It's not quite that bad, but pretty close. An article on the victory of Syriza in Greece told readers:

"International economists say the eurozone needs a judicious mix of all of the above: monetary stimulus to avoid deflation, deficit-cutting by debtor countries, higher spending by creditor countries, and broad economic overhauls in many nations to lift long-term prospects."

Really? Do all international economists say this? Did these international economists predict the economic collapse in 2008? If not, when did these international economists stop being wrong about the economy? Do these international economists know that the OECD says that Germany has stricter employment protection regulations than either Italy or France?

Later we are told:

"Ms. Merkel’s economic medicine, with its focus on Europe’s long-term prospects in a fast-changing global economy, could show benefits eventually, economists say. The problem, they add, is that meanwhile, Europe is staring at a lost decade."

It's not clear who these economists are or what they can possibly be thinking. There is a large and growing body of evidence that high rates of long-term unemployment permanently lower a country's productive potential. With countries like Greece, Spain, and possibly France looking at decade or more of double-digit unemployment under the German plan, the losses to GDP could easily last 20 years or more. If the economists the Wall Street relies upon are making GDP growth projections for 2033 and beyond, they probably should lose their licenses. 

Robert Samuelson cautioned, somewhat reasonably, against over-optimism on the U.S. economy. His basic point is that other economies around the world don't look very good right now. Their weakness could spill over and dampen growth in the United States. This is largely right, especially with the recent run-up in the dollar making U.S. goods and services less competitive.

However Samuelson does get some items wrong. He tells readers that Japan's economy is in a recession. This is almost certainly wrong. We don't have growth data for fourth quarter yet, but it is almost certain to be positive. Furthermore, even the drop in the third quarter was misleading. The economy contracted because of a large drop in inventory accumulations. Final demand actually grew modestly in the quarter. The unemployment rate has actually fallen slightly through Japan's recession, with the unemployment rate averaging 3.5 percent in October and November, compared to 3.6 percent in the first quarter. 

The Japan story is fairly simple. The austerity gang got the government to impose a large tax increase in April, which was a severe hit to the economy. However, with aggressive monetary policy and no further austerity, the economy is again growing at a modest pace.

The other point worth correcting is Samuelson's comment that one-third of U.S. corporate profits now come from overseas. This is true in an accounting sense but it is almost certainly a gross exaggeration of the economic distribution of profits. Most major U.S. corporations find ways to have profits from the United States show up on the books of subsidiaries in countries with lower tax rates.

Insofar as profits are foreign only in accounting, they will not be affected by the slowdown elsewhere in the world. Of course reduced corporate profits are not likely to have much impact on domestic demand in any case. Companies are already sitting on vast piles of cash, so lower profits would likely have little impact on investment. A reduction in dividend payouts or a fallback in stock prices may have a modest impact on the consumption of the wealthy, but this would probably not be large enough to have noticeable impact on the economy.

The Washington Post had a major business section piece on the "winners and losers of a stronger dollar" which never explicitly discussed its impact on the trade deficit. This is truly remarkable since the $500 billion plus annual trade deficit (@3 percent of GDP) is the main cause of the economy's weakness and continued high unemployment.

The logic of this is straightforward. The deficit is money that is income that is generated in the United States but is creating demand overseas. It has the same impact on the U.S. economy as if consumers decided to stuff $500 billion every year under their mattresses instead of spending it.

This is the main cause of the "secular stagnation" that has been widely discussed, even in the pages of the Washington Post. There is no easy mechanism for replacing this $500 billion in lost annual demand. We could do it with larger budget deficits, but deficit hawks like the folks at the Post, get hysterical at such suggestions. 

In the last decade we replaced the demand lost from the trade deficit with the demand from a housing bubble, which generated record levels of construction spending (measured as a share of GDP) and an unprecedented consumption boom. In the late 1990s we filled the hole with the demand created by a stock bubble, which spurred investment and a slightly smaller consumption boom. However without another bubble, there is no plausible mechanism for filling this hole in demand.

The rising dollar will make things worse since the value of the dollar is the main determinant of the trade deficit. A rise in the dollar will make U.S. goods and services more expensive to foreigners, meaning they will buy less of our exports. It makes foreign goods and services cheaper for people living in the United States, causing us to buy more imports. The net effect will be a larger trade deficit and a loss of jobs.

The piece also makes a common mistake by implying that it matters that oil is generally priced in dollars:

"Oil prices are falling everywhere, but because the commodity is priced in dollars, American drivers are seeing a bigger discount than drivers in other countries."

Actually, the story would be exactly the same if oil were priced in euros or yen and we saw a similar run-up in the dollar against the value of other currencies. The fact that the price of oil is generally quoted in dollars is of no consequence.

I have had several readers send me a blogpost from Scott Sumner saying that the Keynesians have been dishonest in not owning up to the fact that they were wrong in predicting a recession in 2013. The argument is that supposedly us Keynesian types all said that the budget cuts and the ending of the payroll tax cut at the start of 2013 would throw the economy back into recession. (Jeffrey Sachs has made similar claims.)

That isn't my memory of what I said at the time, but hey we can check these things. I looked at a few of my columns from the fall of 2012 and they mostly ran in the opposite direction. The Washington insider types were hyping the threat of the "fiscal cliff" in the hope of pressuring President Obama and the Democrats to make big concessions on Social Security and Medicare. They were saying that even the risk of falling off the cliff could have a big impact on growth in the third and fourth quarter of 2012.

My columns and blogposts (e.g. here, here, here, here, and here) were largely devoted to saying this was crap. I certainly agreed that budget cutbacks and the end of the payroll tax cuts would dampen growth, but the number was between 0.5-0.8 percentage points. This left us far from recession. (All my columns and blogposts from this time are at the CEPR website, so folks can verify that I didn't do any cherry picking here.)

I know Paul Krugman is the real target here, not me, but we've been seeing the economy pretty much the same way since the beginning of the recession. If he had a different story at the time I think I would remember it. But his columns and blogposts are archived too. I really don't think anyone will find him predicting a recession in 2013, although I'm sure he also said that budget cuts and tax increases would dampen growth. 

Anyhow, I'm generally happy to stand behind the things I've said, and when they are proven wrong I hope I own up to it. But I don't see any apologies in order. No recession happened in 2013 and none was predicted here.



I see that Alex Tabarrok has found a quote from me from May of 2013 in which argued that the economy would not grow fast enough to make a significant dent in the unemployment rate in the near future:

"It is absurd to think that the economy has enough momentum to make any substantial dent in unemployment in the foreseeable future."

Since that time, the unemployment rate has fallen by roughly 2.0 percentage points. That would certainly qualify as a "substantial dent." Interestingly, growth over this period averaged just 2.8 percent. With potential growth generally put between 2.2-2.4 percent (potential growth is the rate needed to keep pace with the growth of the labor force) this difference of between 0.4-0.6 percentage points would ordinarily not be enough to make a substantial dent in the unemployment rate. In fact, if we look at the employment to population ratio (EPOP), the percentage of the population with jobs, it rose by just 0.6 percentage points over this period. At that rate, it would take approximately a decade to get back to the pre-recession EPOPs.

What I had not anticipated is the large number of people who would give up looking for work and drop out of the labor force over the next year and a half. The labor force participation rate fell from 63.4 percent in April of 2013 (the most recent data available when I wrote the column) to 62.7 percent in December of 2014. This drop corresponds to roughly 1.7 million people leaving the labor force. In past recoveries the labor force participation rate rose as more people got jobs.

Anyhow, I will own up to having gotten this one badly wrong. I did not expect people to be leaving the labor force as the economy recovered. I expected that participation rates would follow past trends. I still expect that this will be the case going forward, so I do think both the EPOP and the labor force participation will rise in the next couple of years, assuming that the economy continues on its modest growth path.

Joe Nocera used his NYT column this morning to beat up on a number of politicians who oppose President Obama's call for fast-track authority to facilitate passage of the Trans-Pacific Partnership (TPP) and the Trans-Atlantic Trade and Investment Pact (TTIP). He claims that they have the trade story badly wrong and that recent trade deals have actually been a big help to the country.

While Nocera may be correct in saying that many politicians have exaggerated the negative impact on NAFTA and other recent trade deals (stop the presses! politicians exaggerating!), but their basic story is correct. There are three points that people should understand in assessing the impact of trade and the meaning of these trade deals:

1) Trade has been an important factor increasing inequality in the United States;

2) The trade deficit is the major reason that the economy has weak demand and remains far below full employment;

3) The TPP and TTIP are about imposing a corporate friendly regulation structure, not trade.

Taking these in turn, the fact that trade has been a major factor contributing to inequality is no longer just a claim from the fringe lefty types. Paul Krugman has written about as has M.I.T. economist David Autor. It was even highlighted in the report of the commission on inclusive prosperity set up by the Center for American Progress and co-chaired by Larry Summers.

The basic point is a simple one. We constructed trade agreements designed to put our steelworkers and textile workers in direct competition with low-paid workers in the developing world. The predicted and actual effect of this policy is to lower the wages of steelworkers and textile workers.

If anyone finds this difficult to understand, imagine that the trade deals of the last quarter century were focused on making it as easy as possible for smart kids in India, China, and other developing countries to train to U.S. standards and then work as doctors, lawyers, dentists and in other highly paid professions in the United States. What would we expect to happen to the wages of doctors, lawyers, dentists and other highly paid professionals? They would fall, bingo!

The story on the trade deficit should be equally straightforward. Our annual trade deficit of $500 billion (@ 3.0 percent of GDP) is a direct drain on domestic demand. This represents money being spent by workers and companies in the United States that is creating demand in other countries, not in the United States. In the good old days, mainstream economists ridiculed the idea that a trade deficit could lead to a shortfall in demand because they assumed as an article of faith that any demand lost due to a trade deficit would be made by increased demand from other sources.

In trying to push its case with the public, Uber decided to share its internal data with Alan Krueger, a prominent Princeton economist and former head of President Obama's Council of Economic Advisers. (Could this be part of Uber's dividend from hiring former Obama political adviser David Plouffe?) Anyhow, Kreuger finds that Uber drivers on average earn a gross premium of $6.00 an hour over the pay of drivers of traditional cabs. (He also had some rather unsurprising findings, for example that more people are now working for Uber after it expanded the number of cities in which it operates.)

The key issue here is the use of the gross premium rather than a direct earnings comparison. The difficulty, as the paper notes, is that we don't know the costs incurred by Uber drivers, who use their own car. (There is a good write-up of the study by Emily Badger in Wonkblog.) Depending on how much Uber drivers drive, they could still end up with less money than their counterparts in traditional cabs.

A useful piece of information is the cost of driving a car, which Badger's colleague, Andrea Peterson tells us is 57 cents per mile, according to the Internal Revenue Service. Well, this one seems pretty straightforward, if Uber drivers average more than 11 miles per hour, they are less well-paid than their counterparts working for traditional cab companies.

Krueger's study doesn't have data on miles traveled (this is strange, since Uber has this data, at least for the time that a paying passenger is in the car), but it does tell us that the median number of trips per hour is 1.3. We really would want the average here, since we are looking at an average wage pay difference. But if we take the 1.3 median number of trips per hour given in the study, then the average trip distance would have to be 8 miles or less for Uber drivers to come out ahead, assuming they did no unpaid miles.

This second assumption is of course obviously wrong. If an Uber driver take a rider 30 miles from downturn to a suburb, there is a good chance that they will be driving back with an empty car. Also, Uber drivers often cruise high density areas to try to be in line for a call. (This is my casual empiricism from asking the few Uber drivers I have been in contact with.) Anyhow, clearly total miles driven will exceed paid miles driven, which means that the average length of a ride would have to be considerably less than 8 miles for Uber drivers to come out ahead of drivers for traditional cabs.

There is one other item in this mix worth noting. The I.R.S figure of 57 cents a mile is a figure for a commercial driver. It assumes that this person has paid for the necessary licenses and insurance. Most Uber drivers have not paid for commercial licenses for themselves and their vehicles. Most probably also don't carry insurance that covers them for commercial driving.

There may be some case here, but of course that is not what George Will is actually arguing. He is pulling numbers from outer space to tell a story of a run away welfare state. As he quotes that great welfare reformer of the past, Daniel Patrick Moynihan:

"the issue of welfare is not what it costs those who provide it but what it costs those who receive it."

Okay, none of us like to see healthy people in their prime working years scamming the rest of us rather than working. But in spite of Will's best efforts at playing with numbers, he does not have much of a story. He tells readers:

"Transfers of benefits to individuals through social welfare programs have increased from less than 1 federal dollar in 4 (24 percent) in 1963 to almost 3 out of 5 (59 percent) in 2013. In that half-century, entitlement payments were, Eberstadt says, America’s “fastest growing source of personal income,” growing twice as fast as all other real per capita personal income. It is probable that this year a majority of Americans will seek and receive payments.

This is not primarily because of Social Security and Medicare transfers to an aging population. Rather, the growth is overwhelmingly in means-tested entitlements."

If we go to the Congressional Budget Office, we can quickly find data going back to 1973. This shows entitlement spending, which accounts for the vast majority of federal government transfers, went from 7.5 percent of GDP in 1973 to 12.3 percent in 2014. I'm not sure that this sort of growth will destroy the nation's fiber. (I realize that this excludes the 1963-73 period, but if that is the story, then the nation's fiber was destroyed more than 40 years ago.)

Furthermore, contrary to what Will tells us, most of the growth was in Social Security and Medicare payments to an aging population, which went from 4.2 percent of GDP in 1973 to 7.8 percent in 2014. This increase accounts for 3.6 percentage points of the 4.8 percentage points of growth in entitlement payments over this period. (Most of the rest can be accounted for by Medicaid, which increased by 1.2 percentage points as a share of GDP. This is a means-tested program, but more than half of expenditures go to low-income seniors.)

Paul Krugman joined in ridiculing billionaire Jeff Greene, a person who richly deserves to be ridiculed. (He wants people to get used to lower living standards.) However people are wrongly attacking Greene when they complain about his betting against subprime mortgage backed securities.

Subprime mortgage backed securities were the fuel for the housing bubble that entrapped tens of millions of people, laid the basis for the economic collapse, and ruined millions of lives. The securities were in fact bad. Greene betting against them made that clear in the markets somewhat sooner than would have otherwise been the case, bringing down the bubble earlier and more rapidly.

This is good. It meant that fewer people were caught up in it than if the bubble had continued to grow for another six months or year. It would have saved people an enormous amount of pain if there had been lots of Jeff Greenes betting against subprime mortgage backed securities in 2003-2004. They could have prevented the housing bubble from ever growing to such dangerous proportions. Certainly his actions were much more commendable in this one that the profiteers and enablers like Robert Rubin, Alan Greenspan, and Timothy Geithner. 

Just to be clear, Greene was acting out of greed, not a desire to help the economy and society. But this is a case where greed was good. Of course he is still a wretched person, flying across the Atlantic in his private jet with two nannies to tell the rest of us that we will have to get used to a lower standard of living.  

Note: Name corrected -- thanks John Wright.

By almost every measure there continues to be a great deal of slack in the labor market. Unemployment rates remain high even for college graduates and even college graduates with degrees in the STEM fields have since little increase in wages in recent years.

Given this backdrop, it is not clear what information the NYT thinks it is giving readers when it reports :

"His company [a cable start-up based in Denver] has created about 60 jobs in the past year, but Mr. Binder said that vacancies often showed the structural problems in the economy. His business sometimes struggles to find qualified candidates for technologically demanding positions, but it is deluged with 700 applicants when it needs to hire an accountant."

The normal way in which businesses attract qualified candidates is by offering higher pay. Clearly these candidates exist, they just might work for Mr. Binder's competitors. Insofar as Mr. Binder's difficulties in getting qualified candidates for technologically demanding positions is evidence of a structural problem, the problem is that we have people in top positions in businesses who apparently do not understand how the labor market works.

Robert Samuelson used his column on Monday to debate the need for the Fed to clamp down on wage growth and came down on the right side: hurry up and wait. This is good to see, but there are a few more data points that make the case even more strongly.

First, the quit rate -- the share of unemployment due to people voluntarily quitting their jobs -- is still at levels that we would expect in a recession. This is important because it is a relatively direct measure of workers' confidence in their labor market prospects. If they are unhappy at their job, but they don't feel they have much opportunity to find a better one, they will be reluctant to quit unless they have a new job lined up.


Percentage of Unemployment Due to Job Leavers

quit rates

                                  Source: Bureau of Labor Statistics.

The second noteworthy point is the high number of people who report working part-time involuntarily. We can debate the reasons that prime age workers might have dropped out of the labor force, but there is no plausible case that people who work part-time jobs and say they want full-time employment, don't actually want full-time employment. This number is still up by more than 2 million (@ 50 percent) from pre-recession levels, suggesting a large amount of labor market slack.

The last point is that we really don't have much basis for fear about getting this wrong by being too lax. According to research from the Congressional Budget Office, the terms of the trade-off between unemployment and inflation have flattened. This research indicates that even if the unemployment rate was a full percentage point below the NAIRU for a full year, the inflation rate would only rise by 0.3 percentage points.

The NAIRU or non-accelerating inflation rate of unemployment, is supposed to be the lowest unemployment rate we can hit without having the inflation rate start to rise. We don't know exactly where it is, but most economists put it between 5.2 percent and 5.5 percent unemployment. (I think we can go far lower.) But the point is that if the "true" number is 5.5 percent, and we allowed the unemployment rate to fall to 4.5 percent for a full year, the inflation rate would only be 0.3 percentage points higher than at the end of the year than the beginning. In the current environment, that would mean going from a 1.6 percent core inflation rate to a 1.9 percent core inflation rate.

That doesn't sound like a really bad story. For this reason, it's hard to see why anyone should be talking about raising interest rates and deliberately slowing the economy right now.


Note: Link fixed.

I thought that reporters had finally learned that monthly wage data are erratic and best ignored, but noooooooo, they apparently still believe that they give us real information about the rate of growth of wages. The immediate cause for complaint is a Morning Edition State of the Union fact check segment in which Scott Horsley told listeners that wages rose in November, but then fell in December.

As I tried to explain after the big wage jump in November was reported, the monthly changes are dominated by noise in the data. The 0.4 percent nominal wage rise reported in the month followed a month where the wage reportedly rose by just 0.1 percent and a prior month where it did not rise at all. Employer pay patterns in the economy as a whole do not change that much from month to month, it should have been obvious this was just noise in the data.

The wage drop reported in December should have further confirmed this. Horsley tried to explain the drop as a composition story, that we hired more people in lower paying industries. This is hard for two reasons. First, we added 48,000 jobs in the high-paying construction industry in December, compared to just 20,000 in November. We added only 7,700 jobs in the low-paying retail sector in December, compared to 55,700 jobs in November. In other words, the mix story seems to go the wrong way.

The other reason is the mix from month to month can only make a marginal difference in average wages. To see this, let's take an extreme case. The gap in pay between the construction sector and the overall average is just over $2 an hour. By contrast, pay in the leisure and hospitality sector is about $10 an hour less than the average. Suppose that we saw 100,000 new jobs in construction and no other jobs in any other sector. This is equal to approximately 0.07 percent of total employment. This means this jump in construction employment would raise wages by less that 0.2 cents an hour. By contrast, the surge in restaurant employment would lower the average hourly wage by 1.0 cent.

In other words, even these extraordinary shifts in composition would have no measurable effect on the pace of wage growth. Anyone looking to explain month to month changes in wages by job mix is looking in the wrong place. The only responsible way to report on the wage data is to take averages over longer periods, the monthly changes simply don't mean anything.

Other news sources just told us what the Republicans said in reaction to President Obama's State of the Union Address, National Public Radio told us what they really thought. Its top of the hours news summary on Morning Edition (sorry, no link) told listeners that Republicans "see it as more tax and spend."

Denmark has long cold rainy winters where the sun only shows up briefly. It is understandable that someone can get pretty sour living in these conditions. But that is no reason for the Washington Post to run scurrilous screeds from Scandinavia that inaccurately impugn the region.

That is a reasonable description of Michael Booth's Sunday Outlook piece, which managed to get most of the important points wrong in a piece titled, "Stop the Scandimania: Nordic nations are not the utopia they are made out to be."

Going in order of importance, Booth somehow thinks that the McDonald's workers in Denmark getting paid $20 an hour pay 75 percent of their income in taxes. He better try to explain that one to the OECD. It puts the tax rate for the average worker at 26.7 percent. Booth is apparently adding in the 25 percent valued added tax, which would still leave us just over 45 percent (the 25 percent tax is applied on 73.3 percent of income left over after-tax). That's pretty far from 75 percent.

Booth then turns to mocking the employment record of the Scandinavian countries:

"last month the Times assured us that 'A Big Safety Net and Strong Job Market Can Coexist. Just Ask Scandinavia.' (*Cough* unemployment is 5.6 percent in the United States, vs. 8.1 percent in Sweden, 8.9 percent in Finland and 6.4 percent in Denmark.)"

According to the European Commission, the employment rate for people between the ages 20 and 64 is 73.3 percent in Finland, 79.8 percent in Sweden, and 75.6 percent in Denmark. All of which are above the 71.1 percent rate in the United States.

He then goes to Sweden, which he rightly attacks for its strong anti-immigrant movement, but then adds:

"This has distracted from the slowing economy, increasing state and household debt levels, and one of the highest youth unemployment rates in Europe."

Again, he'll have to explain his calculations to the folks who do this stuff for a living. The European Commission has a category for young people who are not working or in school or a training program. The share of young people in Sweden in this category about 7.5 percent, near the bottom of the European Union. As far as state indebtedness, the I.M.F. tells us the government has a deficit of about 2.0 of GDP and total debt equal to 42 percent of GDP, that less than 70 percent of the level in the United States.

Usually when a country takes steps to "defend" its currency, the problem is that the value of its currency is falling in world currency markets. This is most often due to higher inflation in the country in question, although the situation can be worsened by speculative attacks. Raising interest rates is a standard form of defense, since it makes it more desirable to hold assets denominated in that currency.

Against this normal pattern, the NYT told readers that Denmark was "defending" its currency by cutting interest rates. Apparently the problem is that the krone, Denmark's currency, was rising against the euro. The krone has been pegged against the euro since its inception. The recent upswing in its value threatened to push the krone above its designated range.

So in this case, the "defense" is intended to reduce the value of the currency, not to raise it.

The NYT ran an article headlined, "China's Economy Expands at Slowest Rate in Quarter Century." People who read the piece discovered that China's growth rate for 2014 was estimated at 7.4 percent, which is more than three times the growth rate projected for the United States. More strikingly, this is not much of a slowdown from the last two years.

The I.M.F. reports growth in both of these years was 7.7 percent. Measured as a share of growth, a drop from 7.7 percent to 7.4 percent in China would be equivalent to a drop from 2.0 percent to 1.92 percent in the United States. It's not clear that this sort of slowdown would draw headlines. 

There are questions about the accuracy of China's growth data, but this article refers only to the reported numbers. These do not provide much a basis for talk of a major slowing of China's economy.

Paul Krugman is still upset over the decision by Switzerland's central bank to end its peg to the euro and allow the value of the Swiss franc to rise. Since some of us non-hyper-inflation worriers don't share his anger, perhaps it worth explaining the difference in views.

Krugman sees the peg as a sort of quantitative easing. He argues it was working (Switzerland's economy has largely recovered), so there was no reason to abandon it. He sees the basis for abandonment as a needless fear over inflation and possibly a concern about central bank losses. (The Swiss central bank is partly private. Sound familiar?)

Krugman may well be right about the reasons that Switzerland's central bank abandoned its peg, but that doesn't mean that it was wrong to do so.

Switzerland's peg was designed to promote its growth at the expense of its neighbors. The under-valued currency boosts the economy by making Swiss exports cheaper relative to the goods and services of its trading partners and making imports into Switzerland more expensive. In this story, Switzerland's growth is a direct subtraction from the growth of its trading partners.

This is not a big deal with a relatively small country like Switzerland, but imagine that Germany left the euro (hold the applause) and adopted the same policy of deliberately under-valuing the new mark against the euro. Germany would then run large trade surpluses and the other euro zone countries would run large deficits, draining away demand. Should we applaud this policy as a form of quantitative easing that needs to be supported?

Krugman's argument rests largely on the idea that we need to promote central bank credibility. I'm a bit more skeptical on this one. Central bank credibility is a two-edged sword. One of the main reasons that we are not supposed to pursue QE-type policies is the risk of inflation, which could undermine central bank credibility.

I would agree with Krugman that the risk of any serious outburst of inflation in the current economic situation is near zero, but of course it is not zero. And the risk of inflation in an economy with less demand and higher unemployment is lower than the risk in an economy with more demand and lower unemployment. This means that we do face more of a risk of inflation and damaging central bank credibility on keeping inflation low with QE than without.

For me, this is a no-brainer. How many parents of children should be unemployed so that everyone knows the Fed won't let the inflation rate get above 2.0? The answer would be very few, but if central bank credibility is some great good of enormous value, then the QE-foes may have a point.

I would keep credibility on the back burner here. Switzerland has a budget surplus and extremely low government debt. It should be running budget deficits to boost its economy and those of its neighbors. There is no reason we should be applauding its efforts to sustain demand in its economy at the expense of its neighbors.

A Washington Post article on President Obama's new willingness to push an economic agenda contrasted U.S. economic performance with "the anemic economies of Europe and Japan." It's not clear on what basis Japan's economy is supposed to be anemic compared with the U.S.

Its unemployment rate stood at 3.5 percent in November, the most recent month for which data are available. Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies. By comparison, the employment rate has risen by just 0.8 percentage points over the same period in the United States (it did rise by another 0.3 percentage points in the fourth quarter). The 1.2 percentage point difference for the period for which we have data from both countries would correspond to another 3 million people being employed in the United States.

It is also worth noting that the employment rate in Japan is 1.7 percentage points above its pre-recession level. In the United States it is more than 3.0 percentage points below its pre-recession level.

It isn't often that I think Paul Krugman gets one wrong, but I think he wrongly attacks those chocolate loving cuckoo clock making Swiss in his column today. His complaint is that the Swiss central bank abandoned its commitment to keep down the value of the Swiss franc against the euro. Krugman sees this a failure of will, with the central bank giving up a commitment to pursue an inflationary policy. This is part of a larger saga of feckless central banks that continue to obsess about inflation when the real problem facing world economies is an inflation rate that is too low.

While the general point is right, it is hard to see how this story applies to Switzerland. Switzerland did not see the same sort of downturn as the rest of the OECD in 2008. Furthermore, it has fully recovered from its downturn with a GDP that is 8 percent above its pre-recession level and an unemployment rate of 3.5 percent.

In this context, it is actually doing what we should want Switzerland to do as a good world citizen. By allowing its currency to rise, it will make its goods and services less competitive internationally. This means it will import more from its trading partners and export less, effectively providing them with an economic boost. This is what we should want to see. The countries that are at or near full employment should be running larger trade deficits or smaller surpluses.

So give the Swiss a gold star. They called this one right. (Now if we can get them to talk to China ....)

Recent comments

  • Guest - Patrick Siegenthaler

    Great point, I wish more people - including many senor financial analysts here in in Switzerland - would take it into account. While the situation may look like it deterioratated for the Swiss economy ever since this adjustment, in reality the economic boost will be worthwhile. All the best Patrick...
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It's more than a bit bizarre that patent protection doesn't get a single mention in a NYT column on "why drugs cost so much." Of course without government granted patent monopolies the vast majority of drugs would sell for $5-$10 per prescription. And, drug companies would not have incentive to mislead the public about the safety and effectiveness of their drugs.

The NYT has somehow decided that Japan needs budget discipline. It's not clear what the basis for this determination is, but the fourth paragraph of an article on Japan's latest budget proposal told readers:

"With the budget proposal, Japan is trying to balance its need for growth and discipline."

The markets apparently do not see the same need as the NYT. The current interest rate on 10-year government bonds is 0.25 percent.

Neil Irwin has an Upshot piece making the case for why we should expect to see wages rising soon. He noted a survey of employers showing more are planning to raise wages than in prior years. He also noted the promise by Aetna to place a floor of $16 an hour on its workers' pay.

However the main piece of evidence is a rise in the number of job opening to a high for the recovery. While this is indeed encouraging, there are three important qualifications that deserve mention.

First, the biggest rise in openings compared with pre-recession levels are in low-paying sectors like retail and restaurant employment. This may mean some shift from these low-paying sectors to higher paying sectors, but the high-paying sectors do not appear to be having trouble getting workers. One exception is the government sector, which has also returned to pre-recession levels of openings. This could reflect the deterioration in the pay and work conditions of government employees.

A second fact worth noting is that real wages were rising very modestly even before the recession. The last time we saw strong real wage growth was at the very beginning of the decade. This series began in December of 2000, just before the 2001 recession kicked in. But the job opening rate was higher in the three months preceeding the recession than the number released by the Labor Department this week, 3.6 percent in 2001 compared to 3.4 percent in November.

Finally, the quit rate at 1.9 percent is below the 2.1-2.2 percent pre-recession level and well below the 2.5 percent rate of 2000-2001. This means that workers still do not feel comfortable leaving their jobs.

Clearly the labor market is improving, but we likely still have a long way to go before most workers see real wage gains. The one wild card is that the Affordable Care Act, by allowing workers to get insurance outside of employment, may make workers more comfortable leaving jobs they don't like. This could lead the labor market to tighten up more quickly than otherwise would have been the case.


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