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Article Artículo

Robert Samuelson's Psychological Problems

Robert Samuelson is convinced that the U.S. economy is suffering from psychological problems. In a piece titled, "why job creation is so hard" he tells readers:

"We have gone from being an expansive, risk-taking society to a skittish, risk-averse one."

Point number one is the rise in the saving rate:

"In the boom years, the personal saving rate (savings as a share of after-tax income) fell from 10.9 percent in 1982 to 1.5?percent in 2005. Now it’s edging up; from 2010 to 2012, it averaged 4.4 percent."

Is this really a matter of psychology? People have lost $8 trillion in housing wealth as a result of the collapse of the bubble. Homeless people generally don't spend much money, is this due to psychological issues? As Samuelson noted, in the pre-bubble years the saving rate averaged more than 8 percent. If anything, we should be surprised by how much people are spending.

Next we have investment. Samuelson tells us:

"Businesses have also retreated. They resist approving the next loan, job hire or investment. Since 1959, business investment in factories, offices and equipment has averaged 11 percent of the economy (gross domestic product) and peaked at nearly 13 percent. It’s now a shade over 10 percent, reports economist Nigel Gault of IHS Global Insight."

Okay, let's look at this one more closely. If we check the data, the Commerce Department tells us that business investment averaged 10.9 percent from 1959 to 2012 (Table 1.1.5). In 2012 it was 10.3 percent. That's a drop of 0.6 percentage points in an economy with huge amounts of excess capacity. Furthermore, if we break it down to the equipment and software component and the structure component, we see that all of the decline was in the latter. Equipment and software investment averaged 7.3 percent over the longer period compared to 7.4 percent in 2012. While the decline in structure investment may be due to psychology, it is possible that the large amount of vacant office and retail space is also an important factor.

Dean Baker / February 18, 2013

Article Artículo

Ecuador

Latin America and the Caribbean

World

Reporting Ahead of Ecuadorean Elections Fits a Familiar Narrative

International media reporting ahead of Ecuador’s elections today has sounded familiar themes, understating the achievements of the Rafael Correa government and attributing Ecuador’s recent economic and social progress to “luck” or happenstance, and high oil prices. Correa is depicted as an enemy of press freedom, despite the fact that Ecuadorean media is uncensored and the majority of it opposes the government; and despite his granting of political asylum to Julian Assange. He is also depicted as a member of Latin America’s “bad left” who has ambitions of regional leadership should “bad left” leader Hugo Chávez succumb to illness or otherwise be unable to continue in office.

A common theme in press accounts is that the Correa administration’s social programs are “funded by the country's oil proceeds.” While some reporting has gone deeper and noted that “Correa has taken on big business and media groups, imposing new contracts on oil companies and renegotiating the country's debt while touting his poverty reduction efforts,” others have not. “High prices for oil exports resulted in higher revenues which the government invested in social programs and public infrastructure,” the Christian Science Monitor reported in a Friday article. The New York Times’  William Neuman presented a contradictory picture of the economic importance of Ecuador’s petroleum sector, writing that “Ecuador is the smallest oil producer in the Organization of the Petroleum Exporting Countries, yet oil sales account for about half of the country’s income from exports and about a third of all tax revenues, according to the United States Energy Information Administration,” just before stating in the next paragraph that “Mr. Correa has taken advantage of high oil prices to put money into social programs, earning him immense popularity, especially among the country’s poor.”

Petroleum exports have been important to Ecuador’s economy for a long time; this did not suddenly come about with Correa. While Correa was favored by high oil prices during most of his six years in office, the collapse of oil prices in 2008 was a major blow to the economy.  Also, an important change during Correa’s first term has been the Ecuadorean government’s relationship with foreign oil companies. Correa notably has driven a much harder bargain than his predecessors, “imposing a windfall profits tax for concessions made to companies for the exploitation of domestic natural resources” that “raised over $500 million for the government in 2010,” as our latest paper notes. A raft of financial and regulatory reforms have also put a considerable amount of revenue in the government’s coffers, contributing to the increase  from 27 percent of GDP in 2006 to more than 40 percent in 2012. Stimulus spending – 5 percent of GDP in 2009 – boosted the economy and allowed Ecuador to get through the global recession with minimal damage, losing only about 1.3 percent of GDP during three quarters of recession, despite being one of the hardest hit countries in the hemisphere by external shocks. Non-petroleum sectors such as construction, commerce and services have also been important drivers of growth in recent years, including in 2011, when Ecuador had some of the highest real GDP growth in the region at 7.8 percent, second only to Argentina in South America.

CEPR / February 17, 2013

Article Artículo

The Educate a Cab Driver, Educate Thomas Friedman Campaign

Thomas Friedman is once again mass marketing misinformation on economics, something that he does all too frequently. Just about everything in the piece is 180 degrees wrong: the Friedman standard.

It begins by telling us that Tim Cook and Apple are sitting on $137 billion that they could be investing:

"Apple is currently sitting on $137 billion of cash in the bank. There are many reasons Apple has not spent its cash horde, but I’ll bet anything that one of them is the uncertain economic and tax environment in this country. Think about how much better we’d all be if Apple, and the many other companies sitting on cash, felt confident enough in the future to spend it. These are the most dynamic companies in the world. They don’t need any government help to innovate."

Okay, Apple is so uncertain about the economic and tax environment in the U.S. that they don't invest. (Funny how that works since they sell largely to a world market of which the U.S. is a substantial part, but not the majority.) Friedman goes on:

"Message: There is no doubt our economy is primarily being held back by the deleveraging and drop in demand that resulted from the 2008 financial crisis. But they are being reinforced today by uncertainty and worry that we do not have our political house in order and, therefore, our tax, regulatory, pension and entitlement frameworks are all in play. So businesses, investors and consumers all hold back just enough for us not to be able to move the growth and employment meters with any robust momentum."

Okay, let's imagine that one of Friedman's cab drivers had access to the Internet and could go to the National Income and Product Accounts that the Commerce Department posts. The cab driver would explain to Friedman that investment in equipment and software is actually pretty healthy. Measured as a share of GDP it is almost back to its pre-recession level. Furthermore, apart from the tech bubble days of the late 90s it has never been much higher than it is today. Here's the picture.

equip-software-inv-11-2012

Source: Bureau of Economic Analysis.

Dean Baker / February 17, 2013