Those of us who follow economic reporting closely have long recognized the Washington Post’s opinion pages as the mother lode of confused economic thinking. Fareed Zakaria lives up to the standard in today’s column, which offers policy tokens for both the left and right.
He starts by noting that the tax/spending package agreed to by President Obama and the Republicans last year added $900 billion to the deficit over 10 years and then wrongly tells readers:
“We can’t keep playing this game.”
Of course we can. The important point, apparently lost on Zakaria, is that the deal increased the deficit by $900 billion over the next two years. This is a period in which virtually every economic forecast projects the U.S. economy to be well below full employment levels of output. This means that deficit spending will crowd out little or no private investment. So what exactly is the problem with playing this game; that we might put more people to work?
Even the interest burden on this debt need not pose a problem. The Fed could simply buy and hold the bonds used to finance the debt. This would mean that the interest is paid to the Fed, which then refunds it to the Treasury at the end of the year. Last year the Fed paid almost $80 billion back to the Treasury. When the economy eventually moves back toward full employment it can raise reserve requirements in the banking system to ensure that the additional reserves don’t lead to inflation.
Zakaria then gives us the right’s caricature of U.S. politics, telling us with reference to policies to promote growth:
“The left and right disagree here as well, with the right focusing more on measures to spur the private sector and the left on government spending.”
Let see, the right tends to be in favor of having the government impose strong patent and copyright monopolies on the market. Is this government involvement spurring the private sector? Does it spur the private sector more than having the government contract with private firms to develop new drugs or new software? If so, it is not obvious how.
How about if the Fed targets a higher rate of inflation (e.g. 3-4 percent) in order to reduce real interest rates and reduce private sector debt burdens. Is this a focus on government spending as opposed to the private sector?
He then tells us that the private sector has been investing furiously around the world but “meagerly” in the United States. If Zakaria had access to the Commerce Department’s data he would know that investment in equipment and software has been rising at almost a 20 percent annual rate over the last year. Actually, investment has been relatively healthy in this downturn.
Zakaria then gives as an example of over-regulation driving business overseas Goldman Sachs’ decision to only offer Facebook shares to its foreign customers. It’s hard to see exactly what the problem is here. Facebook is trying to skirt U.S. laws on disclosure requirements for publicly traded companies. They are apparently able to do this by just selling shares to foreign investors. Perhaps this means that foreign investors will get a good deal or alternatively will get scammed by Facebook, but it is hard to see any important implications for the U.S. economy. This doesn’t affect how many jobs Facebook will create in the United States.
Zakaria then turns to drug development where the Obama administration announced plans for a $1 billion program to help spur progress. He then complains that regulations are the problem, commenting that:
“The Food and Drug Administration takes twice as long to approve a drug as its European counterparts. As a result, health-care research has been moving offshore, particularly as China and India innovate in every product and process.”
Actually this makes no sense whatsoever. Under the TRIPs agreement, countries are prohibiting from providing favorable access rules based on the location of research. This means that the rate at which the FDA approves drugs would have nothing to do with a company’s decision on where to locate its research. We should expect company’s to base their research where it can be done at the lowest cost. They would then look to have drugs approved wherever it is profitable to have them approved. There is no logical connection between the two, even though pharmaceutical industry lobbyists may try to convince members of Congress and gullible columnists that there is.
Those of us who follow economic reporting closely have long recognized the Washington Post’s opinion pages as the mother lode of confused economic thinking. Fareed Zakaria lives up to the standard in today’s column, which offers policy tokens for both the left and right.
He starts by noting that the tax/spending package agreed to by President Obama and the Republicans last year added $900 billion to the deficit over 10 years and then wrongly tells readers:
“We can’t keep playing this game.”
Of course we can. The important point, apparently lost on Zakaria, is that the deal increased the deficit by $900 billion over the next two years. This is a period in which virtually every economic forecast projects the U.S. economy to be well below full employment levels of output. This means that deficit spending will crowd out little or no private investment. So what exactly is the problem with playing this game; that we might put more people to work?
Even the interest burden on this debt need not pose a problem. The Fed could simply buy and hold the bonds used to finance the debt. This would mean that the interest is paid to the Fed, which then refunds it to the Treasury at the end of the year. Last year the Fed paid almost $80 billion back to the Treasury. When the economy eventually moves back toward full employment it can raise reserve requirements in the banking system to ensure that the additional reserves don’t lead to inflation.
Zakaria then gives us the right’s caricature of U.S. politics, telling us with reference to policies to promote growth:
“The left and right disagree here as well, with the right focusing more on measures to spur the private sector and the left on government spending.”
Let see, the right tends to be in favor of having the government impose strong patent and copyright monopolies on the market. Is this government involvement spurring the private sector? Does it spur the private sector more than having the government contract with private firms to develop new drugs or new software? If so, it is not obvious how.
How about if the Fed targets a higher rate of inflation (e.g. 3-4 percent) in order to reduce real interest rates and reduce private sector debt burdens. Is this a focus on government spending as opposed to the private sector?
He then tells us that the private sector has been investing furiously around the world but “meagerly” in the United States. If Zakaria had access to the Commerce Department’s data he would know that investment in equipment and software has been rising at almost a 20 percent annual rate over the last year. Actually, investment has been relatively healthy in this downturn.
Zakaria then gives as an example of over-regulation driving business overseas Goldman Sachs’ decision to only offer Facebook shares to its foreign customers. It’s hard to see exactly what the problem is here. Facebook is trying to skirt U.S. laws on disclosure requirements for publicly traded companies. They are apparently able to do this by just selling shares to foreign investors. Perhaps this means that foreign investors will get a good deal or alternatively will get scammed by Facebook, but it is hard to see any important implications for the U.S. economy. This doesn’t affect how many jobs Facebook will create in the United States.
Zakaria then turns to drug development where the Obama administration announced plans for a $1 billion program to help spur progress. He then complains that regulations are the problem, commenting that:
“The Food and Drug Administration takes twice as long to approve a drug as its European counterparts. As a result, health-care research has been moving offshore, particularly as China and India innovate in every product and process.”
Actually this makes no sense whatsoever. Under the TRIPs agreement, countries are prohibiting from providing favorable access rules based on the location of research. This means that the rate at which the FDA approves drugs would have nothing to do with a company’s decision on where to locate its research. We should expect company’s to base their research where it can be done at the lowest cost. They would then look to have drugs approved wherever it is profitable to have them approved. There is no logical connection between the two, even though pharmaceutical industry lobbyists may try to convince members of Congress and gullible columnists that there is.
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The Post wrongly told readers in a front page news story that “budget analysts across the political spectrum agree that popular Medicare and Social Security programs will have to be overhauled to truly cure the nation’s ills.” This is not true.
For example, a book that was co-authored by Peter Orszag, who had been President Obama’s director of the Office of Management and Budget, and Peter Diamond, a Nobel Laureate and Obama nominee to Fed, suggests relatively modest changes to Social Security. In fact, virtually all budget analysts across the political spectrum agree that the shortfall in the Social Security program is relatively minor.
The Post wrongly told readers in a front page news story that “budget analysts across the political spectrum agree that popular Medicare and Social Security programs will have to be overhauled to truly cure the nation’s ills.” This is not true.
For example, a book that was co-authored by Peter Orszag, who had been President Obama’s director of the Office of Management and Budget, and Peter Diamond, a Nobel Laureate and Obama nominee to Fed, suggests relatively modest changes to Social Security. In fact, virtually all budget analysts across the political spectrum agree that the shortfall in the Social Security program is relatively minor.
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Why does the NYT have to lump Medicare and Social Security together when everyone knows their stories are fundamentally different? According to the Congressional Budget Office, over the next quarter century annual spending on Social Security is projected to increase by an amount equal to 1.4 percentage points of GDP. This is considerably less than the increase in annual defense spending of 1.7 percentage points of GDP between 2001 and 2010. And, Social Security expenditures over this period are fully paid for by past and future Social Security taxes.
In contrast, the cost of Medicare is projected to rise by 2.3 percentage points of GDP over this period, starting from a considerably lower base. The annual cost of Medicaid and other health care programs is projected to rise by 1.9 percentage points. As everyone recognizes, the story of long-term budget deficits is the story of our broken health care system. Why is this so hard to tell the public?
(Thanks to Daniel Alvarado.)
Why does the NYT have to lump Medicare and Social Security together when everyone knows their stories are fundamentally different? According to the Congressional Budget Office, over the next quarter century annual spending on Social Security is projected to increase by an amount equal to 1.4 percentage points of GDP. This is considerably less than the increase in annual defense spending of 1.7 percentage points of GDP between 2001 and 2010. And, Social Security expenditures over this period are fully paid for by past and future Social Security taxes.
In contrast, the cost of Medicare is projected to rise by 2.3 percentage points of GDP over this period, starting from a considerably lower base. The annual cost of Medicaid and other health care programs is projected to rise by 1.9 percentage points. As everyone recognizes, the story of long-term budget deficits is the story of our broken health care system. Why is this so hard to tell the public?
(Thanks to Daniel Alvarado.)
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With reference to intellectual property, the New York Times told readers that, “China has a well-earned reputation for theft.” Intellectual property rules are defined by each country. China can only engage in “theft” if it has set up rules that is violating. In many cases, its laws on intellectual property do not provide clear protection to U.S. firms, therefore they may not be engaging in anything that can be described as “theft.”
This article also misinforms readers about the relative size of the Chinese and U.S. economies. It told readers that China’s per capita income is less than $4,300. This is the measure of income on an exchange rate basis. The more realistic basis for comparison is China’s GDP measured on a purchasing power parity basis, which is $7,400 a year – 75 percent higher.
With reference to intellectual property, the New York Times told readers that, “China has a well-earned reputation for theft.” Intellectual property rules are defined by each country. China can only engage in “theft” if it has set up rules that is violating. In many cases, its laws on intellectual property do not provide clear protection to U.S. firms, therefore they may not be engaging in anything that can be described as “theft.”
This article also misinforms readers about the relative size of the Chinese and U.S. economies. It told readers that China’s per capita income is less than $4,300. This is the measure of income on an exchange rate basis. The more realistic basis for comparison is China’s GDP measured on a purchasing power parity basis, which is $7,400 a year – 75 percent higher.
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The New York Times was touting the prospect of renewed spending by business leading the recovery. There are two major problems with this story. First, investment in equipment and software has already been growing rapidly. Over the last four quarters it has grown at almost a 20 percent annual rate. People who have access to the Commerce Department’s data on GDP (a group that apparently excludes employees of the NYT) are aware of this fact.
The other important fact known to people with access to this data is equipment and software spending is actually a relatively small share of GDP. (There was huge overbuilding of non-residential structures, so it is not plausible to imagine a big pick-up in this sector any time soon.) Equipment and software spending were equal to 7.1 percent of GDP in the third quarter of 2010. This means that even if the growth rate doubles to 40 percent, it would only add 1.4 percentage points to GDP growth. This would have less impact than reducing imports by 10 percent.
In short, while a more rapid pace of investment spending can be helpful, it is unlikely to be sufficient to restore the economy to healthy growth path. That will almost certainly require a reduction in the trade deficit, which in turn depends on a decline in the value of the dollar. The latter is apparently a low or non-existent priority for the Obama administration.
The New York Times was touting the prospect of renewed spending by business leading the recovery. There are two major problems with this story. First, investment in equipment and software has already been growing rapidly. Over the last four quarters it has grown at almost a 20 percent annual rate. People who have access to the Commerce Department’s data on GDP (a group that apparently excludes employees of the NYT) are aware of this fact.
The other important fact known to people with access to this data is equipment and software spending is actually a relatively small share of GDP. (There was huge overbuilding of non-residential structures, so it is not plausible to imagine a big pick-up in this sector any time soon.) Equipment and software spending were equal to 7.1 percent of GDP in the third quarter of 2010. This means that even if the growth rate doubles to 40 percent, it would only add 1.4 percentage points to GDP growth. This would have less impact than reducing imports by 10 percent.
In short, while a more rapid pace of investment spending can be helpful, it is unlikely to be sufficient to restore the economy to healthy growth path. That will almost certainly require a reduction in the trade deficit, which in turn depends on a decline in the value of the dollar. The latter is apparently a low or non-existent priority for the Obama administration.
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An article that discussed President Obama’s public campaign to boost exports told readers that the federal government “has little control” over the value of the dollar. This is not true. The Treasury and Fed could set out to lower the value of the dollar if they opted to do so. This could mean selling dollars in international money markets and buying other countries’ currencies. They could even opt to peg the value of the dollar against other countries currencies, as China has done with the dollar.
In the Clinton years, Robert Rubin had a policy of pushing up the value of the dollar. He put muscle behind this effort through the U.S. control of the IMF at the time of the East Asian financial crisis. The conditions that the IMF imposed were so onerous that developing countries decided that they needed to accumulate massive amounts of reserves in order to avoid being put in a similar situation. This meant accumulating large amounts of dollars. They did this by keeping down the value of their currencies against the dollar (i.e. raising the value of the dollar).
It is very misleading to assert that the value of the dollar is outside of the government’s control. President Obama, like his predecessors, has allowed the dollar to remain over-valued. An over-valued dollar effectively subsidizes imports and imposes a tariff on exports. There is nothing that President Obama’s new competitiveness panel can realistically hope to do that would come close to offsetting the competitive disadvantage created by an over-valued dollar.
An article that discussed President Obama’s public campaign to boost exports told readers that the federal government “has little control” over the value of the dollar. This is not true. The Treasury and Fed could set out to lower the value of the dollar if they opted to do so. This could mean selling dollars in international money markets and buying other countries’ currencies. They could even opt to peg the value of the dollar against other countries currencies, as China has done with the dollar.
In the Clinton years, Robert Rubin had a policy of pushing up the value of the dollar. He put muscle behind this effort through the U.S. control of the IMF at the time of the East Asian financial crisis. The conditions that the IMF imposed were so onerous that developing countries decided that they needed to accumulate massive amounts of reserves in order to avoid being put in a similar situation. This meant accumulating large amounts of dollars. They did this by keeping down the value of their currencies against the dollar (i.e. raising the value of the dollar).
It is very misleading to assert that the value of the dollar is outside of the government’s control. President Obama, like his predecessors, has allowed the dollar to remain over-valued. An over-valued dollar effectively subsidizes imports and imposes a tariff on exports. There is nothing that President Obama’s new competitiveness panel can realistically hope to do that would come close to offsetting the competitive disadvantage created by an over-valued dollar.
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The NYT adopted Washington insider standards today. In order to push a deficit reduction agenda, it told readers that the United States has: “an accumulated debt that is starting to weigh on the economy.”
The article presents absolutely no evidence (literally) to support this assertion. The way an economist would look for evidence that the debt is weighing on the economy is by examining interest rates. The current interest rate on 10-year Treasury bonds is 3.44 percent. This is far lower in both nominal and real terms than it has been (except for the last two years) for most of the last three decades.
In other words, the standard way to measure whether the debt is imposing a burden on the economy is showing clearly that it is not. The NYT’s assertion is just a complete fabrication that has no place in a news article.
The NYT adopted Washington insider standards today. In order to push a deficit reduction agenda, it told readers that the United States has: “an accumulated debt that is starting to weigh on the economy.”
The article presents absolutely no evidence (literally) to support this assertion. The way an economist would look for evidence that the debt is weighing on the economy is by examining interest rates. The current interest rate on 10-year Treasury bonds is 3.44 percent. This is far lower in both nominal and real terms than it has been (except for the last two years) for most of the last three decades.
In other words, the standard way to measure whether the debt is imposing a burden on the economy is showing clearly that it is not. The NYT’s assertion is just a complete fabrication that has no place in a news article.
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The NYT reported in some detail on the plans by conservative Republican House members for large spending cuts. The piece included several comments from Republican members saying that the country was on the edge of default.
It would have been helpful to point out that there is zero evidence to support this contention. Bond holders are willing to hold U.S. government debt at extraordinarily low interest rates. This means that investors who have tens of billions of dollars at stake do not share the concerns about the government’s solvency expressed by these members of Congress.
It is also worth pointing out that the United States would never be in the same box as Greece or Ireland, as asserted by one of the representatives quoted in the article. Since the United States has its own currency, it can always have the Federal Reserve Board buy its debt. This can create a risk of inflation (in the current economic environment this risk is near zero), but there is no possibility that U.S. debt will lack buyers, as was the case with Greece and Ireland.
In other words, this is a totally imaginary threat, like the prospect of Martians invading. It is possible that members really fear an attack from Martians, but responsible news reporting should point out that there is no basis in reality for such fears.
The NYT reported in some detail on the plans by conservative Republican House members for large spending cuts. The piece included several comments from Republican members saying that the country was on the edge of default.
It would have been helpful to point out that there is zero evidence to support this contention. Bond holders are willing to hold U.S. government debt at extraordinarily low interest rates. This means that investors who have tens of billions of dollars at stake do not share the concerns about the government’s solvency expressed by these members of Congress.
It is also worth pointing out that the United States would never be in the same box as Greece or Ireland, as asserted by one of the representatives quoted in the article. Since the United States has its own currency, it can always have the Federal Reserve Board buy its debt. This can create a risk of inflation (in the current economic environment this risk is near zero), but there is no possibility that U.S. debt will lack buyers, as was the case with Greece and Ireland.
In other words, this is a totally imaginary threat, like the prospect of Martians invading. It is possible that members really fear an attack from Martians, but responsible news reporting should point out that there is no basis in reality for such fears.
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The NYT ran a piece profiling Gene Sperling, the new head of President Obama’s National Economic Council (NEC), that could have been a paid advertisement. The piece completely ignores the economic imbalances that developed under the Clinton administration and hit their peaks during Sperling’s tenure as NEC head, most notably the stock bubble and trade deficit caused by an over-valued dollar.
The article gives Sperling credit for coming up with the idea of using the budget surpluses at the end of the Clinton years to “save Social Security,” which thereby prevented this money from being either spent or given back in tax cuts. It would have been worth noting that the surplus eventually disappeared as a result of the collapse of the stock bubble and the stimulus measures necessary to get the economy back on its feet.
The NYT ran a piece profiling Gene Sperling, the new head of President Obama’s National Economic Council (NEC), that could have been a paid advertisement. The piece completely ignores the economic imbalances that developed under the Clinton administration and hit their peaks during Sperling’s tenure as NEC head, most notably the stock bubble and trade deficit caused by an over-valued dollar.
The article gives Sperling credit for coming up with the idea of using the budget surpluses at the end of the Clinton years to “save Social Security,” which thereby prevented this money from being either spent or given back in tax cuts. It would have been worth noting that the surplus eventually disappeared as a result of the collapse of the stock bubble and the stimulus measures necessary to get the economy back on its feet.
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The Post reported on the better than expected numbers on existing home sales reported for December. It told readers that:
“Low interest rates, relatively affordable prices and tentative optimism about the economy helped lure buyers in December.”
Actually, the data on existing home sales reports on closed sales in December. It generally takes 6-8 weeks between when a house contract is signed and when the sales are closed. This means that the December data reflect attitudes in October and early November, not December.
The Post reported on the better than expected numbers on existing home sales reported for December. It told readers that:
“Low interest rates, relatively affordable prices and tentative optimism about the economy helped lure buyers in December.”
Actually, the data on existing home sales reports on closed sales in December. It generally takes 6-8 weeks between when a house contract is signed and when the sales are closed. This means that the December data reflect attitudes in October and early November, not December.
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