That's not quite how the paper put it, but it is in fact what it reported. The story according to the headline is "bipartisan partnership produces a health bill that passes house." According to the article the bill instructs the Food and Drug Administration (FDA) to use information from doctors' practices and drug registries in determining whether to approve new drugs rather than just relying on clinical trials. The problem with this approach is that the industry often pays doctors to say good things about their drugs. It would difficult for the FDA to know for certain that the information it is relying upon was not paid for by the company seeking approval of a drug.
The piece also includes the interesting tidbit that the cost of additional funding for the FDA, another provision in the bill, would be covered by selling off some of the country's petroleum reserve. This shows the remarkable cynicism of the deficit hawks in Congress.
Selling oil reserves is simply a shuffling of assets, it is not a way of either improving the government's financial situation or reducing the drain on the economy from the budget deficit. It's analogous to a household pawning its silverware to avoid having to borrow. There is no economic reason to prefer selling off this asset to adding debt, it is just a silly ritual that apparently is taken seriously in Washington policy circles these days.
That's what a NYT article seemed to be telling people. The center of the story is the fact that it appears that La Grange, Ill (population 15,550) was using grossly out of date mortality tables in calculating the pension obligations for its police and fire fighters. Without directly saying as much, the piece implies that this is a common problem with much larger pension funds and that such practices are the basis for the underfunding of many public sector pensions.
In fact, the main reason that some public sector funds face severe shortfalls is that politicians like Richard M. Daley and Chris Christie chose not to make required contributions. This is a serious problem since the country's elites apparently praise such behavior. Since ending his last term as mayor of Chicago, Mr. Daley has been appointed a senior distinguished fellow at the University of Chicago, given a seat on the board of Coca Cola, and made a principal of the investment firm Tur Partners LLC. Chris Christie is running for the Republican presidential nomination. Reporters covering his campaign rarely mention his failure to make required pension contributions, including going back an explicit commitment to state employee unions, as a liability. If the people most directly responsible for the underfunding of pensions get rewarded, then it should not be surprising that we do have some cases of major underfunding.
Bizarrely, at one point the piece suggests that the public might look to actuaries as the main target for the underfunding of public sector pensions:
"Retirees are counting on the money promised to them. Taxpayers are in no mood to bail out troubled pension funds. Some are looking for scapegoats.
"'Actuaries make a juicy target,' said Mary Pat Campbell, an actuary who responded to the board’s call for comments."
This is bizarre since Wall Street is the far more obvious target. The recession following the collapse of the housing bubble is likely to cost the country more than $10 trillion in lost output. This both directly contributed to pension shortfalls, by making it more difficult for governments to make required contributions to pensions during the recession years, and indirectly by reducing the revenue base of many governments on an ongoing basis. It is rather strange that taxpayers should look to target actuaries, most of whom make relatively modest salaries, rather than big Wall Street players who often make tens of millions or even hundreds of millions of dollars a year.
The media seem to think it's a really huge deal that investors in China's stock market have not made any money since February. The Washington Post told readers that it could even threaten the regime's legitimacy in a front page story headlined, "stock slide sandbags China's leaders."
The article begins:
"For decades, the Chinese Communist Party has been able to keep control of democracy protests, dissidents, the legal system and the military, but it is now facing an even more intractable foe: a plummeting stock market.
"Invisible and fast-paced, mutinous market forces have defied the party-led government’s efforts to arrest the month-long slide in Chinese stock markets. If this continues, the slump in stock prices could slow the economy and undermine faith in the party’s leadership and power, experts on China and economics say."
This is an interesting assessment. Those of us who are less expert on China than experts consulted for this article might wonder how the regime managed to survive a stock market crash between October of 2007 and October of 2008 in which the market lost over 60 percent of its value. This is more than twice as large a decline as the market has experienced in the current downturn. In spite of this plunge, China's economy grew more than 9.0 percent in 2009, although it did require a substantial government stimulus program.
The piece also contains the strange paragraph:
"For decades, some enthusiasts have argued that China was the exception to the rule: that its farsighted leaders could make the transition to a more open economy while avoiding the debt trap that every other so-called miracle economy had fallen into since World War II. That idea could be the biggest casualty of the crash, both at home and abroad."
It's not clear what the article means in asserting that every other miracle economy has fallen into a debt trap. South Korea and Taiwan have experienced rapid and sustained growth for more than five decades, with only brief periods of recessions. As a result, South Korea now has a per capita income that is roughly 90 percent of the per capita income in the United Kingdom. Taiwan's income is more than 15 percent higher. Are these countries not supposed to be "so-called miracle economies" or is this the record of economies mired in a "debt-trap?"
China's stock market rose 5.8 percent today.
Thomas Edsall had a very good piece on divisions in the Democratic Party over trade policy in the NYT this morning. The piece cites a large body of academic research pointing out that U.S. trade policy has played a large role in destroying manufacturing jobs and redistributing income upwards. It notes that this is the basis of the opposition of unions to trade policy, which has caused the overwhelming majority of Democrats in Congress to oppose the Trans-Pacific Partnership (TPP).
However the piece errors in referring to the TPP and U.S. trade policy in general as "free trade." It is absolutely not free trade.
One of the main goals of the TPP is to increase patent and copyright protection. That is protection as in protectionism. These government granted monopolies can increase the price of drugs and other protected items by several thousand percent. This has the same economic impact and leads to the same distortions as tariffs of several thousand percent. Markets do not care if the price of a product is raised due to a tariff or a government granted patent monopoly, it leads to the same distortions.
These trade deals have also done almost nothing to remove the protectionist barriers that make it difficult for foreigners to train to become doctors, dentists, or other professionals and work in the United States. The reasons that these highly paid professions have not seen their salaries hurt by trade is due to the fact that the government has protected them, not that there is some inherent impossibility in Indians training to U.S. standards and becoming doctors in the United States.
Also, a free trade policy would mean pushing for freely floating currencies. This has clearly not been a priority for the Obama administration as our trading partners, most importantly China, have accumulated trillions of dollars of foreign reserves in order to inflate the value of the dollar against their currencies, thereby supporting their large trade surpluses. The Obama administration chose to not even include currency as a topic in the TPP.
It is important to point out that our trade policy is not free trade first because it might lead some to believe that our trade policy involves pursuing some great economic principle. It doesn't. It's about redistributing money to the rich.
Second, it is important because at this point the biggest gains for "everyday people" will actually come from more free trade, not less. It's not realistic to think that the United States will erect tariffs or other barriers that will block the import of manufactured goods from Mexico, China, and other developing countries. It is reasonably to think that we might push for more market based exchange rates, less costly patent and copyright protection, and the elimination of unnecessary professional restrictions that prevent us from having lower cost health care, legal services, and other professional services.
With the prospect of Grexit increasing, there have been numerous news stories pronouncing this as a disaster for Greece. There have also been many accounts telling us that Greece will not have the same positive prospects as Argentina.
As Paul Krugman reminds us Argentina recovered fairly quickly after it broke the link between its currency and the dollar. As he points out, the real disaster was in the period leading up to the break.
While many people have emphasized ways in which Argentina has advantages in this break relative to Greece, that was not a general perception at the time. The general story back at the end of 2001 and 2002 was that Argentina faced disaster.
For example, on January 1, 2002 we got this NYT piece headlined, "Argentina drifts leaderless as economic collapse looms."
Here are the first three paragraphs:
"Without a president, a cabinet or a functioning government, Argentina drifted rudderless today, as people waited for the Peronist party to resolve its bitter internal differences over who should run the country and for how long.
"The surprise resignation of the interim president, Adolfo Rodríguez Saá, late Sunday means that by Tuesday Argentina is likely to have its fifth leader in less than two weeks, counting temporary caretakers.
"But with bank accounts partly frozen, a moratorium on payment of the foreign debt and political leaders clearly at a loss for what to do, the possibility of an economic collapse loomed as an even larger concern. All day long, nervous depositors lined up outside banks in hopes of withdrawing some of their money."
There was another dire piece on Janauary 4th after a new government had been installed. Among other things, this piece told readers:
"Though most Argentines earn their salaries in pesos, an estimated 80 percent of all debts here were contracted in dollars. That raises the specter of widespread bankruptcies if ordinary Argentines are suddenly forced to pay 30 or 40 percent more pesos to meet their obligations."
Yes, Argentina did have its own currency before the devaluation, but it faced the same sort of debt problem that Greece will face with many debts denominated in a currency that will suddenly be worth much more relative to people's pay checks.
Anyhow, this is not to claim that a break with the euro will be easy or that Greece will necessarily do as well as Argentina in the aftermath. But it is important to remember that many people were predicting absolute disaster for Argentina at the time of its default and they were proven wrong. Perhaps these folks' judgements about economics have improved in the last thirteen years, but I wouldn't bet on it.
Yes, the bottom is really falling out in China, prepare for another Great Depression there. I won't claim any great expertise on China's economy, but the exasperated reporting on the recent fall in China's stock market should also note that it followed an enormous boom. Undoubtedly many people who bought into this boom will be hurt, but it's not clear that it is a disaster for China's economy if it's stock market returns to its level of five months ago.
It is also worth noting that its market had a far sharper drop in 2008. Its economy continued to grow strongly after the crash, although it did require a large government stimulus program.
Steve Rose has a new piece on wage growth being published by the Urban Institute which was previewed in a blog post in the Wall Street Journal. It shows a considerably better picture than most of us are used to seeing. Whereas my friends at the Economic Policy Institute (EPI) show the real median wage for men has fallen by 7.4 percent between 1979 and 2011, Rose finds that real annual compensation for men has risen by 13.4 percent. EPI’s data show that the median hourly wage for women has risen by 24.2 percent. Rose finds a gain of 73.0 percent.
There are three issues that explain the differences. The main difference for women is the increase in average annual hours worked. Women are far more likely to be full-time full year workers in 2013 than they were in 1979. This is largely due to a breakdown of the barriers that excluded women from most types of better paying jobs and social norms that tended to confine women to working in the home. While the increased opportunities for women is clearly a positive development, we would expect pay to rise accordingly. People expect to be paid more for working forty hours a week than for working 30 hours a week. Therefore if we find that people having higher earnings because they are working more hours rather than getting higher hourly pay, it doesn’t really change the wage stagnation story.
The second issue is that Rose is looking at total compensation rather than just hourly pay. This includes payments that employers make for Social Security taxes, health care insurance and defined contribution pensions. This matters more for the 1980s, when there were substantial increases in Social Security and Medicare taxes than in the last two decades.
Looking at compensation in principle is reasonable if we want to know what workers are paid for their work, but it does raise some issues. The most important is that Rose’s measure only counts payments to defined contribution pensions, not payments to defined benefit pensions. This means that a switch from defined benefit pensions to defined contribution pensions would show up as an increase in compensation in Rose’s measure, even if no more money is being paid by the employer. This switch only explains a small part of the difference in wage growth, but it is certainly peculiar.
Neil Irwin generally has insightful economic analysis in his NYT Upshot pieces, however he strikes out in his turn to power politics today. He tells readers:
"German leaders genuinely believe that a new deal along those lines would be bad economic policy for Greece. Many economists at the International Monetary Fund and American officials would argue it is entirely sensible. The fact is that the time for those debates is over for now; we’re in a realm of power politics, not substantive economic policy debates.
"The choice for leaders of Germany, France and the rest of Europe will look something like this:
"If they tolerate the Greek government’s demands, they will be setting a bad example for every other country that might wish to challenge the strictures of the European Union, telling voters in Portugal and Spain and Italy that if they make enough fuss, and elect extremist parties, they too will get a much sweeter deal. It would send the signal that a country can borrow all it likes, walk away from those debts and make the rest of Europe pay the bill, as long as it is intransigent enough."
Actually, the choice for leaders of France and the rest of Europe does not look like this.
It may be true that, "German leaders genuinely believe that a new deal along those lines would be bad economic policy for Greece." German leaders do show considerable evidence of having no understanding of economics. This is why they are taking positions that put them at odds with economists at the I.M.F. and just about everywhere else. The evidence of the last five years contradicts their claims about the economy as completely as possible, but it appears that many people in top positions in Germany are genuinely flat-earthers who simply can't accept that the world is round and that the euro zone economy is suffering from a shortfall of demand and need not worry about debt.
However, there is no reason to believe that leaders in France and the rest of Europe suffer from the same learning disability. Therefore, they may recognize that the main reason Greece has been forced to borrow large amounts of money over the last five years and run up its debt has not been its profligate spending, but rather the strangling of its economy.
Sharp cutbacks in government spending led to a huge reduction in demand. Since Greece is in the euro, there was little possibility for much increase net exports through a reduction in the value of its currency. Also, since the other euro zone countries were also pursuing austerity, they would not provide growing markets for Greek exports. In this context, it was virtually inevitable that Greece's economy would contract sharply. This means bringing in less tax revenue. It also leads to more spending for things like pensions, as workers who are unable to find jobs opt to retire earlier than they would have otherwise and start collecting their pension.
The leaders of France and the rest of Europe may understand the basic economics here. This means that rather than blessing profligate spending, a turn to favor Greece means rejecting failed economic theories that have devastated the euro zone's economy. This would mean pushing for higher spending in the core countries, especially Germany, and pursuing other mechanisms for increasing demand.
Yep, some things never change. Robert Samuelson tells us the tragic story of Greece: it needs to reduce its debt, but to do so it has to raise taxes and/or cut spending. That slows growth, which raises unemployment and also lowers its GDP, quite possibly raising its debt-to-GDP ratio. After telling us that there is no easy exit from this problem for Greece, Samuelson goes on:
"But it’s important to note that Greece’s predicament, though extreme, is shared by many major countries, including the United States, Japan, France and other European nations. ...
"When only a few countries are over-indebted (meaning they cannot borrow from private markets at reasonable interest rates), this isn’t necessarily true. Countries can dampen domestic consumption and rely on export-led growth to take up the slack and limit unemployment. Nor is debt automatically bad. It has obvious productive uses: to fight severe recessions; to pay for wars and other emergencies; to finance public “investments” (roads, schools, research).
"Unfortunately, this standard view of government debt — we’re not talking about household and business debt — does not fully apply now. The reason is that numerous countries face similar problems."
So Samuelson thinks that many countries cannot borrow at reasonable interest rates? That's not what I read in the newspapers.
Let's see, according to the Economist, the United States can borrow long-term at less than 2.3 percent interest. That's less than half of the rate during those wonderful Clinton years when we were paying down the debt. Canada can do even better, paying just 1.7 percent. Those no-good-lazy-croissant-eating French types can borrow at a less than a 1.3 percent rate. The frugal Germans have to pay just 0.8 percent, a bit more than the hugely indebted Japanese who can get away with paying less than 0.5 percent.
In short, almost everyone other than Greece can borrow at extremely low interest rates. (Those high rates are their euro zone dividend.) Rather than being some difficult conundrum as Samuelson tries to tell his readers, this story is about as simple as it gets. The world is suffering from a huge shortfall in demand. We need people, businesses, and/or governments to spend money.
Unfortunately, the deficit gestapos are preventing more spending for reasons that defy logic but undoubtedly make sense to them. Anyhow, this is a really simple story, even if there is a lot of money to be made in trying to make it appear complicated.
Philosophers have debated the nature of knowledge for millenniums, but it turns out that the Washington Post has the secret. In a mostly useful article on the high and rising prices of prescription drugs it told readers:
"Patents are necessary to encourage companies to innovate, but they also slow the progress of cheaper generic versions of drugs to market, and allow drug companies to charge much more in the interim than they could if they had more competition."
Hmm, patents are necessary to encourage companies to innovate? There is no other mechanism? Do U.S. defense contractors innovate? They may get patents, but they are mostly paid on contract. If there is a reason that people will refuse to innovate for money, but will only innovate with the incentive of a patent monopoly, it would be interesting to know what it is.
As a practical matter, patents are an incredibly inefficient mechanism for financing drug research for reasons mentioned in this article and others. If the research costs were paid upfront all of these amazing new drugs would be cheap to patients and we would not have to waste time fighting over who would pay the tab. (At the point the drug has been developed, the costs have already been paid. Why not make the drug available at the marginal cost? That is the economist's approach.)
Paying for research upfront would also have the advantage that all the findings would be in the public domain. This means that doctors would be better informed about which drug might be best for their patients. It would also mean that money would not be wasted pursuing paths that had already been shown to be dead ends. In addition, since no one is getting huge patent rents from having people use their drugs, upfront funding would take away the incentive to deceive the public about the safety and effectiveness of drugs, which has led to so much needless suffering.
Rather than trying to tell people that we need patents to finance research, a lengthy piece like this could at least have noted that many economists, such as Nobel laureate Joe Stiglitz, have argued for more efficient alternatives to the patent system. This is exactly the sort of article where this issue should be raised.
The NYT headlined a front page piece, "health insurance companies seek big rate increases for 2016." The piece told readers insurance companies "are seeking rate increases of 20 percent to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected." It then goes on to list specific instances where insurers are seeking large rate increases.
There are several problems with this story. First, it does not try to give any sort of weighting which would give a basis for the assessing the typical increase seen by people getting insurance through the exchanges. This matters both because some plans have more people enrolled than others and also because the percentage increase makes a much bigger difference for older people with high average premiums than for younger people. The average cost for a plan for people in the oldest age group (55–64) is three times as much as the average for people in the under 35 age group. If people in the latter age group see a 20 percent rise in their premiums it will imply a much smaller dollar increase than for the former group.
Since the article made no effort to assess the number of people in plans requesting large premium increases nor the amount of the premiums, there is no way to assess the increase in the premium for the typical person. The article does refer to a study by the Kaiser Family Foundation, and notes that it finds relatively small increases for the second lowest cost plan. However, it does not give readers the amount of increase found in this study and points out that to avoid a large increase it may be necessary to change plans, which could also mean changing doctors.
The Kaiser study found that the premium for the second lowest cost silver plan (the benchmark for subsidies in the exchanges) is projected to rise by 4.4 percent between 2015 and 2016 in the eleven cities it examined. It also is important to note that even staying in the same plan does not guarantee that a patient can continue to see their doctor, since doctors often leave plans.
The article also misrepresents the issue of the health of beneficiaries telling readers:
"Some say the marketplaces have not attracted enough healthy young people."
Actually, it doesn't matter whether people are young, it matters whether they are healthy. A healthy older person pays on average three times as much to insurers as a healthy young person and gets the same amount back in payments. Also, the losses described in this article would be largely offset by the backstops put in place in the ACA for insurers that enroll less healthy patients.
As the Kaiser report points out:
"Some of this remaining uncertainty is mitigated by the ACA’s “3 R’s” programs. These programs – risk adjustment, reinsurance, and risk corridors – redistribute risk among insurance carriers so that plans that enroll disproportionately sicker or higher-cost enrollees can be prevented from having to significantly raise premiums."
There is a real issue here, since people should not have to be constantly changing plans to ensure that they have affordable insurance, however this article does little to indicate the extent to which this is actually a problem, although it is likely to scare many readers.
Thanks to Robert Salzberg for calling this article to my attention.
Remember the robots that are going to take all our jobs leaving us unemployed? Apparently they don't have robots in Europe. That's the story readers would get from a mostly useful set of charts in the Washington Post comparing Greece and Germany.
Underneath the chart comparing the populations of the two countries the article tells readers:
"Despite the difference, both countries share a troubling trend: a shrinking population. Europe is experiencing a demographic time bomb as the continent ages and birth rates fall, leading to questions about whether there will be enough workers to power a dynamic economy in the decades to come."
This is of course 180 degrees at odds with the robots making us all unemployed story. That is a story of too many workers. The Post is telling us here a story of too few workers. It is possible for one or the other to be true, but not both. Only a D.C. policy wonk could possibly take both problems seriously.
As a practical matter, we are likely to see productivity growth in the future comparable to what we have seen in the past. At the low end, it would be around 1.5 percent a year. At the high end we could envision getting back to the Golden Age (1947–73) rates of growth of 3.0 percent. The low end would still leave us easily able to care for our aging population and enjoy rising standard of livings. (Guess what, we have always had an aging population.) The high end should allow for more rapid improvements in living standards but there is no more reason to think that it would lead to mass unemployment than did the Golden Age productivity growth.
Since several commentators have raised questions about the similarities between the debt situations of Greece and Puerto Rico, it is worth pointing out some important ways in which they differ. Puerto Rico gets the benefit of several important federal government programs which will continue regardless of the finances of its own government. This means that if its own government ceases to exist due to financial paralysis, the people of Puerto Rico can still count on their monthly Social Security checks, their Medicare payments for their health care, and food stamps for low-income families. The people of Greece do not receive any comparable benefit from the European Union.
The banks and financial system in Puerto Rico is also supported by the FDIC, the Fed, and Fannie Mae and Freddie Mac. This means that if every bank in Puerto Rico goes belly up because its economy is a wreck, all the depositors can still count on getting their money back up to the FDIC limit. If the housing market collapses, people will still be able to buy homes because Fannie Mae and Freddie Mac are prepared to buy up the mortgages.
The bulk of aid to Greece has taken the form of the I.M.F., the E.U., and the E.C.B. making payments to Greece's creditors. This was initially the banks who were bailed out of their bad loans and more recently to themselves. It has not gone to help the Greek people. If the Syriza government were offered terms comparable to those Puerto Rico now has, the only fight would be over how quickly they could get a pen to sign the deal.
This doesn't mean Puerto Rico doesn't have very serious economic problems as a result of being tied to the U.S. dollar, but it has a range of supports that are beyond the dreams of the people of Greece.
It is always cute when a major news outlet decides to blame problems on a policy it doesn't like in a new story. That is what the Wall Street Journal did today in a news story that told readers Puerto Rico's main problem is having the same minimum wage as the rest of the United States.
While the minimum wage is clearly high relative to labor productivity in Puerto Rico, its economic performance over the last four decades cannot be reconciled with a story where the minimum wage is the main culprit. Puerto Rico's minimum wage converged to the U.S. minimum wage over the period 1978 to 1983. In spite of this sharp increase in the minimum wage, Puerto Rico's unemployment rate fell sharply from the 1970s to the 1980s as its economy experienced strong growth (figures 3 and 4). While the unemployment rate in Puerto Rico remained higher than in the United States, the general direction was downward until the recession hit in 2007.
This simple story suggests that the minimum wage cannot be the main culprit. It is certainly possible that the minimum wage may have led to somewhat higher unemployment than would otherwise be the case, but the cause of the Puerto Rico's economic crisis must be elsewhere.
Note: An earlier version described the article as a front page story. The article did not run on the front page of the paper.
Further Note: The WSJ had a much fuller account of Puerto Rico's economic problems earlier in the week.
The introduction to a Morning Edition segment on the response in Spain (sorry, no link) told listeners that Spain was undergoing austerity to pay down its "massive debt." This is inaccurate. Spain did not have anything that can be remotely described as massive debt before the austerity policies imposed on the country by its creditors.
Prior to the collapse of the country's housing bubble, Spain's debt to GDP ratio was 26 percent, just over one-third of the U.S. level. It was running surpluses of more than 2.0 percent of GDP, the equivalent of a budget surplus of roughly $350 billion a year in the United States. (Its worth noting that Greece's debt to GDP ratio was a much more manageable 107 percent of GDP before the crisis and austerity pushed it to 170 percent of GDP.)
The segment also is a bit out of line with reality in touting Spain's economic success under austerity. It boasted that Spain had the strongest growth in the euro zone. This is an extremely low bar. Spain's growth rate did not cross 3.0 percent last year and is not projected to do so this year. By contrast, it averaged almost 4.0 percent in the last two years before the crash. Countries recovering from steep downturns are expected to have faster than normal growth.
According to the I.M.F.'s growth projections (which have consistently proven to be overly optimistic) Spain's per capita income will not surpass its 2007 level until 2018. This is a considerably worse than the situation faced by the United States in the Great Depression. The OECD puts Spain's unemployment rate at 22.7 percent as of April.
The Washington Post ran a map showing which countries in Europe use the euro and which use other currencies. The map is wrong. It shows Montenegro and Kosovo as using currencies other than the euro. This is not accurate, both countries do use the euro as their official currency although they have not have been accepted into the euro zone.
This is important in the context of the discussions on Greece because it illustrates the point that Greece cannot be forced off the euro. The European Commission and the European Central Bank can impose incredibly onerous conditions on Greece, but they cannot prevent the country from using the euro if it so chooses. The decision to leave the euro could only be made by the Greek government, not its creditors.
A NYT article reported on a new commitment by China to reduce its emissions of greenhouse gases. At one point it referred to China as the world's second largest economy. Actually, using a purchasing power parity measure of GDP, which is the one most economists would use to measure an economy's size, China passed the United States last year and is now close to 4 percent larger. (China's economy would be about 6 percent larger if Hong Kong is included.)
In the context of GHG emissions it is important to note that a substantial portion of China's emissions are associated with producing items for consumption in the United States and elsewhere. China has an overall trade surplus and a large surplus on manufactured goods.
They're really lowering the bar big time over at the Washington Post. An editorial condemning the Greek government and urging Greek voters to accept the last offer from its creditors told readers, "the Greek economy had started to perk up prior to Mr. Tsipras’s ascendance."
The Greek economy did grow in 2014. According to the I.M.F., the per capita growth rate last year was 1.4 percent. Since per capita income in Greece is down by almost 25 percent from its 2007 level, at the 2014 growth rate the country will be back to its 2007 income level by 2035.
The piece also called on the government for further cuts in what it described as Greece's "unsustainable pensions." These pensions have already been cut by more than 40 percent and now average less than 700 euros (@ $800) a month. The pensions may well be unsustainable under the macroeconomic policies being imposed by Greece's creditors, but this is primarily because these policies have pushed Greece into a depression. The result has been a sharp reduction in the number of workers paying into the pension system and a big increase in the number of workers collecting pensions, since many have been forced by economic conditions to retiree early.
Using the I.M.F. projections from April 2008 as a benchmark, the policies pursued by the euro zone leadership will have the cost the region more than $10 trillion (@ $30,000 per person) by the end of 2015. In this context it is interesting that the Washington Post condemns the Greek government as being irresponsible.
The NYT had a bizarre front page article about the limited effectiveness of monetary policy in the euro zone and elsewhere. The headline of the piece refers to "trillions" of dollars being spent by central banks, a line repeated in the first sentence:
"There are some problems that not even $10 trillion can solve.
"That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises."
In fact, central banks have not spent this money, they have lent this money, mostly by buying government bonds. This matters hugely because lending is a much more indirect way to boost the economy than spending.
Lending by central banks is supposed to boost growth by lowering interest rates. This encourages borrowing in the public and private sectors. This helps to explain the growth in debt in recent years. Rather than indicating a troubling situation, this was actually the point of the policy. Rather than focus on the amount of debt countries, companies, and individuals have incurred, it would be more reasonable to examine their interest burdens. These are mostly quite low.
For example, Japan's interest burden is less than 1.0 percent of GDP in spite of having a debt to GDP ratio of more than 200 percent. This is due to the fact that the interest rate on even its long-term debt is well below 1.0 percent.
The Bank of International Settlements (BIS) issued a new report warning of the dangers of low interest rates. Robert Samuelson wants us to take these warnings very seriously, effectively saying that another crisis could be around the corner due to the recent build up of debt.
First, it is worth noting that warning of disaster due to expansionary monetary policy is what they do at the BIS, sort of like basketball players play basketball. The BIS has been warning for years that inflation was about to kick up if central banks didn't start raising interest rates. Of course, the exact opposite has happened, inflation rates have fallen and most central banks have been actively trying to increase the inflation rate from levels they view as too low to support growth.
The second point is that the rise in debt in a time of low interest rates is to be expected for two reasons. First, at low interest rates governments, corporations and individuals have more incentive to take on debt. This is not obviously a problem. For example, many corporations have taken advantage of extraordinarily low interest rates to issue long-term bonds. This gives them the opportunity to have cash to work with for decades into the future at very low cost. In these cases, they have the cash on hand and can easily meet their interest obligations.
In response to questions from people everywhere, I will share a couple of quick thoughts on the possible departure of Greece from the euro. First, several people have raised the possibility of Greece being thrown out of the euro.
There is no way that Greece can literally be thrown out of the euro in the sense of being prohibited from using the euro. Any country has the option to use any currency it chooses. This was an issue that came up in the referendum over Scottish independence. The independence movement wanted to leave the United Kingdom but to continue to use the British pound as its currency. U.K. Prime Minister David Cameron said that the Scots could not keep the pound if they left the United Kingdom.
This was not true, unless the U.K. was prepared to invade Scotland and physically prevent their banks and stores from using the pound. The Bank of England could refuse to support any of the Scottish banks, which would make it highly undesirable for them to use the pound, in addition to the fact that the U.K. would not be setting monetary policy for the benefit of Scotland, but Scotland would certainly have the option to continue to use the pound for their currency.
In this vein, there are several countries around the world that use the dollar for their currency, including Panama, Ecuador, and Zimbabwe. They did not need to get permission from the United States to use the dollar, they just opted to do it (in the case of Ecuador and Zimbabwe to end hyperinflation).
In this way, Greece will have the option to keep the euro indefinitely. It is difficult to see why it would want to if it lacks the support of the European Central Bank, since it would almost certainly mean a substantially worsening of its economy from its current Great Depression levels of output. However if Greece's leaders decide that keeping the euro is more important than reviving the economy, the eurozone authorities cannot keep them from doing it, short of an armed invasion.