to GDP and Spain and Ireland were running budget surpluses.
The root of the crisis was a speculative bubble in the real estate markets in Spain, Ireland and much of the rest of Europe. With few exceptions, the people who profited from this bubble and the people in policy positions who let it go unchecked are still in the same positions as they were before the crisis. Like the Post, many of them are trying to shift blame to profligate government spending.
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There is a big market in defending the One Percent these days and the Post is rising to the challenge. It presented a front page Outlook piece by James Q. Wilson that tells readers that inequality is not a really big deal because of the all the mobility in U.S. society. Furthermore, it tries to tell us we would be worse off with less inequality because inequality fell in Greece over the last three decades.
Wilson’s main source for his claims about mobility is a study from the St. Louis Fed which in turn relies on data from a study from President Bush’s Treasury Department. Wilson tells us that less than half of the people in the top one percent were still there 10 years later. This reflects the findings of the study. However 75 percent of the top one percent were still in the top 5 percent 10 years later and almost 83 percent were in the top ten percent.
Much of the mobility found in this study was likely simply the result of life-cycle effects. Earnings peak between ages 45 and 65. If we assume that people in these age groups are twice as likely to be in the top one percent as people who are younger or older, then we would expect 25 percent of the people in the top one percent to fall to a lower income category over a 10 year period simply because they have aged out of their peak earnings years.
Unlike most other studies of income mobility, the Treasury study did not restrict itself to prime earners (ages 25-55 at the start of the 10-year period). This would lead it to find greater mobility than other studies. Also, since this study is based on tax filing, some of the mobility may reflect the ability of individuals to game the tax system so that they show very low income in either the first or last year. If had restricted itself to the 25-55 age group it like would have found less mobility. [Thanks Stuart.]
Wilson’s claim about Greece as an example of a country that has not seen an increase in inequality is the sort of argument by anecdote that people make when the data will not support their case. There were other countries, such as France, which have not seen an increase in inequality without obvious negative economic impacts. In fact, the rise in inequality across most European countries has been quite modest over the last three decades.
In addition, the most obvious factor that undermined Greece’s economy seems to have been its decision to join the euro. This prevented it from allowing its currency to devalue in order to remain competitive. It is difficult to see how greater inequality would have improved its situation. Furthermore, since one of the country’s main problems is a huge amount of tax evasion, data on income inequality is probably not very reliable.
It is also worth noting that this piece exclusively discusses the loser liberalism approach of taxing the income of the top 1 percent to redistribute income to the rest of the population. It does not address an agenda of reversing the policies that lead to the enormous upward redistribution of the last three decades. The Post appears to have a ban of any discussion of this approach.
There is a big market in defending the One Percent these days and the Post is rising to the challenge. It presented a front page Outlook piece by James Q. Wilson that tells readers that inequality is not a really big deal because of the all the mobility in U.S. society. Furthermore, it tries to tell us we would be worse off with less inequality because inequality fell in Greece over the last three decades.
Wilson’s main source for his claims about mobility is a study from the St. Louis Fed which in turn relies on data from a study from President Bush’s Treasury Department. Wilson tells us that less than half of the people in the top one percent were still there 10 years later. This reflects the findings of the study. However 75 percent of the top one percent were still in the top 5 percent 10 years later and almost 83 percent were in the top ten percent.
Much of the mobility found in this study was likely simply the result of life-cycle effects. Earnings peak between ages 45 and 65. If we assume that people in these age groups are twice as likely to be in the top one percent as people who are younger or older, then we would expect 25 percent of the people in the top one percent to fall to a lower income category over a 10 year period simply because they have aged out of their peak earnings years.
Unlike most other studies of income mobility, the Treasury study did not restrict itself to prime earners (ages 25-55 at the start of the 10-year period). This would lead it to find greater mobility than other studies. Also, since this study is based on tax filing, some of the mobility may reflect the ability of individuals to game the tax system so that they show very low income in either the first or last year. If had restricted itself to the 25-55 age group it like would have found less mobility. [Thanks Stuart.]
Wilson’s claim about Greece as an example of a country that has not seen an increase in inequality is the sort of argument by anecdote that people make when the data will not support their case. There were other countries, such as France, which have not seen an increase in inequality without obvious negative economic impacts. In fact, the rise in inequality across most European countries has been quite modest over the last three decades.
In addition, the most obvious factor that undermined Greece’s economy seems to have been its decision to join the euro. This prevented it from allowing its currency to devalue in order to remain competitive. It is difficult to see how greater inequality would have improved its situation. Furthermore, since one of the country’s main problems is a huge amount of tax evasion, data on income inequality is probably not very reliable.
It is also worth noting that this piece exclusively discusses the loser liberalism approach of taxing the income of the top 1 percent to redistribute income to the rest of the population. It does not address an agenda of reversing the policies that lead to the enormous upward redistribution of the last three decades. The Post appears to have a ban of any discussion of this approach.
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It seems more likely that the issue is the latter. The Atlantic had a column headlined:
“unions hate private equity, but they love its profits.”
However as the Economist points out (cited in the update), it is not clear that limited partners, like pension funds, actually do better investing in profit equity than investing in stock index funds. There may be an issue with specific officials getting kickbacks from private equity funds, but it is not clear that unions in general would be happy about private equity funds giving them returns that trail major stock indexes.
It seems more likely that the issue is the latter. The Atlantic had a column headlined:
“unions hate private equity, but they love its profits.”
However as the Economist points out (cited in the update), it is not clear that limited partners, like pension funds, actually do better investing in profit equity than investing in stock index funds. There may be an issue with specific officials getting kickbacks from private equity funds, but it is not clear that unions in general would be happy about private equity funds giving them returns that trail major stock indexes.
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When the Mets were an expansion team in 1962 and on their way to losing a record 120 games, their manager Casey Stengel reportedly cried out in frustration after a Mets error, “can’t anybody here play this game?” Readers of the coverage of the 4th quarter GDP report must have felt the same way.
Most of the coverage was along the same lines as the Washington Post headline, “U.S. Economic Recovery Picks Up Pace.” At the most basic level, this is true. GDP grew at a 2.8 percent annual rate, up from 1.8 percent in the third quarter and its strongest showing since the second quarter of 2010. However a closer examination of the data indicated that there was little cause for celebration.
There are always a number of random factors that will affect measured GDP in any given quarter. Often they average out so that the measured GDP is pretty much in line with what we may view as the underlying rate of growth. Sometimes they don’t average out so that the headline number might be notably better or worse than the economy’s underlying growth rate. This is the situation for the last two quarters.
The most obvious wildcard in GDP numbers is inventory changes. These are erratic. Sometimes they reflect conscious decisions of firms to build-up or run-down inventories. Sometimes firms accumulate inventories because they didn’t sell as much as expected. Sometimes it is just the timing of when items get counted in stock.
Whatever the cause, inventory fluctuations often have a very large impact on GDP growth. And, this impact is often reversed in the following quarter. (The impact on growth is the change in the change. If inventories grow by $50 billion in both the third and fourth quarters then inventories add zero to growth. The $50 billion growth in inventories only boosts growth in the fourth quarter if we added less than $50 billion in the third quarter.)
This is worth noting because more than the entire difference between the third quarter growth rate and the fourth quarter growth rate can be explained by the movement in inventories. Inventories subtracted 1.35 percentage points from growth in the third quarter, when they rose at just a $5.5 billion annual rate. They added 1.95 percentage points to growth in the fourth quarter when they rose at a strong $63.6 billion annual rate.
Needless to say, this speedup in the rate of inventory accumulation will not continue. In future quarters inventories are likely to grow at a somewhat slower pace. In the absence of this inventory growth we would have been looking at 0.9 percent growth rate in the fourth quarter.
Fortunately, there were a couple of items on the other side which will certainly not be repeated. Defense spending fell at a 12.5 percent annual rate, lopping 0.73 percentage points off growth for the quarter. Defense spending is heading downward with the winding down of the wars in Iraq and Afghanistan, but certainly not at 12.5 percent annual rate. This just reflects the erratic timing of defense expenditures.
Similarly the category of housing and utilities showed a sharp drop in the quarter, reducing growth by 0.4 percentage points. This is a measure of the rental value of housing, it can only fall if fewer homes are occupied. The likely cause of the sharp drop was better than usual weather, which means less spending on utilities. This drop will almost certainly be reversed in the first quarter of 2012.
However, there is one more negative in the picture. Car sales grew at a 48.1 percent annual rate, adding 0.81 percentage points to growth in the quarter. This was largely a reversal of a decline earlier in the year that resulted from shortages due to the earthquake in Japan. It is not going to be repeated. Car sales will add much less to growth in 2012.
Source: Bureau of Economic Analysis.
The long and short is that there was likely little change in the underlying rate of growth from the third quarter to the fourth quarter. The winding down of the stimulus, coupled with the negative impact from the Japan earthquake brought growth to a near halt in the first half of the year.
Now that the stimulus has almost fully unwound we are back on a growth path of around 2.5 percent — pretty much the economy’s trend rate of growth. This means that we are making up little or none of the ground lost during the recession. That is a really bad story.
When the Mets were an expansion team in 1962 and on their way to losing a record 120 games, their manager Casey Stengel reportedly cried out in frustration after a Mets error, “can’t anybody here play this game?” Readers of the coverage of the 4th quarter GDP report must have felt the same way.
Most of the coverage was along the same lines as the Washington Post headline, “U.S. Economic Recovery Picks Up Pace.” At the most basic level, this is true. GDP grew at a 2.8 percent annual rate, up from 1.8 percent in the third quarter and its strongest showing since the second quarter of 2010. However a closer examination of the data indicated that there was little cause for celebration.
There are always a number of random factors that will affect measured GDP in any given quarter. Often they average out so that the measured GDP is pretty much in line with what we may view as the underlying rate of growth. Sometimes they don’t average out so that the headline number might be notably better or worse than the economy’s underlying growth rate. This is the situation for the last two quarters.
The most obvious wildcard in GDP numbers is inventory changes. These are erratic. Sometimes they reflect conscious decisions of firms to build-up or run-down inventories. Sometimes firms accumulate inventories because they didn’t sell as much as expected. Sometimes it is just the timing of when items get counted in stock.
Whatever the cause, inventory fluctuations often have a very large impact on GDP growth. And, this impact is often reversed in the following quarter. (The impact on growth is the change in the change. If inventories grow by $50 billion in both the third and fourth quarters then inventories add zero to growth. The $50 billion growth in inventories only boosts growth in the fourth quarter if we added less than $50 billion in the third quarter.)
This is worth noting because more than the entire difference between the third quarter growth rate and the fourth quarter growth rate can be explained by the movement in inventories. Inventories subtracted 1.35 percentage points from growth in the third quarter, when they rose at just a $5.5 billion annual rate. They added 1.95 percentage points to growth in the fourth quarter when they rose at a strong $63.6 billion annual rate.
Needless to say, this speedup in the rate of inventory accumulation will not continue. In future quarters inventories are likely to grow at a somewhat slower pace. In the absence of this inventory growth we would have been looking at 0.9 percent growth rate in the fourth quarter.
Fortunately, there were a couple of items on the other side which will certainly not be repeated. Defense spending fell at a 12.5 percent annual rate, lopping 0.73 percentage points off growth for the quarter. Defense spending is heading downward with the winding down of the wars in Iraq and Afghanistan, but certainly not at 12.5 percent annual rate. This just reflects the erratic timing of defense expenditures.
Similarly the category of housing and utilities showed a sharp drop in the quarter, reducing growth by 0.4 percentage points. This is a measure of the rental value of housing, it can only fall if fewer homes are occupied. The likely cause of the sharp drop was better than usual weather, which means less spending on utilities. This drop will almost certainly be reversed in the first quarter of 2012.
However, there is one more negative in the picture. Car sales grew at a 48.1 percent annual rate, adding 0.81 percentage points to growth in the quarter. This was largely a reversal of a decline earlier in the year that resulted from shortages due to the earthquake in Japan. It is not going to be repeated. Car sales will add much less to growth in 2012.
Source: Bureau of Economic Analysis.
The long and short is that there was likely little change in the underlying rate of growth from the third quarter to the fourth quarter. The winding down of the stimulus, coupled with the negative impact from the Japan earthquake brought growth to a near halt in the first half of the year.
Now that the stimulus has almost fully unwound we are back on a growth path of around 2.5 percent — pretty much the economy’s trend rate of growth. This means that we are making up little or none of the ground lost during the recession. That is a really bad story.
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Yes, they noticed the role of inventories. It is still possible to find workers with the necessary skills in the United States.
Yes, they noticed the role of inventories. It is still possible to find workers with the necessary skills in the United States.
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The Washington Post tells us that Congress is considering a transportation bill that will spend $260 billion over the next five years. It would have been helpful to tell readers that this is equal to roughly 1.3 percent of projected spending over this period. It is a bit more than 3.7 percent of projected discretionary spending over this period.
The Washington Post tells us that Congress is considering a transportation bill that will spend $260 billion over the next five years. It would have been helpful to tell readers that this is equal to roughly 1.3 percent of projected spending over this period. It is a bit more than 3.7 percent of projected discretionary spending over this period.
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The Post devoted a business section article to Newt Gingrich’s supply side economics. It would have been useful to note the findings of the research on this topic, for example this Congressional Budget Office study. It found that even in a best case scenario the additional growth sparked by a tax cut could replace less than a third of the lost tax revenue. Even this effect would be temporary, with slower growth in later years implying larger deficits.
The Post should not just throw Gingrich’s assertions out to readers as though they might be true. There is extensive research on this topic which the Post’s business reporters should be familiar with – its readers almost certainly are not.
The Post devoted a business section article to Newt Gingrich’s supply side economics. It would have been useful to note the findings of the research on this topic, for example this Congressional Budget Office study. It found that even in a best case scenario the additional growth sparked by a tax cut could replace less than a third of the lost tax revenue. Even this effect would be temporary, with slower growth in later years implying larger deficits.
The Post should not just throw Gingrich’s assertions out to readers as though they might be true. There is extensive research on this topic which the Post’s business reporters should be familiar with – its readers almost certainly are not.
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In a NYT column on inequality and fairness, Stanley Fish told readers:
“Americans don’t mind if income is redistributed as long as it is done by market forces and not the government. Income equality is fine if it is ‘naturally’ achieved, but if it is socially engineered it can be perceived as class warfare, a plot against the well-to-do.”
Three paragraphs later he poses the rhetorical question:
“Is it fair that Internet pirates in China can appropriate without paying for it the intellectual property of Americans who rely for their income on ideas they have copyrighted?”
The problem here is that copyright is social engineering. It is a government policy that redistributes money from the rest of us to the likes of Time-Warner, Disney, and Lady Gaga. The overwhelming majority of revenue raised through the copyright system goes to the entertainment corporations and a very small number of individuals. The vast majority of creative workers make little or nothing through the copyright system.
It is necessary to finance creative work, but copyright is an extremely inefficient tool for this purpose. (Here’s one alternative.) It creates an enormous gap between the price and marginal cost of a product. Economists usually get upset when a tariff or other trade barrier raises the gap between price and marginal cost by 10-20 percent. In this case, items that would be free without a copyright monopoly, instead can be quite costly. This implies enormous economic losses.
In addition the enforcement of copyright is extremely expensive, especially in the Internet Age. The difficulties of enforcing this archaic system is the motive behind bills like SOPA, which would have imposed enormous costs on intermediaries to ensure that they were not being used to transfer unauthorized copies of copyrighted material.
It is also striking that Fish makes the reference to copyright specifically in regard to China’s respect for U.S. copyrights. This is noteworthy because the demand for China to respect U.S. intellectual property comes to some extent as a trade-off for raising the value of its currency against the dollar.
China clearly will not give the United States everything that may be on its wish list when they negotiate. This means that the more concessions it gets in an area like respecting intellectual property, the less it will get in other areas, like raising the value of the yuan against the dollar. This is directly related to inequality, since a sharp rise in the value of the yuan would lead to many more manufacturing jobs in the United States, which in turn would increase employment opportunities and wage growth for non-college educated workers.
In short, the example that Fish wants to give as a case of fairness — China should respect U.S. intellectual property claims — is actually the opposite on closer inspection. It is one of the ways in which government policy is social engineering designed to redistribute income upward.
[Thanks to Keane Bhatt for this one.]
In a NYT column on inequality and fairness, Stanley Fish told readers:
“Americans don’t mind if income is redistributed as long as it is done by market forces and not the government. Income equality is fine if it is ‘naturally’ achieved, but if it is socially engineered it can be perceived as class warfare, a plot against the well-to-do.”
Three paragraphs later he poses the rhetorical question:
“Is it fair that Internet pirates in China can appropriate without paying for it the intellectual property of Americans who rely for their income on ideas they have copyrighted?”
The problem here is that copyright is social engineering. It is a government policy that redistributes money from the rest of us to the likes of Time-Warner, Disney, and Lady Gaga. The overwhelming majority of revenue raised through the copyright system goes to the entertainment corporations and a very small number of individuals. The vast majority of creative workers make little or nothing through the copyright system.
It is necessary to finance creative work, but copyright is an extremely inefficient tool for this purpose. (Here’s one alternative.) It creates an enormous gap between the price and marginal cost of a product. Economists usually get upset when a tariff or other trade barrier raises the gap between price and marginal cost by 10-20 percent. In this case, items that would be free without a copyright monopoly, instead can be quite costly. This implies enormous economic losses.
In addition the enforcement of copyright is extremely expensive, especially in the Internet Age. The difficulties of enforcing this archaic system is the motive behind bills like SOPA, which would have imposed enormous costs on intermediaries to ensure that they were not being used to transfer unauthorized copies of copyrighted material.
It is also striking that Fish makes the reference to copyright specifically in regard to China’s respect for U.S. copyrights. This is noteworthy because the demand for China to respect U.S. intellectual property comes to some extent as a trade-off for raising the value of its currency against the dollar.
China clearly will not give the United States everything that may be on its wish list when they negotiate. This means that the more concessions it gets in an area like respecting intellectual property, the less it will get in other areas, like raising the value of the yuan against the dollar. This is directly related to inequality, since a sharp rise in the value of the yuan would lead to many more manufacturing jobs in the United States, which in turn would increase employment opportunities and wage growth for non-college educated workers.
In short, the example that Fish wants to give as a case of fairness — China should respect U.S. intellectual property claims — is actually the opposite on closer inspection. It is one of the ways in which government policy is social engineering designed to redistribute income upward.
[Thanks to Keane Bhatt for this one.]
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The Washington Post reported on the Obama administration’s plans to cut the military budget. It reports that the administration plans cuts of $487 billion over the next decade, but warns that the cuts could be as large as $600 billion.
It is unlikely that many readers would have the ability to assess the significance of cuts of this magnitude since few know how much the country is expected to spend on the military over this period. The baseline projections show that the government will spend roughly $8 trillion on the military over the decade. This means that the cuts proposed by the Obama administration come to a bit more than 6 percent of projected spending over this period. Six hundred billion in cuts would amount to roughly 7.5 percent of projected spending. It is worth noting that even under the larger package of cuts, we would still be spending a larger share of GDP on the military than we did in 2000.
The Washington Post reported on the Obama administration’s plans to cut the military budget. It reports that the administration plans cuts of $487 billion over the next decade, but warns that the cuts could be as large as $600 billion.
It is unlikely that many readers would have the ability to assess the significance of cuts of this magnitude since few know how much the country is expected to spend on the military over this period. The baseline projections show that the government will spend roughly $8 trillion on the military over the decade. This means that the cuts proposed by the Obama administration come to a bit more than 6 percent of projected spending over this period. Six hundred billion in cuts would amount to roughly 7.5 percent of projected spending. It is worth noting that even under the larger package of cuts, we would still be spending a larger share of GDP on the military than we did in 2000.
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