August 07, 2011
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!]
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