An AP article on the latest productivity data from the Bureau of Labor Statistics (BLS) was a bit confused on the relationship between productivity, profits, and job growth. The article noted the 0.3 percent decline in productivity reported for the second quarter. This followed a decline of 0.6 percent in the first quarter. It suggested that this could be bad for hiring since it would reduce corporate profits and leave them with less money to hire additional workers.
Actually, slower productivity growth can be good for hiring. Increased productivity and hiring are alternative ways for meeting additional demand for labor. If employers find that they can’t get more productivity out of the existing workforce, then they have no choice but to hire more labor (which could mean overtime) in order to meet an increase in demand.
Profits on the other hand tend to be very weakly correlated with employment growth. Firms will not hire more workers just because they have higher profits, they hire more workers when they feel they have the demand for additional workers. This is why hiring was very weak in 2010 even though profits had bounced back to their pre-recession level.
It is also worth noting that productivity is poorly measured and the data are subject to large revisions. For example, productivity growth in the first quarter had been previously reported as 1.8 percent. For this reason preliminary productivity data must always be viewed with considerable skepticism.
It is worth noting that the weak productivity growth of the last year appears to be offsetting the rapid growth from earlier in the downturn. This has left the economy slightly below its post-1995 productivity growth path. Several analysts had suggested that there had been a qualitatively leap in productivity growth earlier in the downturn and offered this as an explanation for slow job growth. It now seems that firms were simply quicker to lay off workers than usual, which explains the unusually fast productivity growth early in the downturn.
Productivity Growth, 1995-2011
Source: Bureau of Labor Statistics.
An AP article on the latest productivity data from the Bureau of Labor Statistics (BLS) was a bit confused on the relationship between productivity, profits, and job growth. The article noted the 0.3 percent decline in productivity reported for the second quarter. This followed a decline of 0.6 percent in the first quarter. It suggested that this could be bad for hiring since it would reduce corporate profits and leave them with less money to hire additional workers.
Actually, slower productivity growth can be good for hiring. Increased productivity and hiring are alternative ways for meeting additional demand for labor. If employers find that they can’t get more productivity out of the existing workforce, then they have no choice but to hire more labor (which could mean overtime) in order to meet an increase in demand.
Profits on the other hand tend to be very weakly correlated with employment growth. Firms will not hire more workers just because they have higher profits, they hire more workers when they feel they have the demand for additional workers. This is why hiring was very weak in 2010 even though profits had bounced back to their pre-recession level.
It is also worth noting that productivity is poorly measured and the data are subject to large revisions. For example, productivity growth in the first quarter had been previously reported as 1.8 percent. For this reason preliminary productivity data must always be viewed with considerable skepticism.
It is worth noting that the weak productivity growth of the last year appears to be offsetting the rapid growth from earlier in the downturn. This has left the economy slightly below its post-1995 productivity growth path. Several analysts had suggested that there had been a qualitatively leap in productivity growth earlier in the downturn and offered this as an explanation for slow job growth. It now seems that firms were simply quicker to lay off workers than usual, which explains the unusually fast productivity growth early in the downturn.
Productivity Growth, 1995-2011
Source: Bureau of Labor Statistics.
Read More Leer más Join the discussion Participa en la discusión
The NYT told readers that a second recession could be even worse than the first. The reason is that people will have less of a cushion going in and that we are supposedly out of policy tools to get us out. There is some serious confusion here that is worth addressing.
First, it is true that most families have little left in reserve to deal with another layoff, so the NYT is absolutely right that a second downturn would really whack people that are already hurting. But there are two important points to make on this.
First, precisely because the economy is still badly depressed in many ways it is much less likely that we will see a recession. Remember a recession means two quarters of negative growth. To have negative growth there have to be sectors of the economy that are shrinking. Typically this would be construction and car purchases.
As it stands, construction (both residential and non-residential) are seriously depressed. It is difficult to imagine that either sector could fall much more than it already has. This means any negative impact that they have on the economy will be very limited. The auto sector is also still well-below pre-recession levels of sales. If it were to dip by another 10-15 percent (a very large dip), it would not have that much impact on the economy.
Consumption more generally is growing, albeit slowly. This is 70 percent of output, and even modest growth in consumption is likely to keep the economy growing. The government sector is shrinking, but only at around a 2 percent annual rate. So, we have to offset a sector that is about 20 percent of GDP shrinking at a 2 percent rate to stay in positive territory.
That is a pretty low bar. I think the double-dip crowd has not done their homework.
The second point is that a double-dip is not the sort of game-changing event that many seem to think. If we have a prolonged period of weak growth, that means rising unemployment and increased suffering. There is no magic to going negative. If we had 2 quarters where the economy shrank by 0.3 percent and followed by a year of 7 percent growth, this would be a great deal.
By contrast, we may be looking at 2 years or more where the growth could be in the range of 2.0 percent or even less. When we have 9.1 percent unemployment, this is an outrage. If we get people applauding because at least we are not seeing a double dip, then we have to calmly escort these ignorant beings to somewhere far away from economic policy discussions. They clearly do not have a clue and need to try a different line of work.
Finally, it is 100 percent nonsense to say that the government is out of policy options. We can do more stimulus. The financial markets are yelling at the government at the top of their lungs saying “borrow more money.” That’s what 2.6 percent interest rate on 10-year Treasury bonds means. There are balanced-budget worshipping politicians who say that the government can’t do anything, but this is not true and the NYT has no business repeating it.
The Fed could also do more. For some reason the article does not mention policies that Ben Bernanke has himself suggested: targeting a long-term interest rate (e.g. a 1.0 percent 5-year Treasury rate) or a higher rate of inflation (e.g. 3-4 percent). The former was mentioned by Bernanke at his Jackson Hole speech last summer; the latter in a paper that he wrote while still a professor at Princeton. Both could help to boost demand and create jobs.
The government could also try to create jobs by taking steps to lower the value of the dollar. The Chinese government has been making threats that it will stop buying up U.S. government debt if we don’t take their advice. The Obama administration could ask what they most want and then do the exact opposite. If the Chinese government stops buying U.S. assets then the dollar will fall against the yuan. This is equivalent to imposing a tariff on Chinese imports and giving a subsidy to U.S. exports. In other words, it should lead to a burst in net exports which will lift the economy and create jobs.
Finally, the government could promote work sharing. Every month employers lay off or fire 2 million workers. If the government gave incentives so that employers were persuaded to shorten hours rather dump employees, and this reduced this figure by 10 percent, it would be equivalent to creating another 200,000 jobs per month.
In short, there is much that the government can do to create jobs. It is understandable that incumbent politicians would want to push the “nothing we can do line” to justify their own failings, however news outlets have no business passing along these excuses which are not true.
The NYT told readers that a second recession could be even worse than the first. The reason is that people will have less of a cushion going in and that we are supposedly out of policy tools to get us out. There is some serious confusion here that is worth addressing.
First, it is true that most families have little left in reserve to deal with another layoff, so the NYT is absolutely right that a second downturn would really whack people that are already hurting. But there are two important points to make on this.
First, precisely because the economy is still badly depressed in many ways it is much less likely that we will see a recession. Remember a recession means two quarters of negative growth. To have negative growth there have to be sectors of the economy that are shrinking. Typically this would be construction and car purchases.
As it stands, construction (both residential and non-residential) are seriously depressed. It is difficult to imagine that either sector could fall much more than it already has. This means any negative impact that they have on the economy will be very limited. The auto sector is also still well-below pre-recession levels of sales. If it were to dip by another 10-15 percent (a very large dip), it would not have that much impact on the economy.
Consumption more generally is growing, albeit slowly. This is 70 percent of output, and even modest growth in consumption is likely to keep the economy growing. The government sector is shrinking, but only at around a 2 percent annual rate. So, we have to offset a sector that is about 20 percent of GDP shrinking at a 2 percent rate to stay in positive territory.
That is a pretty low bar. I think the double-dip crowd has not done their homework.
The second point is that a double-dip is not the sort of game-changing event that many seem to think. If we have a prolonged period of weak growth, that means rising unemployment and increased suffering. There is no magic to going negative. If we had 2 quarters where the economy shrank by 0.3 percent and followed by a year of 7 percent growth, this would be a great deal.
By contrast, we may be looking at 2 years or more where the growth could be in the range of 2.0 percent or even less. When we have 9.1 percent unemployment, this is an outrage. If we get people applauding because at least we are not seeing a double dip, then we have to calmly escort these ignorant beings to somewhere far away from economic policy discussions. They clearly do not have a clue and need to try a different line of work.
Finally, it is 100 percent nonsense to say that the government is out of policy options. We can do more stimulus. The financial markets are yelling at the government at the top of their lungs saying “borrow more money.” That’s what 2.6 percent interest rate on 10-year Treasury bonds means. There are balanced-budget worshipping politicians who say that the government can’t do anything, but this is not true and the NYT has no business repeating it.
The Fed could also do more. For some reason the article does not mention policies that Ben Bernanke has himself suggested: targeting a long-term interest rate (e.g. a 1.0 percent 5-year Treasury rate) or a higher rate of inflation (e.g. 3-4 percent). The former was mentioned by Bernanke at his Jackson Hole speech last summer; the latter in a paper that he wrote while still a professor at Princeton. Both could help to boost demand and create jobs.
The government could also try to create jobs by taking steps to lower the value of the dollar. The Chinese government has been making threats that it will stop buying up U.S. government debt if we don’t take their advice. The Obama administration could ask what they most want and then do the exact opposite. If the Chinese government stops buying U.S. assets then the dollar will fall against the yuan. This is equivalent to imposing a tariff on Chinese imports and giving a subsidy to U.S. exports. In other words, it should lead to a burst in net exports which will lift the economy and create jobs.
Finally, the government could promote work sharing. Every month employers lay off or fire 2 million workers. If the government gave incentives so that employers were persuaded to shorten hours rather dump employees, and this reduced this figure by 10 percent, it would be equivalent to creating another 200,000 jobs per month.
In short, there is much that the government can do to create jobs. It is understandable that incumbent politicians would want to push the “nothing we can do line” to justify their own failings, however news outlets have no business passing along these excuses which are not true.
Read More Leer más Join the discussion Participa en la discusión
Former Federal Reserve Board chair Alan Greenspan shared his wisdom on Face the Nation yesterday. His wise words were presented in the top of the hour news segment on Morning Edition.
Greenspan is best known for being unable to see the $8 trillion housing bubble, the collapse of which wrecked the economy. Given Greenspan’s obviously limited understanding of economics, one wonders if Face the Nation and NPR were unable to find a street drunk to share their views.
Former Federal Reserve Board chair Alan Greenspan shared his wisdom on Face the Nation yesterday. His wise words were presented in the top of the hour news segment on Morning Edition.
Greenspan is best known for being unable to see the $8 trillion housing bubble, the collapse of which wrecked the economy. Given Greenspan’s obviously limited understanding of economics, one wonders if Face the Nation and NPR were unable to find a street drunk to share their views.
Read More Leer más Join the discussion Participa en la discusión
It’s apparently hard to get economic news at the Washington Post. How else can one explain the fact that it explains the movement of markets over the weekend only in reference to S&P’s downgrade of U.S. debt and completely ignores the debt crisis in Europe that could lead to the collapse of the euro. The latter threatens the same sort of freeze up of the financial system that we saw in the wake of the Lehman bankruptcy. It is likely that markets were more concerned about this prospect than the downgrade by one of the three major credit rating agencies.
The article also includes a bizarre quote from Kazahiro Takahashi, general manager of investment research with Daiwa Securities:
“But he still thinks the fallout is likely to be severe, as evidenced by Japan’s 1998 credit downgrade. After ratings agency Moody’s took away Japan’s top-notch credit rating, the Japanese economy experienced deflation, or a period of falling prices, which led to stagnated economic growth, he said.
‘The same kind of problem should be expected for the U.S. economy, too, … Of course, if the U.S. economy, the largest economy in the world, becomes deflationary like Japan, that would have a great impact for the world economy.'”
It is unlikely that the Post could find many other analysts who believe that the United States is about to experience deflation and even fewer who believe that the downgrade makes deflation more likely. If the U.S. was actually having difficulty taxing and borrowing to meet its debt payments, then it would most likely print more money to pay its debt. This would tend to increase inflationary pressure, not deflationary pressure.
It also would have been worth noting that S&P’s downgrade of Japan’s debt in 2002 had no noticeable impact on Japanese interest rates. The government can still borrow long-term at interest rates just over 1.0 percent. Furthermore, this was a clear example where Moody’s was completely wrong. It is now 13 years after the downgrade, no one believes that Japan is anywhere close to defaulting on its debt. And, because of the deflation over this period, bondholders are getting repaid in yen that are worth more than the yen they lent.
It’s apparently hard to get economic news at the Washington Post. How else can one explain the fact that it explains the movement of markets over the weekend only in reference to S&P’s downgrade of U.S. debt and completely ignores the debt crisis in Europe that could lead to the collapse of the euro. The latter threatens the same sort of freeze up of the financial system that we saw in the wake of the Lehman bankruptcy. It is likely that markets were more concerned about this prospect than the downgrade by one of the three major credit rating agencies.
The article also includes a bizarre quote from Kazahiro Takahashi, general manager of investment research with Daiwa Securities:
“But he still thinks the fallout is likely to be severe, as evidenced by Japan’s 1998 credit downgrade. After ratings agency Moody’s took away Japan’s top-notch credit rating, the Japanese economy experienced deflation, or a period of falling prices, which led to stagnated economic growth, he said.
‘The same kind of problem should be expected for the U.S. economy, too, … Of course, if the U.S. economy, the largest economy in the world, becomes deflationary like Japan, that would have a great impact for the world economy.'”
It is unlikely that the Post could find many other analysts who believe that the United States is about to experience deflation and even fewer who believe that the downgrade makes deflation more likely. If the U.S. was actually having difficulty taxing and borrowing to meet its debt payments, then it would most likely print more money to pay its debt. This would tend to increase inflationary pressure, not deflationary pressure.
It also would have been worth noting that S&P’s downgrade of Japan’s debt in 2002 had no noticeable impact on Japanese interest rates. The government can still borrow long-term at interest rates just over 1.0 percent. Furthermore, this was a clear example where Moody’s was completely wrong. It is now 13 years after the downgrade, no one believes that Japan is anywhere close to defaulting on its debt. And, because of the deflation over this period, bondholders are getting repaid in yen that are worth more than the yen they lent.
Read More Leer más Join the discussion Participa en la discusión
Washington Post columnist Robert Samuelson came up with a new metric for measuring the size of the military budget. He told readers that under last week’s debt deal:
“defense spending would shrink to 15 percent of the budget by 2016. This would be the lowest share since before World War II.”
Wow, military spending measured as a share of the budget, what a great concept! The Samuelson measure means that we should be spending more money on the military if we were to have a national health insurance program run through the government, like Medicare. It also implies that if we privatize Medicare and Social Security, then we should cut back the military to keep its share of the budget in its normal historical range.
And remember, you can only find this in the Washington Post.
Washington Post columnist Robert Samuelson came up with a new metric for measuring the size of the military budget. He told readers that under last week’s debt deal:
“defense spending would shrink to 15 percent of the budget by 2016. This would be the lowest share since before World War II.”
Wow, military spending measured as a share of the budget, what a great concept! The Samuelson measure means that we should be spending more money on the military if we were to have a national health insurance program run through the government, like Medicare. It also implies that if we privatize Medicare and Social Security, then we should cut back the military to keep its share of the budget in its normal historical range.
And remember, you can only find this in the Washington Post.
Read More Leer más Join the discussion Participa en la discusión
A front page NYT article on the impact of the S&P downgrade included several assertions that were not supported by evidence. For example, the article told readers in the second paragraph:
“Even before the panel [the congressional commission established in the debt agreement] is appointed, its mission is expanding. Its role is not just to cut the annual budget deficit and slow the explosive growth of federal debt but also to appease the markets and help restore the United States’ top credit rating of AAA. Otherwise, taxpayers may eventually have to pay more in interest for every dollar borrowed by the Treasury.”
This assertion is not sourced to anyone. Also, in the wake of the downgrade, interest rates on Treasury bonds have fallen, not risen. While this is likely the result of concerns over the survival of the euro, it indicates that financial markets are not especially concerned over S&P’s downgrade.
The article also asserted that members of the congressional panel will have to “mute ideological disagreements.” It is not clear that members of Congress have ideological disagreements. Members of Congress get elected because of their ability to appeal to powerful interest groups. The differences around proposals to cut programs like Social Security and Medicare or to raise taxes on the wealthy most obviously stem from the different interest groups being represented. It is not obvious that the ideology of individual members of Congress matters, since their ability to keep their jobs will depend on the extent to which members of Congress can keep their backers satisfied.
It also would have been useful to include the views of members of Congress who ridiculed the downgrade, pointing out that S&P had rated hundreds of billions of subprime mortgage backed securities as investment grade. It also had given top investment grade ratings to both Lehman and AIG until the day they collapsed. It also was off by $2 trillion in its calculations of U.S. indebtedness. In other words, there are very good reasons not to take S&P’s ratings seriously and there certainly many people who do not, including it seems investors in financial markets.
A front page NYT article on the impact of the S&P downgrade included several assertions that were not supported by evidence. For example, the article told readers in the second paragraph:
“Even before the panel [the congressional commission established in the debt agreement] is appointed, its mission is expanding. Its role is not just to cut the annual budget deficit and slow the explosive growth of federal debt but also to appease the markets and help restore the United States’ top credit rating of AAA. Otherwise, taxpayers may eventually have to pay more in interest for every dollar borrowed by the Treasury.”
This assertion is not sourced to anyone. Also, in the wake of the downgrade, interest rates on Treasury bonds have fallen, not risen. While this is likely the result of concerns over the survival of the euro, it indicates that financial markets are not especially concerned over S&P’s downgrade.
The article also asserted that members of the congressional panel will have to “mute ideological disagreements.” It is not clear that members of Congress have ideological disagreements. Members of Congress get elected because of their ability to appeal to powerful interest groups. The differences around proposals to cut programs like Social Security and Medicare or to raise taxes on the wealthy most obviously stem from the different interest groups being represented. It is not obvious that the ideology of individual members of Congress matters, since their ability to keep their jobs will depend on the extent to which members of Congress can keep their backers satisfied.
It also would have been useful to include the views of members of Congress who ridiculed the downgrade, pointing out that S&P had rated hundreds of billions of subprime mortgage backed securities as investment grade. It also had given top investment grade ratings to both Lehman and AIG until the day they collapsed. It also was off by $2 trillion in its calculations of U.S. indebtedness. In other words, there are very good reasons not to take S&P’s ratings seriously and there certainly many people who do not, including it seems investors in financial markets.
Read More Leer más Join the discussion Participa en la discusión
The Post featured a lengthy front page piece on the Republican debt ceiling strategy. Early in the article, it told readers that:
“Democrats called the GOP irresponsible for gambling with the economy and the nation’s flawless credit. Republicans countered that an epic clash over the debt limit was inevitable, given the outcome of the election and widespread anger with runaway government spending.”
There was no “runaway government spending.” The bulk of the increase in spending was for transfer payments like unemployment insurance and food stamps that always rise during a downturn. They rose more in this downturn than in most because it was steeper. A real newspaper would have put the words “runaway government spending” in quotation marks rather than implying that it was something that actually existed in the world.
Somewhat later, the article tells readers that:
“smaller government and lower taxes, not explosive federal spending, would be their [the “young gun” Republicans] route to growth and prosperity.”
No one was advocating “explosive federal spending.” This means that a real newspaper would have put these words also in quotation marks.
This is how you can tell the difference between the Washington Post and a real newspaper.
The Post featured a lengthy front page piece on the Republican debt ceiling strategy. Early in the article, it told readers that:
“Democrats called the GOP irresponsible for gambling with the economy and the nation’s flawless credit. Republicans countered that an epic clash over the debt limit was inevitable, given the outcome of the election and widespread anger with runaway government spending.”
There was no “runaway government spending.” The bulk of the increase in spending was for transfer payments like unemployment insurance and food stamps that always rise during a downturn. They rose more in this downturn than in most because it was steeper. A real newspaper would have put the words “runaway government spending” in quotation marks rather than implying that it was something that actually existed in the world.
Somewhat later, the article tells readers that:
“smaller government and lower taxes, not explosive federal spending, would be their [the “young gun” Republicans] route to growth and prosperity.”
No one was advocating “explosive federal spending.” This means that a real newspaper would have put these words also in quotation marks.
This is how you can tell the difference between the Washington Post and a real newspaper.
Read More Leer más Join the discussion Participa en la discusión
The Washington Post is going full speed ahead in its quest to gut Social Security and Medicare. Its lead editorial told readers that:
“what seems to have sent markets panicking last week is a dawning sense that capitalist democracies may have made more promises than their economies are capable of fulfilling — without significant growth-generating structural reforms.”
Cool, how did the Post determine this one? I would have guessed that markets were rattled by the fact that the ECB is run by incompetents who understand almost nothing about economics. They are raising interest rates at a time when there is massive underemployment in the euro zone countries and no real risk of inflation. This will slow growth throughout the region and raise the interest rates that the heavily indebted countries must pay on their debt. That would seem the most immediate cause of crisis. If the markets just became aware of some new set of promises, the Post neglected to report what these might be.
Of course those who care about future growth in the U.S. are probably not happy about a budget deal that locks in a path of declining government spending when there is no obvious source of private sector demand to replace it. This is 180 degrees at odds with the Post’s assertion — the problem is that the government is not making enough promises, not that it is making too many.
The Post then gives us this beautiful line:
“The next time someone tells you that this predicament is all the fault of a) Wall Street b) President Obama c) the Republicans or d) China, respond with this number: 138 percent. That is the ratio of U.S. household debt to disposable income as of 2007.”
The Post’s editors are so cute when they try do arithmetic. (I remember an editorial praising NAFTA in which it claimed that Mexico’s GDP had quadrupled between 1988 and 2007. The actual growth was 82 percent. The Post never corrected this one. Hey, math is hard!) Let’s think about this 138 percent for a moment.
The Post largely missed it, but the country had an $8 trillion housing bubble in the last decade. It had a $10 trillion stock bubble in the 90s. According to standard ecoonomics (the stuff people learn in intros), people consume based on their wealth. Most people had no reason not to believe that the bubble wealth was real. They certainly would have no reason not to believe it was real if they relied on the Washington Post for their news, which never mentioned the bubble.
This means that because of the bubbles, people spent a huge amount relative to their incomes. At the peak of the stock bubble the saving rate had fallen from a post-war average of 8 percent of disposable income to just 2 percent. At the peak of the housing bubble it fell to zero.
This is the reason that we have the 138 percent debt to income number that the Post is advertising. We had a bubble that was partially inflated by Wall Street greed and fraud and allowed to grow unchecked by incompetents like Alan Greenspan, Ben Bernanke, and Hank Paulson. So we can talk about Wall Street blame and 138 percent in the same sentence. Isn’t arithmetic fun?
Now let’s give the Post’s editors a quick economics lesson. They obviously think people should be consuming more now. Is that really a good thing? If we check the saving rate it is now around 5 percent, still below the post-war average. How low does the Post think it should go, 3 percent, 2 percent? Since the Post is intent on gutting Medicare and Social Security, how do they expect people to support themselves in their old age if they save at much lower rates than the parents and grandparents, who were not generally wealthy in retirement even with an average saving rate of 8 percent?
The real imbalance in the U.S. economy at present is not that people are consuming too little. The biggest imbalance is the trade deficit. If the U.S. runs a trade deficit, then it must have negative national savings. That is an accounting identity, there is no way around it. That means that we must either have the large budget deficits that the Post hates or we must have the overconsumption that the Post hates.
If we want people to save more and to have the government stop running large deficits, then we must get the trade deficit down. And, the only way to get the trade deficit down is to get the value of the dollar down. Unfortunately in Washington Post land this is also a bad thing. (One of the bad events that it wants readers to fear is a flight from the dollar.)
So, the answers in the world are very clear. In the short term we will need the government to provide a boost to the economy. In the longer term, we will need to get the dollar down so that our trade is closer to balance. Unfortunately the Post cannot see this because it has serious problems with logic and arithmetic.
[To prove this point, the Post editorial tells us:
“Even China seems near exhaustion of a growth model based on an overvalued currency and inefficient, state-determined investment.”
Umm, its economy is still growing around 9 percent a year. More importantly, China’s currency is undervalued, not overvalued. Math is sooooo hard!]
The Washington Post is going full speed ahead in its quest to gut Social Security and Medicare. Its lead editorial told readers that:
“what seems to have sent markets panicking last week is a dawning sense that capitalist democracies may have made more promises than their economies are capable of fulfilling — without significant growth-generating structural reforms.”
Cool, how did the Post determine this one? I would have guessed that markets were rattled by the fact that the ECB is run by incompetents who understand almost nothing about economics. They are raising interest rates at a time when there is massive underemployment in the euro zone countries and no real risk of inflation. This will slow growth throughout the region and raise the interest rates that the heavily indebted countries must pay on their debt. That would seem the most immediate cause of crisis. If the markets just became aware of some new set of promises, the Post neglected to report what these might be.
Of course those who care about future growth in the U.S. are probably not happy about a budget deal that locks in a path of declining government spending when there is no obvious source of private sector demand to replace it. This is 180 degrees at odds with the Post’s assertion — the problem is that the government is not making enough promises, not that it is making too many.
The Post then gives us this beautiful line:
“The next time someone tells you that this predicament is all the fault of a) Wall Street b) President Obama c) the Republicans or d) China, respond with this number: 138 percent. That is the ratio of U.S. household debt to disposable income as of 2007.”
The Post’s editors are so cute when they try do arithmetic. (I remember an editorial praising NAFTA in which it claimed that Mexico’s GDP had quadrupled between 1988 and 2007. The actual growth was 82 percent. The Post never corrected this one. Hey, math is hard!) Let’s think about this 138 percent for a moment.
The Post largely missed it, but the country had an $8 trillion housing bubble in the last decade. It had a $10 trillion stock bubble in the 90s. According to standard ecoonomics (the stuff people learn in intros), people consume based on their wealth. Most people had no reason not to believe that the bubble wealth was real. They certainly would have no reason not to believe it was real if they relied on the Washington Post for their news, which never mentioned the bubble.
This means that because of the bubbles, people spent a huge amount relative to their incomes. At the peak of the stock bubble the saving rate had fallen from a post-war average of 8 percent of disposable income to just 2 percent. At the peak of the housing bubble it fell to zero.
This is the reason that we have the 138 percent debt to income number that the Post is advertising. We had a bubble that was partially inflated by Wall Street greed and fraud and allowed to grow unchecked by incompetents like Alan Greenspan, Ben Bernanke, and Hank Paulson. So we can talk about Wall Street blame and 138 percent in the same sentence. Isn’t arithmetic fun?
Now let’s give the Post’s editors a quick economics lesson. They obviously think people should be consuming more now. Is that really a good thing? If we check the saving rate it is now around 5 percent, still below the post-war average. How low does the Post think it should go, 3 percent, 2 percent? Since the Post is intent on gutting Medicare and Social Security, how do they expect people to support themselves in their old age if they save at much lower rates than the parents and grandparents, who were not generally wealthy in retirement even with an average saving rate of 8 percent?
The real imbalance in the U.S. economy at present is not that people are consuming too little. The biggest imbalance is the trade deficit. If the U.S. runs a trade deficit, then it must have negative national savings. That is an accounting identity, there is no way around it. That means that we must either have the large budget deficits that the Post hates or we must have the overconsumption that the Post hates.
If we want people to save more and to have the government stop running large deficits, then we must get the trade deficit down. And, the only way to get the trade deficit down is to get the value of the dollar down. Unfortunately in Washington Post land this is also a bad thing. (One of the bad events that it wants readers to fear is a flight from the dollar.)
So, the answers in the world are very clear. In the short term we will need the government to provide a boost to the economy. In the longer term, we will need to get the dollar down so that our trade is closer to balance. Unfortunately the Post cannot see this because it has serious problems with logic and arithmetic.
[To prove this point, the Post editorial tells us:
“Even China seems near exhaustion of a growth model based on an overvalued currency and inefficient, state-determined investment.”
Umm, its economy is still growing around 9 percent a year. More importantly, China’s currency is undervalued, not overvalued. Math is sooooo hard!]
Read More Leer más Join the discussion Participa en la discusión
Thomas Friedman tells us today that we have “win together or lose together.” That’s a really cute line.
Folks who look at the National Income and Product Accounts know that corporate profits are at a record high share of national income. And within corporate profits, the financial sector is at a record high. Given that we have 25 million people unemployed, underemployed or who have given up looking for work altogether, that doesn’t seem like much togetherness.
We could increase togetherness with a modest financial speculation tax like the 0.25 percent tax that the UK imposes on each side of stock trades. A similar tax applied to trades of stocks, bonds, options, futures, and other derivative instruments can easily raise more than $100 billion a year. That would help to bring down the deficit that so concerns Mr. Friedman and his friends.
Friedman gives his usual tirade about people in the United States overconsuming. The problem in this story is that people would not have been overconsuming if the housing bubble wealth was real. At its peak, the housing bubble created more than $8 trillion in housing equity compared to a situation where house prices had just followed their long-term trend. People consumed based on this wealth, exactly as economic theory predicted.
This would have been an entirely rational decision if they were able to keep their bubble equity, but of course they were not. The problem was not that people were being spendthrifts, the problem was that the people in charge of running the economy allowed an $8 trillion bubble to grow that had predictably disastrous consequences.
The blame here lies not with the average homeowner, who acted rationally with the information available. The blame lies with the people who managed the economy, like Alan Greenspan, Ben Bernanke, and Hank Paulson, and the people who opine on economic issues in major news outlets. If these people were competent, they would have been shooting at the bubble with everything they had before it reached such dangerous levels.
Friedman also turns to Harvard economist Ken Rogoff for suggestions for hastening the recovery. For some reason he missed one of his favorites. Rogoff suggested that the Fed deliberately run a high rate of inflation (e.g. 6 percent) for a couple of years. This would have the effect of reducing the real value of people’s debts, making it possible for them to spend more money.
It also is worth noting that the U.S. cannot return to normal levels of employment without “overspending” unless we get the trade deficit down. This can only happen if the dollar falls substantially against other currencies. Thomas Friedman should know this.
Thomas Friedman tells us today that we have “win together or lose together.” That’s a really cute line.
Folks who look at the National Income and Product Accounts know that corporate profits are at a record high share of national income. And within corporate profits, the financial sector is at a record high. Given that we have 25 million people unemployed, underemployed or who have given up looking for work altogether, that doesn’t seem like much togetherness.
We could increase togetherness with a modest financial speculation tax like the 0.25 percent tax that the UK imposes on each side of stock trades. A similar tax applied to trades of stocks, bonds, options, futures, and other derivative instruments can easily raise more than $100 billion a year. That would help to bring down the deficit that so concerns Mr. Friedman and his friends.
Friedman gives his usual tirade about people in the United States overconsuming. The problem in this story is that people would not have been overconsuming if the housing bubble wealth was real. At its peak, the housing bubble created more than $8 trillion in housing equity compared to a situation where house prices had just followed their long-term trend. People consumed based on this wealth, exactly as economic theory predicted.
This would have been an entirely rational decision if they were able to keep their bubble equity, but of course they were not. The problem was not that people were being spendthrifts, the problem was that the people in charge of running the economy allowed an $8 trillion bubble to grow that had predictably disastrous consequences.
The blame here lies not with the average homeowner, who acted rationally with the information available. The blame lies with the people who managed the economy, like Alan Greenspan, Ben Bernanke, and Hank Paulson, and the people who opine on economic issues in major news outlets. If these people were competent, they would have been shooting at the bubble with everything they had before it reached such dangerous levels.
Friedman also turns to Harvard economist Ken Rogoff for suggestions for hastening the recovery. For some reason he missed one of his favorites. Rogoff suggested that the Fed deliberately run a high rate of inflation (e.g. 6 percent) for a couple of years. This would have the effect of reducing the real value of people’s debts, making it possible for them to spend more money.
It also is worth noting that the U.S. cannot return to normal levels of employment without “overspending” unless we get the trade deficit down. This can only happen if the dollar falls substantially against other currencies. Thomas Friedman should know this.
Read More Leer más Join the discussion Participa en la discusión
The NYT told readers that:
“Beijing has few options other than to continue to purchase United States Treasury bonds, Chinese officials are clearly concerned that China’s substantial holdings of American debt, worth at least $1.1 trillion, is being devalued.”
Both parts of this statement are wrong. Beijing has the option to stop buying dollars from its exporters. The reason that the government accumulates dollars and other foreign currencies is that it buys the currency from the companies who are exporting to the United States and other countries.
It has the option not to buy the currency. This would force the exporters to sell their dollars in international currency markets which would lower the value of the dollar. The lower valued dollar would help to correct the trade imbalance between the United States and the rest of the world. This is the adjustment process that is supposed to take place in a system of flexible exchange rates.
The second part of the statement, that “Chinese officials are clearly concerned that China’s substantial holdings of American debt … is being devalued,” is almost certainly wrong because Chinese officials should know with absolute certainty that it will be devalued. The only plausible route through which the trade deficit in the United States will be brought into balance is through a large reduction in the value of the dollar. Everyone who has taken an intro econ class knows this, so presumably China’s top economic officials understand this fact. They presumably have made the judgement that maintaining their export market in the United States is worth the expected loss on their dollar holdings.
Finally, as a matter of accounting identities, the existence of the large U.S. trade deficit means that it will be a net international borrower. In other words, the headline of this article that “China Tells U.S. It Must ‘Cure Addiction to Debt'” is absurd. China’s decision to prop up the dollar against the yuan is the main cause of the trade deficit that makes the U.S. a net borrower. In other words, it is China’s own actions that lead to the U.S. borrowing that it is complaining about.
The NYT told readers that:
“Beijing has few options other than to continue to purchase United States Treasury bonds, Chinese officials are clearly concerned that China’s substantial holdings of American debt, worth at least $1.1 trillion, is being devalued.”
Both parts of this statement are wrong. Beijing has the option to stop buying dollars from its exporters. The reason that the government accumulates dollars and other foreign currencies is that it buys the currency from the companies who are exporting to the United States and other countries.
It has the option not to buy the currency. This would force the exporters to sell their dollars in international currency markets which would lower the value of the dollar. The lower valued dollar would help to correct the trade imbalance between the United States and the rest of the world. This is the adjustment process that is supposed to take place in a system of flexible exchange rates.
The second part of the statement, that “Chinese officials are clearly concerned that China’s substantial holdings of American debt … is being devalued,” is almost certainly wrong because Chinese officials should know with absolute certainty that it will be devalued. The only plausible route through which the trade deficit in the United States will be brought into balance is through a large reduction in the value of the dollar. Everyone who has taken an intro econ class knows this, so presumably China’s top economic officials understand this fact. They presumably have made the judgement that maintaining their export market in the United States is worth the expected loss on their dollar holdings.
Finally, as a matter of accounting identities, the existence of the large U.S. trade deficit means that it will be a net international borrower. In other words, the headline of this article that “China Tells U.S. It Must ‘Cure Addiction to Debt'” is absurd. China’s decision to prop up the dollar against the yuan is the main cause of the trade deficit that makes the U.S. a net borrower. In other words, it is China’s own actions that lead to the U.S. borrowing that it is complaining about.
Read More Leer más Join the discussion Participa en la discusión
