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Article Artículo

How Much Do We Learn About Trade and Poverty in the Developing World from a NYT Article Ostensibly Telling Us About Trade?

Honesty goes out the door when a major trade deal is being debated. This means that politicians, academics, and major news outlets, like the NYT, discard normal standards to push the trade pact. The basic point is that lots of profits are on the line for the corporations for whom the deal was negotiated, and in that situation, truth is a luxury that can't be afforded.

In this vein, we get the NYT Magazine piece by Nathaniel Popper asking in its title, "how much do we really know about trade?" The story in this piece is that opening the U.S. market to developing countries has led to huge reductions of poverty in the developing world. He gives the example of Vietnam:

"A young Canadian economist at Wilfrid Laurier University, Brian McCaig, studied what happened in Vietnam immediately after the United States slashed tariffs on goods from that country in 2001 — a bilateral trade agreement similar to many others before and since that have opened up the United States to manufactured goods from Asia. He found that over the next three years, as the value of apparel and clothing accessories going to the United States from Vietnam rose by 277 percent, the poverty level in Vietnam fell to 19.5 percent from 28.9 percent, twice as fast as it had fallen in the preceding four years and enough to lift about seven million people out of poverty. This wasn’t American food-stamp poverty those Vietnamese were escaping; it was malnourished, dollar-a-day poverty."

Popper goes on to describe the enormous growth in China and the improvements in living standards it has meant for hundreds of millions of people. He then points out that opening to the developing world has also meant lower cost goods for moderate income people in the United States, but then we get back to the developing world:

"He [M.I.T. economist David Autor] told me that whatever the virtues or costs in the United States, they pale in comparison with the basic humanitarian benefits that people in places like China and Vietnam have experienced as a result of trade with the United States. 'The gains to the people who benefited are so enormous — they were destitute, and now they were brought into the global middle class,' Autor says. 'The fact that there are adverse consequences in the United States should be taken seriously, but it doesn’t tilt the balance.'"

Okay, let's get the story here straight. Developing countries owe their growth to the fact that they ran large trade surpluses with the United States. It's great that so many economists will make this sort of assertion since it runs 180 degrees at odds with standard trade theory.

Capital is plentiful in rich countries, it is scarce in poor countries. This means that it is supposed to flow from slow growing rich countries, where it gets a low return, to fast-growing developing countries where it gets a high return. This means rich countries should run have a capital account deficit with developing countries as capital flows out. That would correspond to rich countries running trade surpluses with developing countries. Developing countries would be running trade deficits that would allow them to build up their capital stocks at the same time they maintain the living standards of their populations.

Now we have Mr. Popper and his crew of economists telling us that the opposite had to happen to allow the poor in developing world to escape poverty. It's interesting that they think we have to throw away long established trade theory.

CEPR / September 16, 2016

Article Artículo

Inequality

United States

Workers

Changes in Household Size Have Reduced, Not Increased, Economic Inequality

If you listen to enough debates on economic inequality, there is one assertion you are bound to hear from those defending the status quo: the inequality statistics are bunk. Basically, the dramatic increase in economic inequality over the past 40 years is a mirage.

Consider, for example, the frequent assertion about differences in household size. This argument is relatively straightforward: statistics on household income inequality don’t adjust for differences in the number of people per household, and therefore likely overstate economic inequality. For example, $80,000 split between a husband and wife with no children can provide roughly the same standard of living as $40,000 for a single individual; therefore, even if statistics on household inequality show that the first household makes twice as much as the second, there is little to no difference in economic well-being.

However, data released earlier this week from the Census Bureau show that disparities in household size have little impact on measures of economic inequality. Furthermore, to the extent that these disparities do matter, their importance has decreased over time; this means that the rise in economic inequality has actually been more significant than the normal statistics indicate.

CEPR and Nicolas Buffie / September 15, 2016

Article Artículo

Men Who Don’t Work: When Did Economists Stop Being Wrong About the Economy?

By Cherrie Bucknor and Dean Baker

The 4.9 percent unemployment rate is getting close to most economists’ estimates of full employment. In fact, it is below many estimates from recent years and some current ones. Many policy types, including some at the Federal Reserve Board, take this as evidence that it’s necessary to raise interest rates in order to keep the unemployment rate from falling too low and triggering a round of spiraling inflation.

The argument on the other side is first and foremost there is zero evidence that inflation is about to start spiraling upward. The Fed’s key measure, the core personal consumption expenditure deflator, remains well below the Fed’s target and shows no evidence of acceleration. The same is true of most wage growth measures.

But there is also good reason for skepticism on the current unemployment rate as a useful measure of labor market tightness. Other measures of labor market tightness, such as the percentage of workers employed part-time for economic reasons and the share of unemployment due to voluntary quits, remain close to recession levels.

Most importantly, there has been a sharp drop in labor force participation rates. As a result, in spite of the relatively low unemployment rate, the employment rate is still close to 3.0 percentage points below its pre-recession level. This story holds up even if we restrict ourselves to looking at prime-age workers (between the ages of 25–54), with an EPOP that is close to 2.0 percentage points below pre-recession levels and almost 4.0 percentage points below 2000 peaks.[1]

The response of the proponents of higher interest rates has been to attribute this drop to a problem with prime-age men rather than a lack of demand in the economy. For example, Tyler Cowen argued that less educated men were watching Internet porn and playing video games rather than working. The problem with this explanation is that the decline in EPOPs is comparable for non-college educated men and women. There is also a decline in EPOPs since 2000 for both college educated men and women, albeit a smaller one than for their less-educated counterparts.

CEPR / September 14, 2016

Article Artículo

Economic Growth

United States

Should the Fed’s Short-Term Inflation Target be Greater than 2.0 Percent?

On January 25, 2012, the Federal Reserve (“Fed”) announced that it would target an inflation rate of 2.0 percent per year. In its press release, the Fed stated:

“The inflation rate over the longer run is primarily determined by monetary policy, and hence the Committee has the ability to specify a longer-run goal for inflation. The Committee judges that inflation at the rate of 2 percent…is most consistent over the longer run with the Federal Reserve's statutory mandate.”

In public debates, this statement has frequently been misinterpreted in at least two ways. The first relates to treating 2.0 percent as a ceiling rather than a target; the second relates to the timeframe over which the target is supposed to be achieved. 

With respect to the first issue: because 2.0 percent is a target, the Fed should find 1.0 percent inflation just as problematic as 3.0 percent inflation. However, some members of the Fed have been treating 2.0 percent more like a ceiling than a middle-of-the-road target. About two weeks ago, Vice Chairman of the Fed Stanley Fischer praised the U.S. economy partially on the basis that inflation was “within hailing distance” of the Fed’s target. Other members of the Fed have made similar statements.

CEPR and Nicolas Buffie / September 14, 2016

Article Artículo

Women

Why Doesn't the WaPo Care About Plunging Employment for Prime-Age Women?

In a Sunday editorial the Washington Post touted the strength of the economy. While it got some things right, it also showed some serious confusion.

At the top of the list is its concern for the declining labor force participation rates for prime-age men (ages 25–54). This is not a men's problem, there has also been a comparable decline in the employment rates for prime-age women. (Employment rates are a better measure than participation rates because many people who are not working continue to look for work as long as they are eligible for unemployment benefits. With stricter eligibility rules in place now than a quarter century ago, a smaller share of the non-employed are counting as unemployed. Using the employment rate gets around this problem.)

fredgraph5

As can be seen, the employment rate (EPOP) for prime-age women is down by more than 2.0 percentage points from its pre-recession level and more than 4.0 percentage points from its 2000 peak. This drop is especially striking since the EPOP for women had been rising in the late 1990s and was projected to continue to rise by the Social Security Trustees, the Congressional Budget Office and most other forecasters.

The fact that the EPOP has fallen for prime-age women, and not just men, indicates that the problem is not some peculiarity of prime-age men, but rather a lack of demand in the labor market. This could be remedied by increasing demand in the economy, but this has been prevented by deficit hawks, like the Washington Post and the various Peter Peterson-funded organizations and their followers in Congress. In fact, even in this piece, the government debt is listed as a major problem in spite of the fact that the burden of debt service is near a post-war low.

CEPR / September 11, 2016