The folks setting economic policy in Europe have already inflicted massive damage on the continent, putting foreign enemies and natural disasters to shame. But the pain goes on.

The NYT reported on a preliminary ruling on the European Central Bank's (ECB) plans to buy government bonds by one of the advocates general at the Court of Justice of the European Union. According to the piece, the ruling authorized the ECB to buy government debt, but said:

"the central bank should not buy government bonds immediately after they are issued, to allow markets to determine a price."

The point of a bond buying program is to raise the price of bonds and push down interest rates below the market level. Also, it really doesn't matter whether the ECB buys the bonds directly from a government or from third parties after they are issued. In both cases it would be taking possession of the same share of the stock of outstanding debt, which is the relevant factor for determining bond prices and interest rates.

Can someone buy these folks an intro econ text?

In a Wonkblog piece Max Ehrenfreund wrongly described the Democrats proposal for a financial transactions tax as a major tax increase on investors. This is not true. Research shows that trading volume will decline roughly in proportion to the increase in transactions costs that result from this tax.

This means that if the tax increases trading costs by 50 percent, we would expect trading volume to decline by roughly 50 percent. This means that investors might pay 50 percent more for each trade, but since they only trade half as much, the total amount they spend on trading costs would be little affected. The cost of the tax would be borne almost entirely by the financial industry, not investors.


The NYT reported on the likelihood of a settlement between Standard and Poors and the Justice Department over accusations that S.&P. had effectively sold investment grade ratings to banks issuing mortgage backed securities (MBS) during the housing bubble years. The claim is that S.&P. knowingly gave ratings to MBS that they did not deserve because rating these issues was a major source of revenue to the company and it did not want to risk the business by giving out honest ratings.

This is a good time to mention the Franken Amendment to the Dodd-Frank bill which would have eliminated the incentive for the rating agencies to exaggerate the quality of MBS by taking the hiring decision away from the banks. Instead of directly hiring a rating agency, an issuer of MBS would contact the SEC, which would then determine which rating agency to assign to the job. While the amendment passed with overwhelming and bi-partisan support in the Senate, it was stripped out in the conference committee, apparently at the request of the Obama administration.

The Securities and Exchange Commission (SEC) then studied the issue for three years and decided that it was not up to the task of picking rating agencies after being inundated with comments from the industry. The gist of these comments was that the SEC might send over an agency that was not competent to rate the bond issue in question. This begs the obvious question of why would any bank be marketing a bond, the quality of which a professional auditor at one of the accredited rating agencies could not accurately assess? Nonetheless the amendment was killed and the pre-crisis system was preserved intact.

And, as economic theory would predict, there is evidence that the rating agencies are again lowering their standards to gain business.

The Washington Post reports that the Democrats have a new plan for middle class tax cuts that will be financed in part by a 0.1 percent tax on financial transactions like stocks, bonds, and derivatives. Since the financial industry and its employees will undoubtedly be pushing tirades telling us that this tax will kill middle class savers, BTP decided to call in Mr. Arithmetic to get his assessment of the issue.

Mr. Arithmetic points out that the amount of the tax born by savers will depend in large part on their response to the tax. Since research indicates that trading volume declines roughly in proportion to the increase in trading costs, this means that ordinary savers will bear almost none of the tax.

To see this point, imagine that our middle class saver has $100,000 in a 401(k). Suppose that 20 percent of it is traded every year and that the trading costs average 0.2 percent. This means that our saver is spending $40 a year on trading costs (0.2 percent of $20,000). 

With the Democrats' proposal, trading costs will rise to 0.3 percent assuming that 100 percent of the tax is passed on in higher trading costs. (This is almost certainly an exaggeration, since the industry will probably not be able to pass the tax on in full.) If trading volume were unchanged, then this middle class saver would now pay $60 a year in trading costs (0.3 percent of $20,000).

However research shows that the folks managing the 401(k) will likely cut back their trading by roughly 50 percent in response to this 50 percent increase in trading costs. This would mean that only 10 percent of the 401(k) or $10,000 would be traded each year. In this case, the 401(k) holder would be paying just $30 a year in trading costs (0.3 percent of $10,000).

Instead of going up, trading costs actually fell. Since 401(k) holders don't on average make money on trading (for every winner there is a loser), they end up better off after the tax. Of course these numbers are approximations and it may well be the case that the decline in trading volume does not fully offset the increase in costs, but the point remains. The vast majority of this tax will fall on the financial industry (think Lloyd Blankfein, Jamie Dimon, and Robert Rubin). The middle class 401(k) holder will be largely unaffected.


Robert Samuelson uses his column today to tell readers that he is very unhappy with Paul Krugman. The specific complaint is that Krugman gives Paul Volcker credit for reducing inflation in the early 1980s, rather than Reagan. (Actually, I thought Krugman was giving Volcker credit for the recovery from the recession, which Krugman said was primarily due to lower Fed interest rates rather than Reagan tax cuts.)

Anyhow, Samuelson insists that Volcker has to share credit with Reagan, since Reagan gave him the political cover to carry through policies that pushed the unemployment rate to 10.8 percent and ruined millions of lives. I'm inclined to agree with Samuelson on this one. A different president might have put pressure on the Fed chair to back away before his policies had done so much damage.

Where Samuelson is wrong is in his characterization of the need for the Volcker policies. He tells readers:

"From 1960 to 1980, inflation — the general rise of retail prices — marched relentlessly upward. It went from 1.4 percent in 1960 to 5.9 percent in 1969 to 13.3 percent in 1979. The higher it rose, the more unpopular it became. People feared that their pay and savings wouldn’t keep pace with prices.

"Worse, government seemed powerless to defeat it."

Actually, the inflation picture was not quite as bad as Samuelson describes. He apparently is referring to the measure using the official consumer price index (CPI), which had a well-known measurement error (more in a moment) that led to an exaggerated measure of inflation. In fact the inflation rate using the now popular consumer expenditure deflator peaked at just over 11 percent.

Earlier in the week I took the environmental movement to task for its lack of interest in pay by the mile auto insurance. I consider it a major failing because this one should be a relative freeby in the effort to reduce greenhouse gas emissions.

In contrast to a carbon tax or cap and trade mechanism, it doesn't raise the price on average, it just changes the incentive structure. And in doing so, it can have a large impact in reducing driving. If the average insurance policy costs $1,000 a year, and people drive 10,000 miles on average, then this converts to a fee of 10 cents a mile. If a car gets 20 miles per gallon, shifting to pay by the mile insurance would have the same incentive effect in reducing driving as a $2.00 a gallon gas tax.

Also, unlike a carbon tax, which is really bad news for the oil and coal industries, insurers could still make plenty of money with pay the mile insurance. The only real obstacle for them is inertia. After all, why should they change the way they sell insurance just to save the planet? 

And, pay by the mile also has the great advantage that insurance is regulated at the state level. This means that if the enviros concentrated their forces on a green-friendly state, they should be able to win support for pay by the mile policies. And, with adverse selection going the right way (low-mileage, low accident drivers go into the pay by the mile pool, driving up the cost of conventional policies), it shouldn't be too hard to quickly get most of a state's drivers into pay by the mile policies. If one state could go this route and substantially reduce miles driven, then others could follow.

Anyhow, several people wrote comments and e-mails complaining that the environmentalists have in fact been pushing for pay by the mile insurance. I can't say I'm aware of everything enviros do, but anything they do on pay by the mile certainly is not as visible as something like the effort on the Keystone pipeline. (Which is worth opposing.)

Mark Brucker, one of my correspondents, sent along a list of relevant pieces for those who might be interested:

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David Leonhardt has a good discussion of many of the issues surrounding President Obama's proposal to make community college free. He concludes the piece by noting that we likely need a more educated work force now than in the last century, then adds:

"If nine years of free education was the sensible norm for the masses in the 19th century and 13 years was the sensible norm in the early 20th century, what is the right number in the 21st century?

"Our current system suggests that the answer is still 13. The performance of our economy suggests otherwise."

Actually almost all of the people who are involved in designing and implementing economic policy have had far more than 13 years of education. The economists who were unable to recognize the $8 trillion housing bubble that wrecked the economy all had well over 20 years of education. Even members of Congress who don't understand basic economics (e.g. spending creates demand) almost all have had 17 years of education and many have law degrees or other post-college degrees.

The problems of our economy seem to stem from inept economic policy. We don't have any source of demand to replace the demand generated by the housing bubble. If Leonhardt is claiming the economy's problems stem from a poorly educated workforce he does not support this with any evidence. 

As Paul Krugman likes to point out, conservative leaders have a bad habit of just making things up: global warming isn't happening, tax cuts pay for themselves, quantitative easing will lead to hyper-inflation etc.. David Leonhardt tells readers that at the Upshot section of the NYT, which he edits, they are committed to calling both sides out when the facts don't support their claims.

And he is taking the occasion to beat up on liberals on the relationship between marriage and happiness. He proudly calls attention to a new study that purports to show that married couples are happier on average than people who are not married, and this is even after controlling for states of happiness before they were married.

It's not clear exactly what liberal view Leonhardt thinks he is challenging. There is an obvious survivor bias in a long marriage. We expect that people in unhappy marriages are less likely to stay married, so this study has effectively found that people in happy stable relationships are happier on average than people not in happy stable relationships. Are there liberals who feel it is important to argue that this is not true?

There is a problem that liberals, like any believer in logic, may have with policy prescriptions that could be mistakenly based on this finding. For example, it certainly does not follow, based on this research, that the government should make it more difficult for couples to divorce. The point is that happy couples are happier, if we forced unhappy couples to remain married, it does not follow that they would be happier than if they were separated.

We may also think that the government should foster happy couples by having subsidies for marriage. But this effectively amounts to penalizing the people who are already unhappy because they are single. After all, someone has to pay for these subsidies, which means that on average we would have money flowing from already unhappy single people to our happy couples. Is this good policy?

It's also not clear that there is importance to marriage as opposed to a stable relationship. In the U.K. (where the subjects for the study lived), like the U.S., most people in stable relationships tend to get married. However in other countries this is not a cultural norm. Are we supposed to believe the sheet of paper makes people happy? Did the Wizard of Oz make the straw man smart when he handed him a diploma?

The Washington Post article on the December jobs numbers told readers:

"Though there were nascent signs of wage growth in November, the data from December showed average hourly earnings slid backward by five cents, to $24.57.

"That wage decrease over the past month, a surprise to economists, indicates that the nation has not yet reached 'full employment' — a condition in which demand from employers is broad enough that workers have a degree of leverage and a chance to see pay raises."

This comment earns a really big OY!

No, the drop in average hourly earnings should not have been a surprise to economists. As some of us were screaming following the November jump in hourly wages, the monthly data are erratic. As I pointed out at the time, the jump reported in November followed two months of very weak wage growth. It simply is not plausible to think that millions of employers who were being tightfisted September and October suddenly got really generous with their workers in November. The world doesn't work that way.

The more obvious explanation is that the monthly changes are driven largely by measurement error. A weak number in one month is likely to lead to a strong number the next (and vice versa) because a weak number likely understated the true rate of wage growth. If the next month's number then accurately measures the true wage, then it will appear like a large jump. This is a regular pattern that anyone who follows the data (e.g. economists) would know.

The point about full employment is also seriously off. The employment to population ratio is still close to four percentage points below its pre-recession level. And, contrary to the protestations about this being due to the retirement of the baby boomers, the decline is largely due to prime age workers (age 25-54) leaving the labor force. And it's a bit hard to believe that all these people in their 30s and 40s just decided they no longer feel like working. In addition, the number of people involuntarily working part-time is still up by more than 2 million from its pre-recession level.

In other words, we are still very far from what would have been considered full employment back in the good old days of the Bush presidency. Folks should be very upset if the Fed starts raising interest rates to slow the economy and keep people from getting jobs.

This piece also misleads readers in saying:

"Another strong sector was professional and business services — accountants, architects, consultants — which added 52,000 positions. The pick-up in better-paying industries is in noted contrast to periods earlier in the recovery, when growth was concentrated in part-time positions and the retail and health sectors."

Actually, most of the growth in the professional and business services sector (67.7 percent) was in the relatively low-paying administrative and waste services categories.


The NYT badly misinformed readers by telling them that Obama was easing up on Federal Housing Authority lending rules to fix a "lagging" housing market. Actually home sales are slightly above their population adjusted pre-bubble level. In fact, if we took account of demographics (the increasing portion of elderly that is constantly used as a justification of low employment rates) then house sales are above pre-bubble levels. Also, inflation-adjusted house prices are 15-20 percent above trend levels.

It is true that builders are not building as many homes as would be expected, but this is explained by vacancy rates that are still relatively high. The lower homeownership rate is likely the function of the weak labor market and also that the "flexible" labor market touted by most economists means that people have to change jobs frequently, which often means moving. People who have to sell their home shortly after buying it end up building wealth for the real estate and financial industry, not their family, which is an important reason why fewer people are becoming homebuyers.

This piece also wrongly asserts that, "rents are soaring." This is not true by the usual definition of "soaring." The Bureau of Labor Statistics owners' equivalent rent measure rose 2.7 percent over the last year. This measure excludes utility fees that are often included in apartment rents, which is appropriate since homeowners also have to pay for utilities.


Owners' Equivalent Rent: Percent Change Over Prior 12 Months


                                    Source: Bureau of Labor Statistics.


Yes, Japan looks like it is becoming less crowded and the folks at the Post are terrified. A Wonkblog piece warned readers that, "Japan's birth rate problem is way worse than anyone imagined."

The basic story is it seems that Japan has consistently over-projected its birthrate. As a result, its population is now declining and the rate of decline may be even faster than is now projected.

The question is why is this a problem? First, just to take an issue off the table, it is important that Japan, like the United States, create a situation where families and especially women, feel they can have children and still have a fulfilling career. But the question here is whether it is a problem for society if people choose to have fewer children and we have a declining population.

The piece tells readers:

"Japan’s declining population has a powerful impact on its economic situation, and not for the better. An aging population leaves the country with fewer workers and more dependents. And conventional wisdom says aging leads to slower economic growth and more deflationary forces, both of which make it more difficult for Japan to chip away at the substantial debt burden from its economic crisis at the beginning of the 1990s."

Actually, since Japan is a densely populated country with expensive real estate, a declining population could be associated with substantial improvements in living standards as the property values and rents would drop due to less demand. It's not clear why fewer workers and more dependents should be a big problem. This has been the reality for the last 60 years, a period in which countries have generally enjoyed rising living standards. The key of course is productivity growth which means that we need fewer workers to produce the same amount of output. (Remember the robots who are supposed to take all of our jobs? That is productivity growth.)

E.J. Dionne is upset about Republican plans to have the Congressional Budget Office (CBO) use dynamic scoring in assessing the effects of tax cuts. He tells readers that dynamic scoring:

"will make it easier for the Republicans to shower money on their favored constituencies while pretending to be fiscally responsible. Dynamic scoring, the Center on Budget and Policy Priorities noted, 'could facilitate congressional passage of large rate cuts in tax reform by making the rate cuts appear — on paper — less expensive than under a traditional cost estimate.'

"To understand the dynamic-scoring game, imagine a formula based on the idea that because infrastructure spending boosts the economy — which it most certainly does — we should pretend that an expenditure of $100 billion is actually, say, only $80 billion."

Dynamic scoring means taking account of the growth effects of tax cuts and incorporating them into budget estimates. This is actually a very reasonable thing to do. When Douglas Holtz-Eakin, a conservative Republican economist, was head of CBO, he put out an analysis of the impact of dynamic scoring on budget estimates. The analysis found that the impact of a simple estimate of the impact of a tax cut on growth was small and in fact negative.

The analysis did find larger positive impacts if the tax cut assumption was coupled with other assumptions, such as a later tax increase, which would give people more incentive to work in the period of low taxes. However these modeling exercises showing growth were not in fact analyzing the policy being considered, which was simply a tax cut.

The issue created in this context has nothing to do with dynamic scoring, it is a question of honest scoring. That should be the real concern. If the Republicans want to follow Holtz-Eakin's analysis and incorporate the negative impact that tax cuts have on growth then there is no reason for anyone to object. However if they just want CBO to make up numbers, their plan is objectionable. But the issue is not dynamic scoring.

This brings up the other side of the equation raised by Dionne. Government investment in infrastructure, education, and research and development does in fact have an impact on growth and CBO should be taking it into account in its projections. Under CBO's current methodology, if the government stopped spending any money on improving and maintaining the infrastructure or on educating our children it would show up as a boost to the economy.

In CBO's models, the reduced government spending would free up resources, some of which would end up as private investment. That would lead to higher productivity and more growth. There is something seriously wrong with modeling that implies we could grow the economy better if we stop maintaining our roads and educating our kids.

Finally it is worth taking issue with the use of "fiscally responsible." The absurd conceptions of fiscal responsibility in place in Washington today are costing the jobs of millions of kids' parents. This policy, which is ruining the lives of mutiple generations, should not be characterized as "responsible." Washington politics may make it impossible to beat back deficit fetishism, but there is no reason that serious people should treat it as reasonable policy.

The horror, the horror! Europe has a declining ratio of workers to retirees, just as has been the case for the last fifty years.

That is the message Arthur Brooks gave us in his NYT column this morning, although he left out the part about the last fifty years.

"Start with age. According to the United States Census Bureau’s International Database, nearly one in five Western Europeans was 65 years old or older in 2014. This is hard enough to endure, given the countries’ early retirement ages and pay-as-you-go pension systems. But by 2030, this will have risen to one in four. If history is any guide, aging electorates will direct larger and larger portions of gross domestic product to retirement benefits — and invest less in opportunity for future generations."

Brooks' source shows the share of the over 65 age group in the population rising from 18.8 percent in 2015 to 23.7 percent in 2030. If that sounds really scary consider that it has risen from 15.7 percent in 2000 to the current 18.8 percent over the last 15 years. In other words, this is a trend that has been taking place for a long time: people are living longer. This is usually viewed as good news.

Even as the ratio of older people to working age population has risen in Europe and elsewhere, people have seen rising living standards due to productivity growth. This is why we can all have enough to eat even though only less than 2.0 percent of the workforce is employed in agriculture. (Remember the robots who are taking our jobs? That is a story of rising productivity. It's a story where we have too many people who want to work.)

It is often said that the environmental movement has less creativity than a dead clam. Nothing demonstrates this point better than the lack of interest in promoting pay by the mile auto insurance.

I am reminded of this issue by a piece on Morning Edition that discussed how the recent drop in gas prices will be associated with thousands of more deaths in traffic accidents. The point is simple: people will be driving more and faster, therefore there will be more accidents and more deaths.

This brings up pay by the mile insurance since the point of the piece is that high gas prices gave people an incentive to drive less and more slowly. If insurance were on a pay by the mile basis it would also give people an incentive to drive less and ideally more safely.

The arithmetic is straightforward and striking. The average insurance policy is around $1,000 a year. The average driver puts in roughly 10,000 miles a year on their car. (These are rough numbers, but last time I checked they were in the ballpark.) This comes to 10 cents if insurance were paid on a per mile basis.

If a typical car gets 20 miles a gallon, then having insurance paid on a per mile basis is the equivalent of a $2.00 a gallon gas tax in discouraging driving. That should be a big deal and the sort of thing that environmentalists should be pushing for, since it is likely far more politically feasible than a $2.00 a gallon gas tax.

Just to be clear, this is not on average increasing insurance costs. It will redistribute them from people who drive relatively little to people who drive a lot. (Insurers already have some differences based on miles driven, but they don't come close to reflecting the actual difference in risks -- as they will tell you.)

Also, charging per mile doesn't prevent insurance companies from factoring in driving records or distinguishing between rural and urban miles. The insurers know where people live and they know their driving records. These could be easily factored in when setting the per mile rates.

Anyhow, a modest subsidy for people to buy pay by the mile policies could go a long way in changing incentives and reducing driving and greenhouse gas emissions. (Note the adverse selection goes in the right direction here. Low mileage drivers would opt for pay by the mile policies leaving high mileage high risk drivers in the conventional insurance pool.)

This should have been an obvious policy to push for those who want to stop global warming, but it might require a bit of new thinking.

A NYT article on the recent drop in the value of the euro against the dollar carried the bizarre headline, "falling euro fans fears of a recession." The headline is strange, because the drop in the euro will not cause a recession. In fact, it will help the economy by boosting net exports from the euro zone, as the article itself states.

Several other points in the article are also seriously confused. It asserts:

"There is also the fact that eurozone countries tend to be net importers of oil and natural gas — which is usually priced in dollars — meaning that their weak currency may not buy as much fuel in the future."

The fact that oil is typically priced in dollars really has nothing to do with the time of day. The price of oil has fallen by roughly 50 percent over the last year measured in dollars. The euro has fallen by a bit more than 10 percent, which means that oil has fallen by roughly 45 percent measured in euros.

The fact that the euro zone produces relatively little oil is a huge benefit in this story relative to the United States. While consumers in both the U.S. and the euro zone will be benefited by the plunge in oil prices, the United States has areas of the country like Texas, North Dakota, and Alaska, that are heavily dependent on oil production. These regions will be badly hurt by the drop in oil prices.

The article also notes that Europe may be hurt by a slowdown in growth elsewhere in the world, referring to the "region’s dependence on trade." Actually the euro zone as a whole doesn't depend much more on trade with the rest of the world than the United States. The vast majority of trade of euro zone countries is with other euro zone countries, therefore a slowdown in growth elsewhere in the world will not do more harm to the euro zone than the United States.

Bob Kuttner has a column in the Huffington Post warning of the dangers of the Trans-Atlantic Trade and Investment Pact (TTIP). Kuttner correctly points out that the deal is not really about reducing trade barriers, which are already minimal, but rather about locking in place a business-friendly structure of regulation (wrongly described as "deregulation").

At one point Kuttner refers to projections that the TTIP will increase GDP in the EU and U.S. by 0.5 percent. It is important to note that this projection is for the period after the deal is fully implemented, more than a decade after it is signed. That means the projection implies an increase in the growth rate of less than 0.05 percentage points annually, an amount far too small to be measured accurately.

It is also worth noting that this projection does not incorporate any negative impact from the protectionist parts of the TTIP. The deal is likely to strengthen patent and copyright protections, leading to higher prices for drugs, software, and other products, all of which will be a drain on consumers and a drag on growth.

Robert Samuelson gave his assessment of where the economy stands in his column this morning. At one point he tells readers that if the economy creates 230,000 jobs a month, by the end of the year it will be approaching full employment.

Even if the economy adds 230,000 jobs a month in 2015, by the end of the year it will still be more than 3 million jobs below what the Congressional Budget Office (CBO) and other forecasters projected before the downturn. That would imply that the economy would still be far below full employment.

Of course it is possible that CBO's projections about the labor force from 2008 were wrong, but this raises the obvious question of when CBO stopped being wrong. It is not obvious that it has learned more about the economy and the labor market in the last seven years, therefore it is not clear that its current assessment of the labor market should be treated as more accurate than its assessment from 2008.

Also, contrary to what is asserted in the article, Japan has been seeing rapid growth in employment under its new stimulus policies. In fact, its employment to population ratio has risen more than twice as much as the U.S. ratio since the end of 2012 when it adopted these policies. It is likely to again see healthy growth in 2015 now that it has put off a scheduled increase in the sales tax.

The Washington Post once again displayed its contempt for economics when it published Michael Harris' book review of The Internet Is Not the Answer, a new book by Andrew Keen. Many of the central points in the review are seriously misleading or just outright wrong.

The best example of the latter is the claim in reference to the turning over of the backbone of the Internet from the government to the private sector in the 1990s:

"It was, in the words of venture capitalist John Doerr, 'the largest legal creation of wealth in the history of the planet.'"

Handing over the Internet to the private sector was not a creation of wealth, it was a transfer of wealth. The wealth already existed -- it was the backbone of the Internet. It simply went from being held by the public to being held by private individuals. This is comparable to creating wealth with patent monopolies. At the point where a patent is issued, the wealth already exists. However the patent allows it to be privately appropriated rather than shared by the public at large.

Harris compounds the confusion when he approvingly cites Keen's assessment of Amazon:

"But Keen argues that 'the reverse is actually true. Amazon, in spite of its undoubted convenience, reliability, and great value, is actually having a disturbingly negative impact on the broader economy.' He points to what he describes as Amazon’s brutally efficient business methodology, which has squeezed jobs out of every sector of retail, according to a 2013 Institute for Local Self-Reliance report that Keen cites. The report says brick-and-mortar retailers employ 47 people for every $10 million in sales, while Amazon employs only 14. Perhaps the question Keen is getting at is this: Are we consumers, or are we citizens? It’s a frustratingly complex inquiry."

There are two different issues here. The first is the extent to which Amazon has led to productivity growth. In general this is a good thing for the economy. Companies like General Motors and U.S. Steel have adopted labor saving technologies over the last century. This has reduced prices for consumers and allowed workers to enjoy higher standards of living. There is no obvious reason we should want people to have to waste time working in retail stores if we can adopt technologies that save us the trouble. Insofar as Amazon has helped to increase productivity, this is a good thing.

That's what readers of a NYT article on the drop in the value of the euro would conclude. The piece told readers that the recent rise in the dollar is:

"A strong dollar is a welcome reflection of a United States economy that is growing and adding jobs at a faster clip than many of its peers."

Of course a strong dollar will make U.S. goods and services less competitive internationally, leading to a rise in the trade deficit. the drop in the trade deficit in the third quarter added 0.8 percentage points to the quarter's growth. It is likely that the rise in the deficit in the fourth quarter will subtract at least that much from the growth rate. In an economy that, according to the Congressional Budget Office, is still operating at a level of output that is almost 4 percentage points (@ $600 billion a year) below its potential level of output, and is down close to 6 million jobs from its trend path, it is bizarre to call a rise in the dollar that will slow growth as "welcome."

This article gets many other issues wrong as well. It tells readers;

"To jump-start growth and avoid deflation, many analysts say the most powerful policy arrow in Mr. Draghi’s quiver is to talk the euro sharply downward, which would bolster exports, increase the price of imports and ultimately, it is hoped, stimulate an increase in inflation."

There is no reason to believe that Mr. Drago is in particular trying to avoid deflation unless he is a member of some bizarre cult of zero worshippers. Having the inflation rate cross zero doesn't make any difference, the problem is that the inflation rate in the euro zone is too low. Draghi wants to raise the inflation rate, it's that simple.

The piece also notes a shift in bank reserves from euros to dollars and comments that it, "could signal a long-term preference on the part of central bankers for high-yielding dollars in favor of less lucrative euros."

Actually central banks usually are not especially interested in the returns on their reserve holdings and they certainly are not making long-term plans since they shift their holdings all the time. If there is a return issue at hand, some central banks may have made the bet that the euro would fall in the short-term against the dollar. Now that the euro has lost considerable ground, they may make a decision to start shifting back to euros from dollars.

Remarkably in the discussion of relative currency values the piece never refers to the trade deficit in the United States. This deficit is the primary cause of the secular stagnation, or lack of demand, that many economists have now determined to be the country's main economic problem. The trade deficit pulls more than $500 billion in demand out of the economy every year. From an economic standpoint it has the same impact as if people suddenly decided to cut back their annual consumption by $500 billion. There is no easy way to replace this demand domestically, which is why the United States economy remains severely depressed more than seven years after the recession began.


The NYT reported that the European Union (EU) will start collecting a tax on digital transactions in 2015 that is expected to raise $1 billion this year. For those who are not very familiar with the size of the EU economy, it is projected to be close to $19 trillion in 2015, which means that the revenue from this tax will be a bit less than 0.006 percent of GDP.

That's what millions of readers of Ron Haskins' column in the NYT on designing effective social programs will be asking. The column tells readers:

"When John M. Bridgeland led Mr. Bush’s Domestic Policy Council, he was amazed to find 339 federal programs for disadvantaged youth, administered by 12 departments and agencies, at a cost of $224 billion."

The piece doesn't indicate whether this spending is for one or ten years. (My guess is the latter, but I'm not really sure without looking at the research to see what is included.) Also, unless folks have a good memory, they are unlikely to know how important this spending was to the government and the economy. The budget was just under $1,800 billion in 2000, which would make the spending close to 12 percent of the budget for one-year. Projected spending for the ten-year budget horizon was over $20 trillion, which would have made the spending in question close to 1.0 percent of projected spending.

Ron Haskins is a serious researcher raising an important point, but it would be helpful if this number were expressed in a way that provided meaningful information to readers.

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