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For many years we regularly saw news stories, like this Washington Post piece, telling us that the official data on the bilateral U.S. trade deficit was hugely exaggerated. The argument was that we count the full value of a final good imported from China in calculating our trade deficit, even though much of the value added came from other countries.
The classic case is an iPhone exported from China to the U.S. We would count the full value of the iPhone as an import from China even though the vast majority of the value added came from other countries. This Post piece cites a study showing that the trade deficit with China would be reduced by 40 percent if we subtracted the value of all intermediate goods produced in third countries. (An honest assessment would also add in the intermediate goods manufactured in China that come to the U.S. in imports from Japan, the European Union, and elsewhere.)
This argument about an overstatement of the China trade deficit was frequently used to argue that people were wrong to be concerned about the bilateral trade deficit. Remarkably, now that Trump has embarked on his trade war with China, the media are telling us that China’s exports to the U.S. actually were a huge deal for its economy.
The NYT ran the strongest piece in this vein, telling readers that the trade war truce “could enshrine a global economic shift.” The homepage lead said that it could “unseat China as the world’s factory floor.”
For fans of logic and arithmetic, we can’t both have China’s trade deficit with the U.S. being no big deal and also a scenario where reducing the deficit unseats China as the world’s factory floor. To see what the actual story might be, a little data is helpful.
The U.S. trade deficit with China peaked at $420 billion in 2018. China’s GDP measured in dollar terms is $14.2 trillion this year. (Measured at purchasing power parity it’s $27.3 trillion. For this question, it is appropriate to use the exchange rate measure.)
If we use the great wisdom from the Washington Post piece and say that our trade deficit with China is just 60 percent of the official figure, then it came to $252 billion in 2018. If we assume an extreme effect of the trade war and the deficit falls by 50 percent (that’s way more than the impact seen to date), China would see a reduction in its trade surplus with the U.S. of $126 billion. That’s just under 0.9 percent of its GDP. It’s a bit hard to believe a loss of net exports equal to 0.9 percent of China’s GDP will fundamentally alter its position in the global economy.
Even if we use the official data the loss would be $210 billion or just under 1.5 percent of GDP. It’s still hard to imagine that fundamentally changing China’s economy, and this is assuming an impact of the trade war that is absurdly high.
Anyhow, the moral of this story is that our top media outlets are perfectly willing to play with the data to tell a story. They don’t care if their story directly contradicts other stories they tell. They just assume that no one will notice.
For many years we regularly saw news stories, like this Washington Post piece, telling us that the official data on the bilateral U.S. trade deficit was hugely exaggerated. The argument was that we count the full value of a final good imported from China in calculating our trade deficit, even though much of the value added came from other countries.
The classic case is an iPhone exported from China to the U.S. We would count the full value of the iPhone as an import from China even though the vast majority of the value added came from other countries. This Post piece cites a study showing that the trade deficit with China would be reduced by 40 percent if we subtracted the value of all intermediate goods produced in third countries. (An honest assessment would also add in the intermediate goods manufactured in China that come to the U.S. in imports from Japan, the European Union, and elsewhere.)
This argument about an overstatement of the China trade deficit was frequently used to argue that people were wrong to be concerned about the bilateral trade deficit. Remarkably, now that Trump has embarked on his trade war with China, the media are telling us that China’s exports to the U.S. actually were a huge deal for its economy.
The NYT ran the strongest piece in this vein, telling readers that the trade war truce “could enshrine a global economic shift.” The homepage lead said that it could “unseat China as the world’s factory floor.”
For fans of logic and arithmetic, we can’t both have China’s trade deficit with the U.S. being no big deal and also a scenario where reducing the deficit unseats China as the world’s factory floor. To see what the actual story might be, a little data is helpful.
The U.S. trade deficit with China peaked at $420 billion in 2018. China’s GDP measured in dollar terms is $14.2 trillion this year. (Measured at purchasing power parity it’s $27.3 trillion. For this question, it is appropriate to use the exchange rate measure.)
If we use the great wisdom from the Washington Post piece and say that our trade deficit with China is just 60 percent of the official figure, then it came to $252 billion in 2018. If we assume an extreme effect of the trade war and the deficit falls by 50 percent (that’s way more than the impact seen to date), China would see a reduction in its trade surplus with the U.S. of $126 billion. That’s just under 0.9 percent of its GDP. It’s a bit hard to believe a loss of net exports equal to 0.9 percent of China’s GDP will fundamentally alter its position in the global economy.
Even if we use the official data the loss would be $210 billion or just under 1.5 percent of GDP. It’s still hard to imagine that fundamentally changing China’s economy, and this is assuming an impact of the trade war that is absurdly high.
Anyhow, the moral of this story is that our top media outlets are perfectly willing to play with the data to tell a story. They don’t care if their story directly contradicts other stories they tell. They just assume that no one will notice.
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Seriously, that’s what a piece on the state of China’s economy told readers.
“Another headache is China’s demographic problem, namely that it is running out workers thanks to the failure of its now-abandoned one-child policy. With growth slowing, China faces a race to avoid the dreaded “middle-income trap” where the economy of developing countries stagnates once the low-hanging fruit of industrialisation has been picked but before income has been spread widely enough around the population. China is expanding its technology industry as fast as it can to build-up high-value manufacturing but, as the Huawei standoff shows, the policy is bringing conflict with the west.”
Fans of logic and arithmetic know that countries don’t “run out of workers.” In a tight labor market, workers move from lower paying lower productivity jobs to higher paying higher productivity jobs. This means that we are likely to see fewer people working the late-night shift in convenience stores or as valets in restaurants. They will instead work at better-paying jobs. Of course, the people who depend on low-paid workers (the “hard to get good help” crowd) will suffer. (Also, don’t forget that we are supposed to be worried about robots taking all the jobs.)
While there are serious human rights issues associated with China’s one-child policy (these are hugely exaggerated, the killing of female infants happened throughout the region in countries that did not have a one-child policy), the slowing of China’s population growth was a great thing for the environment. In 1975, China’ population was roughly 50 percent larger than India’s population. Currently, they are almost the same, with India projected to pass China in the next decade.
If China’s population had grown at the same pace as India’s since 1975 there would be another 650 million people on the planet. This would make the prospect of limiting the damage from greenhouse gas emissions hugely more difficult.
Seriously, that’s what a piece on the state of China’s economy told readers.
“Another headache is China’s demographic problem, namely that it is running out workers thanks to the failure of its now-abandoned one-child policy. With growth slowing, China faces a race to avoid the dreaded “middle-income trap” where the economy of developing countries stagnates once the low-hanging fruit of industrialisation has been picked but before income has been spread widely enough around the population. China is expanding its technology industry as fast as it can to build-up high-value manufacturing but, as the Huawei standoff shows, the policy is bringing conflict with the west.”
Fans of logic and arithmetic know that countries don’t “run out of workers.” In a tight labor market, workers move from lower paying lower productivity jobs to higher paying higher productivity jobs. This means that we are likely to see fewer people working the late-night shift in convenience stores or as valets in restaurants. They will instead work at better-paying jobs. Of course, the people who depend on low-paid workers (the “hard to get good help” crowd) will suffer. (Also, don’t forget that we are supposed to be worried about robots taking all the jobs.)
While there are serious human rights issues associated with China’s one-child policy (these are hugely exaggerated, the killing of female infants happened throughout the region in countries that did not have a one-child policy), the slowing of China’s population growth was a great thing for the environment. In 1975, China’ population was roughly 50 percent larger than India’s population. Currently, they are almost the same, with India projected to pass China in the next decade.
If China’s population had grown at the same pace as India’s since 1975 there would be another 650 million people on the planet. This would make the prospect of limiting the damage from greenhouse gas emissions hugely more difficult.
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Ruchir Sharma again used a New York Times column to complain about plans put forward by Elizabeth Warren and Donald Trump (more the former than the latter) to lower the value of the dollar to make U.S. goods and services more competitive in the world economy. While he raises a number of geopolitical arguments, the gist of his economic argument is that the U.S. is able to run large and persistent trade deficits because the dollar is the leading reserve currency in the world. (Hence the “exorbitant privilege.”)
This ability to run large trade deficits could be a good thing, if we had an economy that was generally near full employment. In that case, the deficit on trade allows us to consume and invest more than would otherwise be possible. However, few serious economists would argue that we have been at or near full employment in the last decade.
Many, if not most, mainstream economists have embraced the idea of “secular stagnation.” This is a more complicated way of saying insufficient demand. In other words, the U.S. economy has not been at or near full employment for the last decade because it has not had enough demand.
A big part of the “not enough demand” story is the trade deficit. If we had balanced trade instead of a deficit of 3.0 percent of GDP, it would have roughly the same impact on aggregate demand as a $600 billion annual stimulus program, all of it in the form of government spending. In other words, the “exorbitant privilege” has been the privilege of having an economy that has been operating well below full employment, with lots of excess capacity.
But wait, there’s more. Because manufacturing goods account for the overwhelming majority of traded items, the large trade deficit translates into a loss of millions of manufacturing jobs. Since manufacturing jobs have historically been a source of relatively high-paying employment for workers without college degrees, the trade deficit has been a big factor in the rise in inequality, especially in the last two decades as the over-valued dollar caused it to explode.
So, “exorbitant privilege” translates into secular stagnation and increased inequality. And Elizabeth Warren wants to jeopardize this with her plans to lower the value of the dollar.
Ruchir Sharma again used a New York Times column to complain about plans put forward by Elizabeth Warren and Donald Trump (more the former than the latter) to lower the value of the dollar to make U.S. goods and services more competitive in the world economy. While he raises a number of geopolitical arguments, the gist of his economic argument is that the U.S. is able to run large and persistent trade deficits because the dollar is the leading reserve currency in the world. (Hence the “exorbitant privilege.”)
This ability to run large trade deficits could be a good thing, if we had an economy that was generally near full employment. In that case, the deficit on trade allows us to consume and invest more than would otherwise be possible. However, few serious economists would argue that we have been at or near full employment in the last decade.
Many, if not most, mainstream economists have embraced the idea of “secular stagnation.” This is a more complicated way of saying insufficient demand. In other words, the U.S. economy has not been at or near full employment for the last decade because it has not had enough demand.
A big part of the “not enough demand” story is the trade deficit. If we had balanced trade instead of a deficit of 3.0 percent of GDP, it would have roughly the same impact on aggregate demand as a $600 billion annual stimulus program, all of it in the form of government spending. In other words, the “exorbitant privilege” has been the privilege of having an economy that has been operating well below full employment, with lots of excess capacity.
But wait, there’s more. Because manufacturing goods account for the overwhelming majority of traded items, the large trade deficit translates into a loss of millions of manufacturing jobs. Since manufacturing jobs have historically been a source of relatively high-paying employment for workers without college degrees, the trade deficit has been a big factor in the rise in inequality, especially in the last two decades as the over-valued dollar caused it to explode.
So, “exorbitant privilege” translates into secular stagnation and increased inequality. And Elizabeth Warren wants to jeopardize this with her plans to lower the value of the dollar.
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That would have been a useful piece of information to include in a Washington Post article on couples taking on debt to pay for the costs of their weddings. The piece told readers:
“Demand among Americans, who are already holding record levels of debt, for help financing weddings are giving rise to an industry of personal loans marketed specifically to brides and grooms.”
While debt is at record levels, so is income levels and asset levels. It is pretty meaningless to tell readers that debt is at a record level without any context. The most relevant measure is the ratio of debt service, the cost of bearing the debt, relative to household income.
The ratio of debt service, or a broader measure that includes rent, is actually near its lowest point in the last forty years according to data from the Federal Reserve Board. This doesn’t quite fit the story of a nation drowning in debt, although there are undoubtedly many households facing serious difficulties paying off their debts.
That would have been a useful piece of information to include in a Washington Post article on couples taking on debt to pay for the costs of their weddings. The piece told readers:
“Demand among Americans, who are already holding record levels of debt, for help financing weddings are giving rise to an industry of personal loans marketed specifically to brides and grooms.”
While debt is at record levels, so is income levels and asset levels. It is pretty meaningless to tell readers that debt is at a record level without any context. The most relevant measure is the ratio of debt service, the cost of bearing the debt, relative to household income.
The ratio of debt service, or a broader measure that includes rent, is actually near its lowest point in the last forty years according to data from the Federal Reserve Board. This doesn’t quite fit the story of a nation drowning in debt, although there are undoubtedly many households facing serious difficulties paying off their debts.
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In talking about learning lessons from the collapse of the housing bubble and Great Recession, E.J. Dionne and leaders of the Wall Street-funded Third Way group both showed they have not learned any lessons. Dionne approvingly quotes Matt Bennet, Third Way’s executive vice-president for public affairs:
“We need to be working to tame capitalism at this moment, because it is not functioning well, …”
The quote implies that upward redistribution of the last four decades is simply the result of untamed capitalism. That may be a convenient view for the beneficiaries of this upward redistribution (hey, it was just the natural workings of the market), but it is 180 degrees at odds with reality.
The longer and stronger and patent and copyright protection of the last four decades, which transfers many hundreds of billions of dollars upward each year (and is the reason prescription drugs are expensive) had nothing to do with an untamed market. This was the result of deliberately structuring of the market by Bennet’s political allies.
Similarly, the financial system has been structured to allow some people to get enormously rich while contributing nothing to the economy. This has included things like rewriting bankruptcy rules on home mortgages and derivatives to facilitate trading. It also means allowing private equity partners to ripoff public pension funds. And, it means that big banks enjoy too big to fail insurance.
And we structured our trade deals to put downward pressure on the wages of the 70 percent of the workforce without college degrees while protecting the most highly paid professionals, such as doctors and dentists. Also, beginning with Robert Rubin in the 1990s, we pushed for an over-valued dollar that put more downward pressure on the pay of less-educated workers.
It is absurd to pretend that the massive upward redistribution of the last four decades was just capitalism running wild. This upward redistribution was the deliberate design of the leadership of both political parties. (Yes, this is the topic of Rigged [it’s free].)
In talking about learning lessons from the collapse of the housing bubble and Great Recession, E.J. Dionne and leaders of the Wall Street-funded Third Way group both showed they have not learned any lessons. Dionne approvingly quotes Matt Bennet, Third Way’s executive vice-president for public affairs:
“We need to be working to tame capitalism at this moment, because it is not functioning well, …”
The quote implies that upward redistribution of the last four decades is simply the result of untamed capitalism. That may be a convenient view for the beneficiaries of this upward redistribution (hey, it was just the natural workings of the market), but it is 180 degrees at odds with reality.
The longer and stronger and patent and copyright protection of the last four decades, which transfers many hundreds of billions of dollars upward each year (and is the reason prescription drugs are expensive) had nothing to do with an untamed market. This was the result of deliberately structuring of the market by Bennet’s political allies.
Similarly, the financial system has been structured to allow some people to get enormously rich while contributing nothing to the economy. This has included things like rewriting bankruptcy rules on home mortgages and derivatives to facilitate trading. It also means allowing private equity partners to ripoff public pension funds. And, it means that big banks enjoy too big to fail insurance.
And we structured our trade deals to put downward pressure on the wages of the 70 percent of the workforce without college degrees while protecting the most highly paid professionals, such as doctors and dentists. Also, beginning with Robert Rubin in the 1990s, we pushed for an over-valued dollar that put more downward pressure on the pay of less-educated workers.
It is absurd to pretend that the massive upward redistribution of the last four decades was just capitalism running wild. This upward redistribution was the deliberate design of the leadership of both political parties. (Yes, this is the topic of Rigged [it’s free].)
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That’s what the Washington Post told readers in reference to the drug BCG, a treatment for early-stage bladder cancer. According to the Post article, there is now a worldwide shortage of BCG. The reason is that the manufacturer, Merck, is producing at the capacity of its manufacturing facility, but the current price does not justify the expenditures associated with building a new facility. The piece tells us that Merck doesn’t want to raise the price because it is worried that it will be seen like Martin Shkreli, who raised the price on single-source generic drugs by more than 5000 percent. (BCG is now off patent and available as a generic.)
While it is possible that Merck really fears that its public relations people are so incredibly inept that they would not be able to make the distinction between price increases to cover manufacturing costs and price increases to gouge consumers, it is also possible that Merck thought it would be good to create a shortage of a drug needed to treat a potentially fatal disease in order to support the case for higher drug prices.
The Post article doesn’t give us a basis for assessing this alternative explanation. In fact, it never mentions the alternative explanation. This suggests that if the alternative explanation is, in fact, the true one (i.e. Merck wanted to create a shortage to create more public support for high drug prices), then Merck has been effective in advancing its goals.
That’s what the Washington Post told readers in reference to the drug BCG, a treatment for early-stage bladder cancer. According to the Post article, there is now a worldwide shortage of BCG. The reason is that the manufacturer, Merck, is producing at the capacity of its manufacturing facility, but the current price does not justify the expenditures associated with building a new facility. The piece tells us that Merck doesn’t want to raise the price because it is worried that it will be seen like Martin Shkreli, who raised the price on single-source generic drugs by more than 5000 percent. (BCG is now off patent and available as a generic.)
While it is possible that Merck really fears that its public relations people are so incredibly inept that they would not be able to make the distinction between price increases to cover manufacturing costs and price increases to gouge consumers, it is also possible that Merck thought it would be good to create a shortage of a drug needed to treat a potentially fatal disease in order to support the case for higher drug prices.
The Post article doesn’t give us a basis for assessing this alternative explanation. In fact, it never mentions the alternative explanation. This suggests that if the alternative explanation is, in fact, the true one (i.e. Merck wanted to create a shortage to create more public support for high drug prices), then Merck has been effective in advancing its goals.
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An otherwise useful NYT article on the ending of Mario Draghi’s tenure as the president of the European Central Bank (ECB) included the bizarre assertion that restraining inflation is “traditionally a central bank’s only task.” This is not at all true, as central banks around the world have often acted to increase employment and maintain financial stability. In fact, the Federal Reserve Board quite explicitly has a dual mandate for price stability and high employment.
The piece is correct in asserting that the ECB charter makes price stability the bank’s only goal, but the ECB is an outlier in this respect. It also is worth remembering that the ECB is a relatively new institution, just coming into existence in 1998, so it was not long able to stick to the single goal of price stability laid out in its charter. (In one of the great absurd moments in history Jean Claude Trichet, Draghi’s predecessor, praised himself at his retirement event for keeping inflation under the ECB’s 2.0 percent target. At the time, the euro was on the edge of collapse, with Greece, Italy, and Spain on the verge of being forced out of the euro.)
An otherwise useful NYT article on the ending of Mario Draghi’s tenure as the president of the European Central Bank (ECB) included the bizarre assertion that restraining inflation is “traditionally a central bank’s only task.” This is not at all true, as central banks around the world have often acted to increase employment and maintain financial stability. In fact, the Federal Reserve Board quite explicitly has a dual mandate for price stability and high employment.
The piece is correct in asserting that the ECB charter makes price stability the bank’s only goal, but the ECB is an outlier in this respect. It also is worth remembering that the ECB is a relatively new institution, just coming into existence in 1998, so it was not long able to stick to the single goal of price stability laid out in its charter. (In one of the great absurd moments in history Jean Claude Trichet, Draghi’s predecessor, praised himself at his retirement event for keeping inflation under the ECB’s 2.0 percent target. At the time, the euro was on the edge of collapse, with Greece, Italy, and Spain on the verge of being forced out of the euro.)
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