Dean Baker
The Exchange (Yahoo! Finance), October 26, 2012

October 26, 2012

October 26, 2012 (GDP Byte)

Robert Samuelson was sufficiently outraged by a NYT editorial claiming that the government creates jobs that for the first time in his 35 years as a columnist he felt the need to attack a newspaper editorial. Samuelson called the NYT view "the flat earth theory of job creation" in his column's headline. Since on its face it might be a bit hard to understand -- there are lots of people who do work for the government and get paychecks -- let's look more closely at what Samuelson has to say on the topic. 

Samuelson tells readers:

"It’s true that, legally, government does expand employment. But economically, it doesn’t — and that’s what people usually mean when they say 'government doesn’t create jobs.'

What the Times omits is the money to support all these government jobs. It must come from somewhere — generally, taxes or loans (bonds, bills). But if the people whose money is taken via taxation or borrowing had kept the money, they would have spent most or all of it on something — and that spending would have boosted employment."

Okay, so we can at least agree that all of those people working as teachers, firefighters, forest rangers etc. do legally have jobs. That seems like progress. But let's look at the second part of the story:

"the money to support all these government jobs. It must come from somewhere."

Yes, that part is true also. But the last time I looked, the money to pay workers at Apple, General Electric, and Goldman Sachs also came from somewhere. Where's the difference?

Samuelson tells us that if the government didn't tax or borrow or the money to pay its workers (he makes a recession exception later in the piece) people "would have spent most or all of it on something -- and that spending would have boosted employment."

Again, this is true, but how does it differ from the private sector? If the new iPhone wasn't released last month people would have spent most or all of that money on something -- and that spending would have boosted employment. Does this mean that workers at Apple don't have real jobs either?

The confusion gets even greater when we start to consider the range of services that can be provided by either the public or private sector. In Robert Samuelson's world we know that public school teachers don't have real jobs, but what about teachers at private schools? Presumably the jobs held by professors at major public universities, like Berkeley or the University of Michigan are not real, but the jobs held at for-profit universities, like Phoenix or the Washington Post's own Kaplan Inc., are real. 

Mark WeisbrotSacramento Bee (CA), October 25, 2012McClatchy Tribune Information Services, October 25, 2012Hanover Evening Sun (PA), October 25, 2012Bellingham Herald (WA), October 25, 2012Bradenton Herald (FL), October 25, 2012Anchorage Daily News (AK), O

Dean Baker
Caixin Online, October 23, 2012

Unless you live in a cave, you’ve no doubt heard about the impending “fiscal cliff” – which is actually much more slope than cliff – and the need for major steps to fix our nation’s financial future. While the fiscal showdown is overhyped, the long-term deficits projections aren’t. So does this mean we’ll need to give Big Bird a pink slip? No. Cutting funding for PBS, Pell Grants, and Acorn doesn’t make a dent in future deficits. Neither do bigger changes, like ending the war in Afghanistan or ending the Bush tax cuts for high earners. The reason for this is that projections of future deficits are driven almost entirely by health care costs. 

Next to other industrialized nations, the U.S. healthcare system is wildly inefficient. Despite only average results, the U.S. spends more per person – in many cases twice as much – on health care than any other OECD country. Between Medicare, Medicaid, and a few smaller programs, the government buys about half of all health care, and therefore savings from lower costs would have a dramatic effect on deficits.  

The graph below shows just how dramatic. The graph plots projections for US publicly held debt as a percentage of GDP, and what those projections would look like if the U.S. healthcare system had the same cost per person as Australia, Canada, or Germany. (The baseline projections come from the Congressional Budget Office’s relatively pessimistic alternative fiscal scenario, and projections include interest payments.) 

If the US had the health care costs of Australia, we’d see public debt in 2022 fall from a projected 90 percent of GDP to a much more manageable 60 percent. Having the same costs as Canada and Germany would make that number only slightly higher, at around 64 percent of GDP. 

David Leonhardt tells readers today that income inequality is primarily due to technology and globalization. It is possible to tell the story of technology if you are prepared to jump over a few hoops. (The big problem is that economists confidently told us in the 90s that technology favored people with college degrees. In the last decade it seems to only favor people with advanced degrees. If that sounds like a "make it up as you go along" story, welcome to the state of modern economics.)

However, the globalization story requires even more hand-waving. The simple story is that we have hundreds of millions of people in developing countries who are prepared to work for a fraction of the wages of our manufacturing workers. This has caused us to lose millions of manufacturing jobs, depressing the wages of both the remaining workers in the sector and the workers in other sectors who must compete with displaced manufacturing workers.

This is undoubtedly a true story. However the part of globalization that economists seem to have difficulty understanding is that there are also tens of millions of potentially highly educated workers in the developing world who are willing to work for much lower pay than their counterparts in the United States. For example, while the average doctor in the United States gets close to $250,000 a year, there would be no shortage of doctors in India, Mexico, China and elsewhere who would be happy to train to U.S. standards and work for half this wage. The same would be true of lawyers, dentists, economists and all the other highly paid professions.

The reason that huge numbers of foreign professionals have not come to the United States and depressed the wages of the highest earning workers in the United States is that we have a large number of professional and legal barriers that make it difficult for foreign professionals to work in the United States.

(Note the use of the word "difficult," rather than "impossible." Economists often believe that because they know an Indian economist who teaches at a major university they have proven that there are no obstacles to foreign professionals working in the United States. This is sometimes referred to as the "Mexican avocado" theory of international trade. According to this theory, if I can buy an avocado grown in Mexico at my local supermarket I have proven that there are no barriers to imports of agricultural goods in the United States. This is of course a ridiculous view, but one that nonetheless usually arises in any discussion of professional barriers.)

Eileen AppelbaumTruthout, October 24, 2012