The Washington Post reported on the new agreement among euro zone countries on fiscal policy and noted the difficulty that many countries would face in reaching their debt targets. It would have been worth mentioning that the polices of the European Central Bank (ECB) are making it more difficult for these countries to reach debt targets.
The ECB has remained committed to keeping a very low inflation rate even in a context where the euro zone countries have a huge amount of excess capacity and unemployed workers. If the ECB adopted more expansionary policies it would both allow more growth and help to reduce the burden of the debt through inflation.
If a country can sustain 3.0 percent real growth for 5 years and there is 4.0 percent inflation, then a debt burden that is equal to 100 percent of GDP can be reduced to 84 percent of GDP even if the country runs annual deficits equal to 3 percent of GDP ($450 billion in the United States). After 10 years the debt to GDP would be down to 73 percent of GDP. More rapid growth will also make it easier to run lower deficits since it will increase tax revenues and reduce payments for unemployment benefits and other transfers.
The Washington Post reported on the new agreement among euro zone countries on fiscal policy and noted the difficulty that many countries would face in reaching their debt targets. It would have been worth mentioning that the polices of the European Central Bank (ECB) are making it more difficult for these countries to reach debt targets.
The ECB has remained committed to keeping a very low inflation rate even in a context where the euro zone countries have a huge amount of excess capacity and unemployed workers. If the ECB adopted more expansionary policies it would both allow more growth and help to reduce the burden of the debt through inflation.
If a country can sustain 3.0 percent real growth for 5 years and there is 4.0 percent inflation, then a debt burden that is equal to 100 percent of GDP can be reduced to 84 percent of GDP even if the country runs annual deficits equal to 3 percent of GDP ($450 billion in the United States). After 10 years the debt to GDP would be down to 73 percent of GDP. More rapid growth will also make it easier to run lower deficits since it will increase tax revenues and reduce payments for unemployment benefits and other transfers.
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Most observers now recognize that the continuing financial crisis facing the euro zone is being deliberately extended by the European Central Bank (ECB). This is being done to force heavily indebted countries to make cuts in social spending and to weaken the power of labor unions. (Italy was required to change its labor laws as a condition of continued support from the ECB.)
The Washington Post decided to cover up the nature of the ECB’s strategy when it told readers that:
“By withholding ECB relief for weaker European governments, he is keeping pressure on political leaders to make difficult choices needed to stabilize the euro currency.”
The Post effectively defined the measures demanded by the ECB as being necessary to “stabilize the euro currency.” That would perhaps be an appropriate stance for the ECB’s public relations department. A serious newspaper should not be blessing policy decisions this way and misrepresenting a choice by the ECB as a necessity dictated by the market.
Most observers now recognize that the continuing financial crisis facing the euro zone is being deliberately extended by the European Central Bank (ECB). This is being done to force heavily indebted countries to make cuts in social spending and to weaken the power of labor unions. (Italy was required to change its labor laws as a condition of continued support from the ECB.)
The Washington Post decided to cover up the nature of the ECB’s strategy when it told readers that:
“By withholding ECB relief for weaker European governments, he is keeping pressure on political leaders to make difficult choices needed to stabilize the euro currency.”
The Post effectively defined the measures demanded by the ECB as being necessary to “stabilize the euro currency.” That would perhaps be an appropriate stance for the ECB’s public relations department. A serious newspaper should not be blessing policy decisions this way and misrepresenting a choice by the ECB as a necessity dictated by the market.
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The Republicans have substituted “job creator” for the word “rich” in discussions of tax policy. It is absolute standard practice for them to object to taxing people who have money by saying that this will reduce job creation.
Since this claim has become so central in policy debates, Morning Edition decided to do what any reasonable news organization might do: see if it is true. Morning Edition called the Republican party and asked to be put in contact with some tax burdened job creators. They were unable to provide anyone for NPR to interview. NPR then contacted several of the business lobbies who have been complaining that higher taxes would impede job growth. These organizations were also unable to find any job creators who would speak to NPR.
NPR then put in a request to talk to job creators on Facebook. It got several responses from small business owners. The ones featured on its segment said that the personal tax rate would affect their disposable income but would have no effect on their hiring. This is pretty much what economic theory would predict.
The Republicans have substituted “job creator” for the word “rich” in discussions of tax policy. It is absolute standard practice for them to object to taxing people who have money by saying that this will reduce job creation.
Since this claim has become so central in policy debates, Morning Edition decided to do what any reasonable news organization might do: see if it is true. Morning Edition called the Republican party and asked to be put in contact with some tax burdened job creators. They were unable to provide anyone for NPR to interview. NPR then contacted several of the business lobbies who have been complaining that higher taxes would impede job growth. These organizations were also unable to find any job creators who would speak to NPR.
NPR then put in a request to talk to job creators on Facebook. It got several responses from small business owners. The ones featured on its segment said that the personal tax rate would affect their disposable income but would have no effect on their hiring. This is pretty much what economic theory would predict.
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Larry Summers, who was Treasury Secretary under President Clinton and a top Obama economic advisor, apparently has forgotten the IMF’s role in the world economy. In an oped column he told readers that:
“From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations.”
This is arguably wrong as a general proposition, but it is certainly wrong in reference to the East Asian bailouts in 1990s that were largely engineered by Larry Summers and the U.S. Treasury Department, which controls the IMF. The conditions demanded in the East Asian bailouts required the countries in crisis in repay loans to western banks in full.
It allowed them to get the money needed to make the repayments by having the dollar rise in value against the currencies of the region (i.e. Robert Rubin’s strong dollar policy).It was not only the East Asian countries that deliberately lowered the value of their currency against the dollar, developing countries throughout the world adopted a policy of accumulating massive amounts of reserves in order to avoid ever being in the same situation as the East Asian countries.
This led to the enormous trade deficits that the U.S. has incurred in subsequent years. This situation was not sustainable, contrary to Summers’ assertion that the IMF puts countries on a sustainable course.
In fact, the trade deficit between the United States and the rest of the world was the major imbalance in the global economy in the last decade. It created the gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade. It is striking that the Post’s opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers.
Larry Summers, who was Treasury Secretary under President Clinton and a top Obama economic advisor, apparently has forgotten the IMF’s role in the world economy. In an oped column he told readers that:
“From the problems of Britain and Italy in the 1970s, through the Latin American debt crisis of the 1980s and the Mexican, Asian and Russian financial crises of the 1990s, the IMF has operated by twinning the provision of liquidity with strong requirements that those involved do what is necessary to restore their financial positions to sustainability. There is ample room for debate about precise policy choices the fund has made. But the IMF has consistently stood for the proposition that the laws of economics do not and will not give way to political considerations.”
This is arguably wrong as a general proposition, but it is certainly wrong in reference to the East Asian bailouts in 1990s that were largely engineered by Larry Summers and the U.S. Treasury Department, which controls the IMF. The conditions demanded in the East Asian bailouts required the countries in crisis in repay loans to western banks in full.
It allowed them to get the money needed to make the repayments by having the dollar rise in value against the currencies of the region (i.e. Robert Rubin’s strong dollar policy).It was not only the East Asian countries that deliberately lowered the value of their currency against the dollar, developing countries throughout the world adopted a policy of accumulating massive amounts of reserves in order to avoid ever being in the same situation as the East Asian countries.
This led to the enormous trade deficits that the U.S. has incurred in subsequent years. This situation was not sustainable, contrary to Summers’ assertion that the IMF puts countries on a sustainable course.
In fact, the trade deficit between the United States and the rest of the world was the major imbalance in the global economy in the last decade. It created the gap in demand that was filled by the stock bubble in the 90s and the housing bubble in the last decade. It is striking that the Post’s opinion pages are only open to people who try to conceal this fact rather than economists who try to explain this history to readers.
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If we see a car that runs into a brick wall at 80 miles an hour, we don’t ask why its front end is messed up. In this same vein, why on earth would be looking for a reason for a lack of jobs in an economy that has a gap of close to $1 trillion a year in annual demand?
This is what Robert Atkinson does in a column in the Huffington Post. If we take him at face value, Atkinson is actually confused about the reason that the economy is lacking jobs. He must have missed the housing bubble and its collapse.
See, the housing bubble was directly creating hundreds of billions of dollars of annual demand by spurring record levels of construction. The housing bubble also generated close to $500 billion in annual consumption through the housing wealth effect. The bubble generated more than $8 trillion in additional equity, almost all of which has now disappeared.
After the bubble collapsed, housing fell from more than 6 percent of GDP to less than 2 percent of GDP, a loss in annual demand of more than $600 billion. The loss of housing wealth, coupled with the loss of close to $5 trillion in stock wealth, led to a falloff in annual consumption of close to $500 billion. Lost tax revenue also led to cutbacks in annual government spending at the state and local level of close to $100 billion.
In short, we have lost more than $1.2 trillion in annual demand. The stimulus package came to around $300 billion per year for two years. Guess what, $1.2 trillion is much more than $300 billion.
The long and short is that the economy is operating way below its potential because there is nothing to replace the gap in demand created by the collapse of the housing bubble. The lack of demand means a shortage of jobs and high unemployment. There is nothing mysterious about this picture, it is about as simple and straightforward as it gets.
I suppose, in this weak economy, that it is good that people can get jobs looking for solutions to mysteries that do not exist. (Make work jobs can make sense if there is no productive employment available.) But there is no reason that the rest of us should be bothered by solutions for non-existent problems.
[Btw, the fact that the stimulus was too small is not 20/20 hindsight, it is what those of us who know economics said at the time.]
If we see a car that runs into a brick wall at 80 miles an hour, we don’t ask why its front end is messed up. In this same vein, why on earth would be looking for a reason for a lack of jobs in an economy that has a gap of close to $1 trillion a year in annual demand?
This is what Robert Atkinson does in a column in the Huffington Post. If we take him at face value, Atkinson is actually confused about the reason that the economy is lacking jobs. He must have missed the housing bubble and its collapse.
See, the housing bubble was directly creating hundreds of billions of dollars of annual demand by spurring record levels of construction. The housing bubble also generated close to $500 billion in annual consumption through the housing wealth effect. The bubble generated more than $8 trillion in additional equity, almost all of which has now disappeared.
After the bubble collapsed, housing fell from more than 6 percent of GDP to less than 2 percent of GDP, a loss in annual demand of more than $600 billion. The loss of housing wealth, coupled with the loss of close to $5 trillion in stock wealth, led to a falloff in annual consumption of close to $500 billion. Lost tax revenue also led to cutbacks in annual government spending at the state and local level of close to $100 billion.
In short, we have lost more than $1.2 trillion in annual demand. The stimulus package came to around $300 billion per year for two years. Guess what, $1.2 trillion is much more than $300 billion.
The long and short is that the economy is operating way below its potential because there is nothing to replace the gap in demand created by the collapse of the housing bubble. The lack of demand means a shortage of jobs and high unemployment. There is nothing mysterious about this picture, it is about as simple and straightforward as it gets.
I suppose, in this weak economy, that it is good that people can get jobs looking for solutions to mysteries that do not exist. (Make work jobs can make sense if there is no productive employment available.) But there is no reason that the rest of us should be bothered by solutions for non-existent problems.
[Btw, the fact that the stimulus was too small is not 20/20 hindsight, it is what those of us who know economics said at the time.]
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In an article about the impact of the euro crisis on the U.S. economy the NYT told readers:
“the American economy has shown signs of life recently, with talk of a double-dip fading and job growth picking up.”
People who were knowledgeable about the economy did not talk of a double-dip recession. There was a growth slowdown in the first half of the year due to one-time factors. This was the period in which most of the federal stimulus was withdrawn, imposing a substantial drag. There was a large rise in oil prices, which was partially reversed in the third quarter (although prices have risen part of the way back to their prior peaks in recent weeks). And, the Japanese earth quake and tsunami disrupted some supply chains, most notably in the auto industry.
With these factors having passed, it was predictable that the economy would again grow at near its trend rate of 2.5 percent. This growth rate will do nothing to reduce the huge gap between the economy’s potential output and its actual output, leaving tens of millions of people unemployed or under-employed. Unfortunately, because baseless comments about a double-dip recession were given such prominence in the media, this sort of growth is viewed as being acceptable.
In an article about the impact of the euro crisis on the U.S. economy the NYT told readers:
“the American economy has shown signs of life recently, with talk of a double-dip fading and job growth picking up.”
People who were knowledgeable about the economy did not talk of a double-dip recession. There was a growth slowdown in the first half of the year due to one-time factors. This was the period in which most of the federal stimulus was withdrawn, imposing a substantial drag. There was a large rise in oil prices, which was partially reversed in the third quarter (although prices have risen part of the way back to their prior peaks in recent weeks). And, the Japanese earth quake and tsunami disrupted some supply chains, most notably in the auto industry.
With these factors having passed, it was predictable that the economy would again grow at near its trend rate of 2.5 percent. This growth rate will do nothing to reduce the huge gap between the economy’s potential output and its actual output, leaving tens of millions of people unemployed or under-employed. Unfortunately, because baseless comments about a double-dip recession were given such prominence in the media, this sort of growth is viewed as being acceptable.
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If the Washington Post managed the development of computers the way it reported on the administration’s efforts to promote green cars, I would be writing this piece on a typewriter. President Obama has been in office less than 3 years. It would be absolutely astounding if his administration’s efforts to promote cleaner cars had already produced marketable results.
The effort to get affordable electric cars will inevitably be a long process involving many cost-saving and efficiency-enhancing innovations. People who know technology understand this fact. People who don’t should not be writing on this issue for major news outlets.
It is also worth noting that in a period in which the economy has widespread unemployment, as is the case now, there is very little opportunity cost to this sort of spending. In other words, if the government did not spend this money we simply would have had more people unemployed. This may make deficit hawks happy, since it would mean a somewhat lower deficit/debt, but there is no obvious advantage to the country from this situation.
If the Washington Post managed the development of computers the way it reported on the administration’s efforts to promote green cars, I would be writing this piece on a typewriter. President Obama has been in office less than 3 years. It would be absolutely astounding if his administration’s efforts to promote cleaner cars had already produced marketable results.
The effort to get affordable electric cars will inevitably be a long process involving many cost-saving and efficiency-enhancing innovations. People who know technology understand this fact. People who don’t should not be writing on this issue for major news outlets.
It is also worth noting that in a period in which the economy has widespread unemployment, as is the case now, there is very little opportunity cost to this sort of spending. In other words, if the government did not spend this money we simply would have had more people unemployed. This may make deficit hawks happy, since it would mean a somewhat lower deficit/debt, but there is no obvious advantage to the country from this situation.
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The media regularly gives us stories about the impending demographic disaster in Japan because of its low birth rate and declining population. Today, in the context of an article about the clean-up from the accidents at its nuclear reactors last spring, the NYT told us Japan’s problems are even worse than we thought:
“The Soviet Union did not attempt such a cleanup after the Chernobyl accident of 1986, the only nuclear disaster larger than that at Fukushima Daiichi. The government instead relocated about 300,000 people, abandoning vast tracts of farmland.
Many Japanese officials believe that they do not have that luxury; the evacuation zone covers more than 3 percent of the landmass of this densely populated nation.”
So we now learn that Japan is not only suffering because it has a declining population, but also because it is a densely populated country. Can things get much worse?
In reality, the demographic story is silly. The alleged problem is a decline in the ratio of workers to retirees. (The correct measure is the ratio of workers to non-workers, the latter would include children.) In a healthy economy, the rise in productivity growth swamps the impact of even very negative demographic trends.
For example, going from 3 workers to retiree to 2 workers per retiree over a 20 year period (an extremely fast rate of decline) would imply that the share of workers’ wages going to support retirees would have to increase by 0.6 percentage points annually, assuming a 70 percent replacement rate for retirees. This is 40 percent of the 1.5 percent annual productivity growth in the years of the productivity slowdown (1973-1995) and 24 percent of the 2.5 percent annual productivity growth in the years since 1995.
This means that in a healthy economy workers can continue to enjoy substantial increases in living standards even during years in which the demographic trend leads to a sharp increase in dependency ratios. Insofar as this is associated with a declining population, there are many gains associated with less crowding and less pollution that will not show up in GDP statistics.
The media regularly gives us stories about the impending demographic disaster in Japan because of its low birth rate and declining population. Today, in the context of an article about the clean-up from the accidents at its nuclear reactors last spring, the NYT told us Japan’s problems are even worse than we thought:
“The Soviet Union did not attempt such a cleanup after the Chernobyl accident of 1986, the only nuclear disaster larger than that at Fukushima Daiichi. The government instead relocated about 300,000 people, abandoning vast tracts of farmland.
Many Japanese officials believe that they do not have that luxury; the evacuation zone covers more than 3 percent of the landmass of this densely populated nation.”
So we now learn that Japan is not only suffering because it has a declining population, but also because it is a densely populated country. Can things get much worse?
In reality, the demographic story is silly. The alleged problem is a decline in the ratio of workers to retirees. (The correct measure is the ratio of workers to non-workers, the latter would include children.) In a healthy economy, the rise in productivity growth swamps the impact of even very negative demographic trends.
For example, going from 3 workers to retiree to 2 workers per retiree over a 20 year period (an extremely fast rate of decline) would imply that the share of workers’ wages going to support retirees would have to increase by 0.6 percentage points annually, assuming a 70 percent replacement rate for retirees. This is 40 percent of the 1.5 percent annual productivity growth in the years of the productivity slowdown (1973-1995) and 24 percent of the 2.5 percent annual productivity growth in the years since 1995.
This means that in a healthy economy workers can continue to enjoy substantial increases in living standards even during years in which the demographic trend leads to a sharp increase in dependency ratios. Insofar as this is associated with a declining population, there are many gains associated with less crowding and less pollution that will not show up in GDP statistics.
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Bloomberg has done some outstanding reporting over the last few years on the Federal Reserve Board’s bailout of the financial sector. Much more money went through the Fed’s special lending facilities than went through the TARP program that was approved by Congress.
Bloomberg’s reporters have taken the lead both in pressing the Fed to release data on its bailout programs and also in publicizing the numbers when they were released. They even sued the Fed (successfully) to force it to release data on the beneficiaries of lending through the discount window. The Fed has resisted the release of information about its programs, claiming that it would make it more difficult for it carry through bailout programs and monetary policy.
Yesterday Fed chairman Ben Bernanke attacked Bloomberg claiming that its reporting was misleading. It looks like the Fed missed the mark on just about every issue.
Perhaps the most important issue is the Fed’s claim that it did not lend at a below-market rate to banks, thereby effectively giving them a subsidy. In fact, it is almost definitional that the rate did provide a subsidy.
No one forced the banks to borrow from the Fed. If they had better options, they would have borrowed elsewhere. Instead the Fed made large amounts of money available to banks at a time when liquidity carried an enormous premium. This meant that the banks could relend the government’s money to others and earn a substantial profit.
This lending may have been justified to stem the financial crisis, but in principle the government could have imposed conditions (e.g. real caps on executive pay, downsizing the too-big-to-fail banks, modifying mortgages) on the banks as the price of getting access to credit at below-market rates. Bernanke and Congress did not seek to impose such conditions.
Given Bernanke’s strenuous opposition to the release of data on the bailout programs it would be interesting to know if he now feels that it is more difficult for the Fed to conduct monetary policy.
Bloomberg has done some outstanding reporting over the last few years on the Federal Reserve Board’s bailout of the financial sector. Much more money went through the Fed’s special lending facilities than went through the TARP program that was approved by Congress.
Bloomberg’s reporters have taken the lead both in pressing the Fed to release data on its bailout programs and also in publicizing the numbers when they were released. They even sued the Fed (successfully) to force it to release data on the beneficiaries of lending through the discount window. The Fed has resisted the release of information about its programs, claiming that it would make it more difficult for it carry through bailout programs and monetary policy.
Yesterday Fed chairman Ben Bernanke attacked Bloomberg claiming that its reporting was misleading. It looks like the Fed missed the mark on just about every issue.
Perhaps the most important issue is the Fed’s claim that it did not lend at a below-market rate to banks, thereby effectively giving them a subsidy. In fact, it is almost definitional that the rate did provide a subsidy.
No one forced the banks to borrow from the Fed. If they had better options, they would have borrowed elsewhere. Instead the Fed made large amounts of money available to banks at a time when liquidity carried an enormous premium. This meant that the banks could relend the government’s money to others and earn a substantial profit.
This lending may have been justified to stem the financial crisis, but in principle the government could have imposed conditions (e.g. real caps on executive pay, downsizing the too-big-to-fail banks, modifying mortgages) on the banks as the price of getting access to credit at below-market rates. Bernanke and Congress did not seek to impose such conditions.
Given Bernanke’s strenuous opposition to the release of data on the bailout programs it would be interesting to know if he now feels that it is more difficult for the Fed to conduct monetary policy.
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Harold Meyerson confuses them today in an otherwise useful column on how democratic governments are being forced aside due to economic pressures. He approvingly quotes Wall Street investment banker Roger Altman:
“financial markets have become ‘a global supra-government. They oust entrenched regimes where normal political processes could not do so. They force austerity, banking bail-outs and other major policy changes. .?.?. [L]eaving aside unusable nuclear weapons, they have become the most powerful force on earth.'”
This is not quite right. The circumstances under which the financial markets brought about a run first on the debt of Greece, Ireland and Portugal, and more recently on the debt of Italy and Spain were created by the policies pursued by the European Central Bank (ECB) and Mario Draghi and his predecessor Jean Claude Trichet.
The ECB has run a policy that is focused on containing inflation and forcing governments to reduce their deficits. It could have instead run a policy that placed its primary emphasis on promoting growth. It also could have played the role of lender of last resort. It was a quite deliberate policy decision by the ECB to impose a fiscal straightjacket on the heavily indebted countries of Europe. (Its policies have made this debt burden much worse.)
It is understandable that Draghi and the ECB would like to pretend that the problems facing Greece, Italy and other countries in the euro zone are simply the result of the market imposing its discipline. However, this is not true. They are responsible for the difficulties facing these countries.
Harold Meyerson confuses them today in an otherwise useful column on how democratic governments are being forced aside due to economic pressures. He approvingly quotes Wall Street investment banker Roger Altman:
“financial markets have become ‘a global supra-government. They oust entrenched regimes where normal political processes could not do so. They force austerity, banking bail-outs and other major policy changes. .?.?. [L]eaving aside unusable nuclear weapons, they have become the most powerful force on earth.'”
This is not quite right. The circumstances under which the financial markets brought about a run first on the debt of Greece, Ireland and Portugal, and more recently on the debt of Italy and Spain were created by the policies pursued by the European Central Bank (ECB) and Mario Draghi and his predecessor Jean Claude Trichet.
The ECB has run a policy that is focused on containing inflation and forcing governments to reduce their deficits. It could have instead run a policy that placed its primary emphasis on promoting growth. It also could have played the role of lender of last resort. It was a quite deliberate policy decision by the ECB to impose a fiscal straightjacket on the heavily indebted countries of Europe. (Its policies have made this debt burden much worse.)
It is understandable that Draghi and the ECB would like to pretend that the problems facing Greece, Italy and other countries in the euro zone are simply the result of the market imposing its discipline. However, this is not true. They are responsible for the difficulties facing these countries.
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