There are two additional reasons that a vacant property tax is a neat idea. First, we already have a tax assessment on file for properties, so it doesn't require additional work. Second, even if people try to game the system by claiming a vacant property is actually occupied, we still have succeeded in imposing higher costs on leaving a property vacant. This means that owners are less likely to do so.
Washington Post economics writer Jim Tankersley took it upon himself to explain to Bernie Sanders, the senator from Vermont and candidate for the Democratic presidential nomination that "deodorant is not starving America's children." My guess is that Senator Sanders is aware of this fact.
The context for Sanders' deodorant comment was a statement about the irrelevance of GDP growth as a measure of well-being when the bulk of the gains go to the wealthy. Tankersley was good enough to include the whole quote:
"If 99 percent of all the new income goes to the top 1 percent, you could triple it, it wouldn't matter much to the average middle class person. The whole size of the economy and the GDP doesn't matter if people continue to work longer hours for low wages and you have 45 million people living in poverty. You can't just continue growth for the sake of growth in a world in which we are struggling with climate change and all kinds of environmental problems. All right? You don't necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country."
The point appears to be one about income distribution not deodorant. In other words, when the rich have even more money they are likely to focus on relatively frivilous ways of spending it, like new types of deodorants and sneakers. The problem isn't that the rich are spending their money on deodorants, the problem is that they are the only ones who have money to spend, as opposed to hungry people having money to spend on food.
Even if Tankersley didn't get this one exactly right, it is encouraging to see economics writers trying to educate presidential candidates. Perhaps Tankersley or one of his colleagues will use their columns or blog posts to explain the basics of Keynesian economics, so that candidates will understand that in the current economic context plans to cut the deficit are in fact plans to reduce economic growth and throw people out of work. Or, maybe they could explain that our bloated financial sector is a drag on growth, so that measures that reduce the size of the financial sector (like the financial transactions tax proposed by Sanders) would actually be a boost to the overall economy.
The fast-track authority needed to get the Trans-Pacific Partnership (TPP) through Congress must be in real trouble. Why else would the Washington Post devote so much space to pushing the deal and attacking its critics?
The latest was a diatribe by editorial board member Jonathan Capehart which is directed largely at Senator Elizabeth Warren. The piece starts by basically calling Senator Warren a liar for describing the TPP as "secret." As Capehart tells us:
"Yes, it is secret from you and me. As Ruth Marcus correctly explained, 'This is not secrecy for secrecy’s sake; it’s secrecy for the sake of negotiating advantage. Exposing U.S. bargaining positions or the offers of foreign counterparts to public view before the agreement is completed would undermine the outcome.' But TPP is not secret to Warren. She has read it."
Okay, so the deal is secret from 99.9999 percent of the country, but Warren is wrong to call it "secret." It is true that members of Congress and a limited number of staff with clearance can read the deal. They cannot take notes and cannot discuss details of the deal with people without security clearance.
The trade agreement is written in technical language. Our senators and congresspeople may all be very bright, but it is a bit much to expect them to be experts on everything from patent and copyright law to consumer safety regulations. Without the assistance of staff or experts outside of Congress it would be quite difficult for members to make an informed judgment on many of the issues in the pact.
But, not to worry:
"Any member of Congress who wants to be briefed on the emerging agreement or ask questions about what they are reading can call the offices of the United States Trade Representative (USTR). According to the folks at USTR, there have been more than 1,700 in-person briefings on the deal. In fact, Ambassador Michael Froman, who is the USTR, has personally briefed Warren on various aspects of TPP."
See, the office of the USTR, possibly even the USTR himself, will be there to clear up any points of confusion. Yep, that's like the prosecutor's office making itself available to help the jury on any points that were not clear during the trial. What could be better than that?
Of course the deal could be made public tomorrow if President Obama chose to do so. After all, that great proponent of open government, George W. Bush, made the Free Trade Area of the Americas draft available to the public before asking Congress to vote on fast-track authority.
Interestingly, Capehart doesn't address Warren's often repeated concern that fast-track authority will be in place well into the term of the next president. This cedes a huge amount of Congressional power to the next president. He also didn't mention the issue that Warren has repeatedly raised of the extra-judicial Investor-State Dispute Settlement panels established by TPP. Australia has opted out of these panels, is there some reason the United States can't opt out also?
It is remarkable how many people seem unfamiliar with the idea of productivity growth. It's a fairly simple concept. It means that workers can produce more output in each hour of work. The world economy has been seeing consistent productivity growth for more than two hundred years. That is why we have seen rising living standards. We live longer and better than our ancestors.
When we hear people running around saying that the robots will take all the jobs, that is a story of productivity growth. The argument is that each worker would be able to produce much more in a day's work because she is working alongside super-productive robots. If these folks had heard of productivity growth then they would know the key question is the rate of productivity growth and whether there is any reason to believe that it will be faster in the future than what we have seen in the past, and furthermore even if faster, whether it will be so much faster as to lead to mass unemployment.
The answer is certainly "no." Productivity growth has been slow in recent years and would have to accelerate enormously to reach the 3.0 percent pace of the Golden Age from 1947-73. And, that was a period of low unemployment and rising wages. There is a story of high unemployment and stagnant wages, but that is a story of bad Fed policy, bad currency policy, and bad fiscal policy. It is not the robots' fault.
Yesterday the Post gave us the opposite picture in a piece from Max Fisher which warned of China's demographic crisis because it faces slowing and then declining population growth. The argument is that it won't have enough workers to take care of its aging population. This one is really bizarre since China has been experiencing rapid productivity and rapid wage growth, which means that even if fewer workers are supporting each retiree, both workers and retirees can still enjoy sharply rising living standards.
This can be easily seen with some simple arithmetic. Suppose they go from having five workers to each retiree to just two over a twenty year period. This is a far sharper decline than China will actually see. Now suppose their rate of productivity and real wage growth is 5.0 percent annually, much slower than they actually have seen. And, assume that a retiree needs 80 percent of the income of an average worker.
In the first year, a worker would have to pay a bit less than 14 percent of their wages in taxes to support the retired population. If we base their before their tax wage as 100, this leaves them with an after-tax wage of 86. By year twenty the tax rate would need to be almost 29 percent in order for two workers to provide an income that is equal to 80 percent of the workers' after-tax income. Sound scary, right?
Well, the wage in year 20 will be 165 percent higher than it was in year one. This means that the after-tax wage will be almost 190 on our index, or more than twice what it had been twenty years earlier. And our retiree will also have more than twice as much income as they had twenty years earlier. Where's the crisis?
Furthermore, this is a low point. Once we reach our ratio of two workers per retiree there is little change going forward. The country does not keep getting older, or at least it does so at a very slow pace. But productivity continues to grow. If we go thirty years out from our start point then the wages of workers the index for after tax wages would be over 300 in the 5.0 percent productivity growth story, more than three times the initial level. Even with 2.0 productivity growth after year 20 the index for after-tax wages would be at 230, almost 170 percent higher than the wage workers had received thirty years earlier.
As a practical matter, the reduced supply of labor just means the least productive jobs go unfilled. No one works the midnight shift at convenience stores. And, it is harder to find people to mow your lawn or clean your house for low pay. Life is tough.
This is apparently a two year old piece. I have no idea why the Post decided to feature it today.
The gods must have a great a sense of humor. Why else would they arrange to have the Trans-Pacific Partnership (TPP) and the reauthorization of the Export-Import Bank both come up as great national issues at the same time?
If anyone is missing the irony, the TPP is being sold as "free trade." This is a great holy principle enshrined in intro econ textbooks everywhere. Since the TPP is called a "free-trade" agreement, those who opposed to it are ignorant Neanderthals who should not be taken seriously.
However the Export-Import Bank is about subsidies for U.S. exports. It is 180 degrees at odds with free trade. It means the government is effectively taxing the rest of us to give money to favored corporations, primarily folks like Boeing, GE, Caterpillar Tractor and a small number of other huge corporations.
The great part of the picture is that most of the strongest proponents of the TPP are also big supporters of the Export-Import Bank. They apparently have zero problem touting the virtues of free trade while at the same time pushing an institution that primarily exists to subsidize exports. Isn’t American politics just the best?
 The supporters of the Export-Import Bank insist that the bank makes a profit and therefore does not involve a subsidy from taxpayers. This is bit of fancy footwork designed to deceive the naïve. By taking advantage of the government’s ability to borrow at extremely low interest rates, the bank can still make money on the difference between the subsidized loan rate provided to its clients and the government’s own borrowing rate. However, in standard economic models that assume full employment (the ones you need to get the story that free trade is good) the bank’s subsidized loans are raising the cost of capital for everyone else by diverting capital to the favored corporations. For this reason the subsidized loans are still effectively imposing a tax on the rest of us, the accounting system just provides an effective way to hide this fact.
Thomas Friedman, the man who told us the world is flat and told us about "hyperconnectivity," is again raising the alarm about economic disruptions ahead. He tells readers about a new study which finds that 47 percent of the jobs in the United States are at risk of being taken over by smart machines and software in the next two decades. Wow!
Economists have a technical term for smart machines and software displacing workers. It's called "productivity growth." Back in the old days, when people who wrote on economic topics for major news outlets were expected to have some knowledge of economics, we thought productivity growth was good. It created the possibility of rising wages, shorter work hours, general improvements in living standards.
We can assess the assess the implications of the study Friedman cited for productivity growth. Suppose that half of the "at risk" jobs disappear over the next two decades. This would translate into a 1.3 percent annual rate of productivity growth. That would be slower than the U.S. has experienced for any sustained period since World War II. We should indeed be worried about the slow pace of technological progress in this case.
Suppose that all the "at risk" jobs identified in the study are eliminated over the next two decades. This translates in a 3.1 percent rate of annual productivity growth, roughly the same pace as during the Golden Age from 1947-73. This should be good news. Workers should be able to enjoy higher pay, shorter hours, and longer vacations.
In a Washington Post column today, Delaware Governor Jack Markell and Third Way President Jonathan Cowan took a swipe at the progressive wing of the Democratic Party in arguing for a set of ill-defined centrist proposals. (For example, they want better schools -- great idea.) There is much about their piece that is wrong or misleading (they imply that the rebuilding of Europe and Japan impedes growth and makes us poorer, that's not what standard trade theory says), but the best part is in the last paragraph where they tell readers:
"Nine years ago, Borders Books had more than 1,000 stores and more than 35,000 employees. Four years ago, it liquidated. Those stores didn’t close and those employees didn’t lose their jobs because the economic system was rigged against ordinary Americans. They closed because technology brought us Amazon and the Kindle."
Actually, Border Books did close in large part because the economic system is rigged against ordinary Americans. One of the main reasons Amazon has been able to grow as rapidly as it did is that Amazon has not been required to collect the same sales tax as its brick and mortar competitors in most states for most of its existence. The savings on sales tax almost certainly exceeded its cumulative profits since it was founded in 1994.
While there is no policy rationale to exempt businesses from the obligation to collect sales tax because they are Internet based, this exemption has allowed Amazon to become a huge company and made its founder, Jeff Bezos one of the richest people in the world. Oh yeah, Jeff Bezos now owns the Washington Post.
I see many folks have a hard time believing that sales tax mattered to Amazon's growth. While readers here may exclusively buy books in stores or on the web. Many do both. And for most of these people it is very likely that if they had to pay 5-8 percent more for the books purchased on the web that they would have bought more in stores. If would add, that if didn't matter to these people, then we have to wonder why Amazon and other Internet retailers didn't just raise their prices by 5-8 percent and put more money in their pockets?
Again, the amount at stake here is almost certainly more than Amazon's cumulative profits. That makes it a big deal.
I see that Niall Ferguson is again pushing the case that the austerity pursued by the Cameron government in 2010 was both necessary and good. This can be a useful opportunity to show why the history since the Conservatives took power does not support this claim, even though they managed to get re-elected.
To quickly summarize Ferguson’s case, he argues that the turn to austerity was a matter of necessity, not choice. The U.K. had a high and rising debt burden. Furthermore, inflation was increasing and reaching dangerous levels. So it was necessary for the government to take quick action to reduce the deficit to keep the economy on a stable path. However, once on this course the economy quickly rebounded. The government’s actions restored business confidence leading to strong investment and growth.
Let’s start with the debt story. Ferguson cites a study from the Bank of International Settlements and argues that the government faced a much worse debt picture than other countries:
“The baseline scenario for the UK at that time was that, in the absence of fiscal reform, public debt would rise from 50% of GDP to above 500% by 2040. Only Japan was forecast to have a higher debt ratio by 2040 in the absence of reform."
Okay, that sounds pretty bad. Of course there is a long time between 2010 and 2040 to deal with rising debt if it becomes a burden on the economy, but there are two points that argue strongly there was no need for the Cameron government to be concerned about a financial panic sinking the country.
Frank Bruni has a very good column on the pay packages of presidents at universities around the country. Bruni points out that many make well over a million dollars a year and some of them make several million a year, when their pension is included.
One aspect to this issue that Bruni neglects to mention is that these pay packages come largely at the public's expense. In the case of public universities, the school are largely financed with public funds, so the taxpayer involvement is quite direct. However even at a private university like Yale, which Bruni reports gave an $8.5 million going away president to its retiring president Richard Levin, the taxpayers subsidize the cost through its tax exempt status. Insofar as money is given to Yale from high income earners, the tax deduction means that the government is losing more than 40 cents on the dollar.
Clearly there is a failure of governance at these institutions where the boards that control them have little incentive to restrain pay at the top. This is likely the case because there are often personal ties between the boards and the presidents and hey, why wouldn't they want to give someone else's money to their friends?
It is striking that pay of these university presidents is not more of an issue at a time when there has been a great effort to highlight the pay and especially the pensions of public sector employees. The deferred pay given to Yale's former president would be equal to roughly 500 pension years for the retired Detroit municipal employees.
The pay of university presidents should also be an issue in plans to make college free or at least less expensive. If college is to be affordable to students or the public, if taxpayers end up footing the bill, then it will be difficult to support such outlandish pay packages for those at the top. The excessive pay for college presidents does not only directly imply substantial costs, it leads to inflated pay for other top university administrators.
The president of the United States gets $400,000 a year. That seems a reasonable limit for public universities or private ones that benefit from tax exempt status. If a school can't attract good help for this pay, it is probably not the sort of institution that deserves the public's support.
Washington Post columnist Ruth Marcus is unhappy with Senator Elizabeth Warren's opposition to the trade agreement. In particular Marcus is upset that Senator Warren has complained that the deal is secret, calling this a bogus argument. I won't go through the whole piece (this stuff has been addressed many places), but I do want to deal with one point Marcus raises.
She noted that Warren pointed out that President Bush had made the draft text of the Free Trade Area of the Americas agreement public, but then tells readers:
"the countries involved in the Free Trade Area of the Americas agreed to make initial proposals public."
This gets us to the Incredible Hulk theory of international relations. For those not familiar with comic book story or movie, the Incredible Hulk is the huge green monster that mild mannered physicist Bruce Banner turns into when he gets angry. This captures Marcus' theory of international relations.
When the United States really wants something, for example if it wants European countries to crack down on bank accounts that might be used to launder money for Al Qaeda, the administration makes demands and gets them met. This is the Incredible Hulk part of the story. But then we get a situation where President Obama would really like to make the draft text of the Trans-Pacific Partnership available to the public, but our negotiating partners just won't let us. This is the story of mild-mannered physicist Bruce Banner.
So the question everyone should ask themselves is, "do we think that if President Obama called our negotiating partners in the TPP and said that he really wants to make a draft public (it will be public soon anyhow), that all or any of them would refuse?"
My answer to this question is "no," but if you want to believe otherwise, I have lots of comic books for you.
Mr. Arithmetic was wondering after seeing an article in the Chicago Sun Times that analyzed the distribution of pensions among former employees of the City of Chicago and the State of Illinois. The article began by telling readers:
"One of every four retired workers from the state of Illinois, the city of Chicago and the Chicago Public Schools is getting a pension of more than $60,000 a year.
"That’s 80,365 people in all."
It then went on to say that 13,240 of these workers had pensions of more than $100,000 a year and 20,004 had pensions between $80,000 and $100,000.
So this group of retirees seems to be doing reasonably well, but what prompted Mr. Arithmetic's interest was the statement:
"In all, the state’s five pension funds, Chicago’s four pension funds and the Chicago teachers pension fund are paying a total of $12.7 billion a year to more than 310,000 people."
Here's the problem. We apparently have total payments of $12,700 million. If this was just divided evenly among all 310,000 beneficiaries it would come to a bit less than $41,000 a head, but we know that many retirees get much more than this figure, so the rest must get much less. We can try to figure out how much less by doing some arithmetic and making some assumptions.
We'll assume conservatively that the average pension for people who get more than $100k a year is $105k, the average pension for people who get between $80k and $100k is $85k, and the average pension for people who get more than $60k and less than $80k is $65k. That gets us:
13,240 * $105k = $1,390 million
20,004 * $85k = $1,700 million
47,121 * $65k = $3,063 million
Taken together this gives us $6,153 million going to these retirees. If we subtract that from $12,700 million being paid out in total, that leaves $6,547 million going to the remaining 229,635 retirees. That comes to an average pension for this group of $28,500 a year. This doesn't seem too high, especially since most of these workers are not covered by Social Security so this will be the bulk of their retirement income.
As far as who pulls in these higher pensions, many of them are police and firefighters. The city reports that the average pension for 2,900 retired firefighters is $67,000. The average pension for 9,200 police officers is $59,000. Obviously there are others who fall into the Sun Times high pension group, but that's a significant part of the story.
Note: My mother is one of these pension beneficiaries, although she is not among the Sun Times' high income group.
There is much that is wrong with former Clinton and Obama aide (and J.P. Morgan executive) Bill Daley's NYT column arguing for the Trans-Pacific Partnership (TPP). First, there is the obvious that he is equating the TPP and past trade deals with "free trade."
Of course they are not the same, these deals have been about putting manufacturing workers in competition with low-paid workers in the developing world, while protecting doctors and other highly paid professionals from the same sort of competition. They also impose a business friendly regulatory structure. And, they increase protectionism in the form of stronger and longer copyright and patent protection.
But this is not new. What stands out in Daley's piece is the ungodly silly assertion that:
"today, of the 40 largest economies, the United States ranks 39th in the share of our gross domestic product that comes from exports. This is because our products face very high barriers to entry overseas in the form of tariffs, quotas and outright discrimination."
Can you see the problem with this one? Think about how much the U.S. might export compared to a country like France. How much would it export compared to a country like Belgium or Luxembourg?
Yes, smaller countries are likely to have a larger share of their economy go to exports because they are smaller. To take advantage of economies of scale, countries like Luxembourg, Belgium, and even France have to integrate their economies with other countries. Because the much larger size of the United States, many economies of scale can be captured entirely by serving the domestic market. That is the main reason that we rank 39th out of Daley's 40 countries in the export share of GDP, not barriers to our products.
You have to wonder if these folks don't ever get tired of these sorts of cheap tricks. Do they really think the TPP is such a bad deal that they can't sell it with honest arguments?
Note: Spelling of "aide" was corrected.
Paul Krugman addressed the question of whether the decline in manufacturing employment can be attributed to the trade deficit. He rightly points out that most of the decline is due to productivity growth, but notes the trade deficit has been a contributing factor. It is worth adding a bit more to the discussion.
The manufacturing share of employment has been declining for more than half a century. The story is that productivity growth is generally faster in manufacturing than the rest of the economy. If, as a first approximation, our demand for manufactured goods increases at the same pace as our demand for all goods and services, then this means we will see a declining share of employment in manufacturing over time.
However, a trade deficit adds to this loss by having a substantial share of manufactured output produced elsewhere. This means that in addition to needing fewer workers to produce the manufactured goods we consume as a result of productivity growth, we also need fewer workers in the United States since a portion of our manufactured goods are being provided by workers in other countries.
This not very pretty graph shows the percent change in the share of manufacturing employment compared to the non-oil, non-agricultural deficit in goods trade as a share of GDP. Note the sharp in decline in shares in the 2000s when the trade deficit was increasing rapidly. In 1997, when the trade deficit in goods was 2.0 percent of GDP, manufacturing accounted for 17.2 percent of total employment. When the deficit peaks at 4.6 percent of GDP in the first quarter of 2005, manufacturing employment was down to 11.5 percent of total employment. This is a decline in share of almost one-third in the span of just eight years. That was not due to productivity growth.
It is incredibly dishonest for proponents of TPP to try to pretend that imports don't displace manufacturing jobs. They do. This doesn't necessarily mean that TPP is a bad pact, it is just one of the factors that has to be considered in assessing the deal. If the TPP proponents don't think they can acknowledge this simple fact and still sell their trade pact, then they must not think they have cut a very good deal for the country.
Suppose Ford closes an assembly plant in Ohio and instead has its cars assembled in Mexico and shipped back to the United States. The workers in the Ohio factory have lost their jobs because of imports. This is a very simple point. For some reason supporters of trade deals like the Trans-Pacific Partnership (TPP) have trouble acknowledging this basic fact.
The difficulty that TPP proponents have acknowledging the jobs lost due to imports is bizarre, because the job loss does not mean that the TPP would be bad policy. It is simply a factor that must be assessed in considering the overall merits of the deal. It is not possible to have a serious assessment of the impact of TPP or any trade deal without considering the workers who would likely lose their jobs due to increased imports. It is also important to note that the impact stems well beyond the workers who lose their jobs to the much larger number who see a reduction in pay as a result of reduced demand for their labor.
With a recent report on the topic, the Congressional Research Service (CRS) seems to have joined the ranks of the denialists. The report goes to great lengths to argue that it is not possible to produce a figure for jobs lost due to imports that is comparable to the International Trade Administration (ITA) estimate that $1 billion of exports supports an average of 5,590 jobs. Rather than providing information to members of Congress about the likely impact of trade on jobs, this report seems to be a deliberate effort at obscuring the issue so as to leave members confused about the extent to which imports will displace jobs.
As a general rule, when someone tries to tell you an economic issue is more complicated than it seems, they are trying to mislead you. This doesn't mean there are not occasionally some complex issues in economics, but these are much rarer than the experts want you to believe. After all, who would pay economists salaries well into the six figures if their work was as simple as washing dishes?
This should be kept in mind by anyone reading Robert Samuelson's column telling readers not to worry about an over-valued dollar leading to a large trade deficit and costing us millions of jobs. This piece includes the memorable lines:
"To be clear: China’s currency manipulation has been real and harmful to U.S.-based firms and workers. By a variety of estimates, Chinese exports have probably cost 2 million or more American jobs since 2000. I have been a critic of the currency manipulation in the past and still am. In an ideal world, we would have moved energetically to eliminate it. But (surprise!) we do not live in an ideal world and, for many reasons, it’s less important now than it once was.
"For starters, recall that trade-induced job losses are not (and never have been) the United States’ main employment problem. Domestic developments dominate the U.S. labor market, for good and ill. The U.S. economy now supports about 150 million jobs; 2 million is a small share of that."
Hey, 2 million jobs, no big deal! Wait, weren't we supposed to think the 20,000 jobs at stake with the Keystone Pipeline are a big deal? So now losing a hundred times (2 million is 100 times 20,000) as many jobs because of an over-valued currency is not a big deal? And of course Samuelson's number is just an estimate of the jobs lost to China. Other countries also prop up the dollar against their currency, likely raising the total to 3-4 million.
For some reason major news outlets like the NYT and WaPo chose not to report on the Federal Reserve Board's release of data on industrial output for April. This release showed that manufacturing output was flat in April leaving output roughly half a percentage point below the November level. Meanwhile capacity utilization, which is often a forerunner of investment in new plant and equipment, dropped to 77.2 percent, 0.9 percentage points below its November level.
The weakness is manufacturing is not surprising given the sharp rise in the trade deficit in the quarter and especially in March. The rise in the deficit is presumably the result of the run-up in the value of the dollar in the second half of 2014. The new data should have warranted at least a short article in these papers.
Tyler Cowen warns readers in his Upshot piece that we may be entering a new era in which growth is weak and the bulk of the workforce, including those with college degrees, see stagnant or declining wages. The warning is well taken, but what's missing is a serious discussion of the policies that are driving this outcome.
Cowen begins his story by pointing out that universities are replacing tenured faculty with low-paid adjuncts. He points out that major manufacturers are doing something similar by paying new hires much less than their incumbent workforce. He could also point to the large number of people who end up working in low paying sectors like retail and restaurants, including many with college degrees.
This is clearly bad news, but all evidence of a weak labor market. We could make the labor market stronger, for example by having the government spend more money on infrastructure, education, and other good things. We could also make the labor market stronger by getting down the value of the dollar to bring our trade deficit closer to balance. If we had balanced trade, it would generate somewhere in the neighborhood of 5-6 million jobs. That would quickly absorb the slack in the labor market and give workers the bargaining power to demand higher wages and turn down low paying jobs.
We don't see this happening because our political leaders don't want to spend more money, preferring higher unemployment. They also have little interest in addressing the trade deficit, hence the decision by the Obama administration not to include currency rules in the Trans-Pacific Partnership (TPP). In fact, the folks in policy positions are prepared to act to ensure that the labor market does not tighten; that would be the purpose of an interest rate hike by the Fed. Higher interest rates slow growth and reduce the pace of job creation.
I'm afraid that I have to take some issue with Paul Krugman's claim that the economic equivalent of accepting nonsense about WMDs to support the war in Iraq was taking seriously the deficit hawks concerns about high interest rates and soaring inflation. While Krugman is right in calling many of these people frauds and cranks, this distracts attention from the real Iraq moment in economics: ignoring the housing bubble.
The accepted view in elite circles is that the crash in 2007-2008 was some sort of natural disaster like Hurricane Katrina. It was impossible to see it coming and only the most astute observers could detect evidence of problems in little things like an explosion in subprime loans and some questionable bank practices in securitization.
This view is very comforting to the elites since almost all of them chose to ignore the evidence that there was a huge bubble and that it's collapse would be really bad news. But just as it should have been easy to see that the dog and pony show the Bush administration put on about weapons of mass destruction was nonsense, it should have been easy to recognize the housing bubble and to know that its collapse would devastate the economy.
In terms of evidence for the bubble, we had a hundred year long history in which house prices had just tracked the overall rate of inflation. Why did they suddenly hugely outpace the rate of inflation? By 2002, when I first wrote about the bubble, the gap was 30 percentage points. In 2006, at the peak of the bubble, the gap was more than 70 percentage points. If this reflected the fundamentals of the housing market, why wasn't anything going on with rents, which were just rising in step with inflation? And why did we have a record vacancy rate as early as 2002?
The Washington Post told readers that China's government is no longer acting to keep the value of the dollar up against its currency:
"Economists say that over the past several years, China’s currency has risen to a fair value, no longer providing Chinese exporters with a leg up on U.S. businesses."
After citing several economists who support the claim that the currency is at or near a market value, it then reports that it's trade surplus is within a normal range.
"Nick Lardy, a Peterson economist specializing in China, says that in 2014 China’s trade surplus dropped to 2.2 percent of gross domestic product, a level considered an indicator of fair exchange rates. At their peak in 2007, China’s exports amounted to 10 percent of GDP, he said."
There are several points worth noting. First, while it appears that China has largely stopped its large-scale purchases of foreign exchange (mostly dollars), its central bank now holds close to $4 trillion in foreign exchange. This is at least twice what would be expected for a country with an economy of China's size.
It is widely believed by economists that the Fed's holding of $3 trillion of assets is holding interest rates down in the United States. The idea is that by holding this stock of government bonds and mortgage backed securities, it is keeping their prices higher than they would be if investors had to hold this stock of assets. (Higher bond prices mean lower interest rates.) If we accept the view that holding a large stock of bonds affects their price, then it must follow that the decision of China's bank to hold a large stock of foreign reserves raises their price relative to a situation where investors held them. This would mean that China's central bank is continuing to prop up the value of the dollar against its currency, even if it is not actively buying dollars.
The point about a trade surplus of 2.2 percent of GDP being normal is also misleading. This would be a reasonable figure for a slow growing rich country like the United States. Economists usually expect fast growing developing countries like China to be running trade deficits. The idea is that capital earns a better return in a fast growing country. This pushes up the value of its currency.
Remember the billions of stories in the media last fall about how the dollar was rising because the U.S. economy was so strong? (It was growing at a bit more than a 2.0 percent annual rate.) That should be happening with China, given the huge difference between its growth rate and the growth rates in the U.S., Europe, and Japan. The rise in the value of China's currency would make its goods and services less competitive internationally, shifting its trade surplus to a deficit. The fact that this is not happening is explained by the actions of China's central bank to keep its currency from rising.
That's the inevitable question people would ask after reading his column headlined, "you can't stop the trade machine." The piece conflates trade, which obviously is not going to be stopped, with the Trans-Pacific Partnership (TPP). There is of course no direct connection, but if you're trying to promote the TPP, why not?
Whether or not the TPP passes, trade between the United States and the countries in the region will continue to grow. It's not even clear that it will grow faster with the trade deal. While the TPP will lower tariffs, most tariffs with most of the countries in the region are already low. (Six of the eleven non-U.S. countries in the TPP already have trade agreements with the U.S.)
On the other hand a major thrust of the deal is to strengthen and lengthen patent and copyright protection. This will raise the price of many items, most importantly prescription drugs, thereby reducing trade. The price increases from these forms of protectionism are equivalent to large tariffs. In the case of drugs, patent protection can raise the price by close to 100 times the free market price.
For example, the Hepatitis-C drug Sovaldi sells for $84,000 for a 3-month course of treatment in the United States. A high quality generic version is available in India for less than $1,000. This has the same effect on the market as imposing a tariff of 10,000 percent. Since the economic distortions from a tariff are proportionate to the square of the size of the patent, the distortions from patent and copyright protection on a limited number of items can easily exceed the gains from eliminating small tariffs on a large number of items. In other words, Zakaria has little basis for even asserting that the TPP will increase trade and growth.
Furthermore, the deal imposes a business friendly regulatory structure that Zakaria just assumes we should want. As Canada's finance minister recently demonstrated when he argued that the Volcker Rule violates NAFTA, these trade deals can impede our ability to regulate the financial industry. The TPP may in fact limit the ability for the federal, state, and local governments to impose regulation in a wide range of areas, including the environment, consumer safety, and labor rules. Since the terms of the agreement will be enforced in the United States by an Investor State Dispute Settlement system, not the U.S. judiciary, it is entirely possible that a wide range of regulations in these areas could be considered violations of the trade agreement.
Do newspapers like the NYT test applicants for reporting jobs on their ability to read minds? It seems they must, since so many of them seem to have this skill. Today's article on the Senate's approval of a motion to debate fast-track authority at several points told readers what various actors think or believe.
My favorite assessment of inner thoughts was in reference to demands that the Trans-Pacific Partnership (TPP) include currency rules:
"But the White House fears that making the accelerated authority contingent on currency policy alterations could scare important partners from the negotiating table, including Japan, the second-largest Trans-Pacific partner."
If we assume that NYT reporters do not actually read minds, this statement means that someone at the White House (is there a reason for anonymity?) said that they feared currency rules would scare countries away from the negotiating table. As a practical matter, the United States would undoubtedly have to make concessions on other issues in order to get Japan and other countries to agree to currency rules.
Such concessions might mean that the TPP would end up being less beneficial to companies like Nike, Boeing, and Pfizer, which would reduce their interest in the pact. However in any serious assessment the issue is whether the TPP ends up being less corporate friendly as a result of currency rules, not whether the possibility of such a deal would disappear. Of course it is possible that the Obama administration would not have an interest in pursuing a trade deal that was less friendly to large corporations who are major campaign contributors.
It is also worth noting that many large U.S. corporations would actually be opposed to a reduction in the value of the dollar against other currencies. Companies like Walmart and GE, that depend on low cost imports, would lose much of their competitive advantage if the price of the Chinese yuan and other currencies rose against the dollar.