A NYT piece on the ongoing legal battle between hedge funds that own a portion of Argentina's debt and the Argentine government likely misled many readers. It referred to the hedge funds as "holdouts," saying that they had refused to accept the terms offered by Argentina to bondholders at the time the country defaulted in 2001.
In fact, these funds did not hold Argentine debt at the time of the default. They bought the debt up after the default at a small fraction of its face value. Their hope was that they could use their political connections and their legal expertise to force the Argentine government to pay substantially more on its debt than it offered to other creditors.
The Post had an interesting piece on the debate within the Republican party over economic policy. At one point the piece notes the stagnation in middle class incomes and then tells readers:
"There is a growing sense among many conservative economists that faster growth by itself will not suffice to lift those incomes at the rate middle-class workers came to expect a generation ago ."
This comment may mislead readers into believing that conservative policies of tax cuts and deregulation have been associated with faster growth. They haven't.
The table below shows the average growth rate under the last six presidents (measured as first quarter of their term to first quarter of the next adminstration.)
Carter -- 3.4%
Reagan -- 3.4%
Bush I -- 2.0%
Bush II -- 1.6%
Obama -- 2.2%
This record shows that tax cutting Republicans have done worse in promoting growth during their administrations than tax and spend Democrats. While Republican policies may not have been successful in producing gains for the middle class, they have also not done very well in promoting growth.
That is the only possible explanation for the appearance of a column on Greece's economy by venture capitalist Aristos Doxiadis. The column's central premise is that Greece's severe downturn cannot be explained by its macroeconomic policies. It claims that other countries had similar austerity but had no comparable decline in output. It instead blames Greece's problems on structural problems that have blocked the growth of exports. Both claims are untrue.
Doxiadis told readers:
"Greece has fared much worse than other eurozone countries that faced a sudden drop in foreign financing, and then enacted similar austerity programs. It lost 26 percent of its G.D.P. from the pre-crisis peak, while Portugal, Ireland and Spain lost no more than 7 percent each. Much of this difference is due to foreign trade.
"In all four countries, when capital from abroad stopped flowing in, increasing exports became an urgent goal. The other three countries achieved this quickly. Greece did not. If it had boosted exports, its recession would have been much shallower; by one estimate, a 25 percent increase in exports could have limited the drop of gross domestic product to just 3 percent."
The claim that the other three countries had similar austerity programs is wrong. According to the I.M.F. the decline in the structural deficit between 2007 and 2014 was 6.0 percentage points of GDP in Ireland, 1.8 percentage point of GDP in Portugal, and -4.1 percentage points of GDP in Spain (the structural deficit grew larger over this period). By comparison the structural deficit in Greece was cut by 12.5 percentage points of GDP over this period, more than twice as large as the deficit reduction in Ireland, the most austere of the other three countries.
The assertion about Greece being the worst export performer of the group is also at odds with the data. According to the OECD, Greece had the largest increase in goods exports (sorry, couldn't find service data) from 2007 to 2014. Measured in dollar terms, Spain's goods exports increased by 27.5 percent over this period. Portugal's exports increased by 21.9 percent while Ireland's exports fell by 3.1 percent. By comparison, the OECD reports that Greece's exports rose by 35.6 percent, far more than the 25 percent increase that Doxiadis held out as a target (he doesn't indicate his time frame).
This matters because Doxiadis' whole argument is that Greece's problems cannot be explained by austerity but rather are due to anti-business regulations and attitudes. It may well be the case that regulations and attitudes are impeding growth in Greece, but contrary to Doxiadis' claim, its downturn is well explained by its austerity, which was much more severe than in the other three countries.
The NYT should have insisted that the column get the basic facts right.
Mr. Doxiadis referred me to data on total Greek exports, which were markedly worse than goods exports alone. Apparently Greece's service exports fared far worse since 2007 than its goods exports.
Better yet, would economists say they had benefited? The reason for the question is that this is essentially the question that the University of Chicago's Initiative on Global Markets (IGM) asked its group of elite economists about trade with China. It asked:
"Trade with China makes most Americans better off because, among other advantages, they can buy goods that are made or assembled more cheaply in China."
This question could be taken to be saying that most Americans are better off because they can get cheaper goods from China. It's a bit difficult to imagine how that could not be true, taken in isolation. In other words, are we better off because we have the opportunity to buy some goods at lower prices?
Other things equal, we certainly would be better off. Hence the question about having the country flooded with foreign educated doctors so that their pay is cut in half. With around 900,000 doctors in the country averaging paychecks of well over $200k a year, this would save the country more than $90 billion a year on health care costs (@ $700 per household per year -- how does that compare to your tax cut?). If we asked our elite economists whether doctors were benefited by lower cost health care, how would they answer? Aren't doctors benefited by paying less rather than more for their health care?
If this seems like a strange question it would not be the first time that IGM stumped the experts. It previously posed a question on whether Piketty's views on growing inequality were correct. The overwhelming majority answered "no," so did Thomas Piketty.
For thousands of years we have seen people develop knowledge and skills, make discoveries, and advance science. The overwhelming majority of this work was not motivated by the hope of getting a patent monopoly. Yet somehow, the ostensibly serious people at the Association of University Technology Managers think that patent monopolies are the only way to support the development of new drugs, or so it would seem from a speech to them by Joseph Allen.
Mr. Allen took issue with my suggestion that if the government funds research that the findings and any associated patents should be placed in the public domain. He pointed to the period before the Bayh-Dole Act when there were:
"28,000 inventions wasting away on the shelves in Washington because there was no patent incentive for anyone to develop them."
Okay, let's try to get this straight. Suppose that the government made its funding partly contingent on developing a usable product approved by the Food and Drug Administration (FDA). Would all the inventions still sit on the shelf because people are too dumb to make a usable product without the motivation of a patent monopoly?
Suppose that the funding even went to private companies who would see their payments increase 50 percent, 100 percent, or even 200 percent if they get a usable product approved by the FDA. Even in that case the inventions would just sit on the shelf because there are no patent monopolies?
One has to wonder what it is about developing drugs that require patent monopolies when people in so many other areas can be motivated simply by money. It's a great mystery.
It's always exciting to read an interesting new idea in the NYT opinion section. It's less exciting to read an idea that is not new, but presented as such. Hence my lack of joy when reading Ezekiel Emanuel's proposal for a prize fund for the development of new antibiotics.
Emanuel wants the government to put up a $2 billion prize for the first five companies that get regulatory approval for a new antibiotic. He writes his piece as though a prize fund for developing drugs is a new idea. It isn't. The idea of prize funds for developing drugs goes back close to two decades (possibly longer), and has had many prominent proponents, most notably Joe Stiglitz, the Nobel prize winning economist.
Emanuel does have an original twist on his proposal. Stiglitz and other proponents of prize funds saw them as an alternative to patents. The idea was that the company got paid for their research when they got the prize. There was no reason to pay them a second time by giving them a monopoly over the sale of the drug.
In fact, one of the main points of the prize was to allow drugs to be sold at their free market price. This would both ensure that they were affordable (drugs are almost always cheap to produce) and eliminate the drug companies' incentive to lie about the safety and effectiveness of their drugs.
Emanuel does depart from earlier proponents of prize funds in proposing that drug companies be allowed to have a patent monopoly even after having been awarded with a prize. This leaves in place the potential problems of affordability and perverse incentives that earlier proponents of prize funds had sought to address.
The NYT won't name names, but obviously these people don't know much economics. In a generally useful article about differences in regulatory policy between the European Union and the United States the NYT told readers:
"The talks [on the Trans-Atlantic Trade and Investment Pact] are considered more of a priority for Europe, which is mired in deflation and high unemployment, than the United States, where the economy is recovering."
An analysis by the Centre for Economic Policy Research in the U.K. (no connection to Washington CEPR) found that the pact would increase the EU's GDP by 0.5 percent after its full effects are felt more than a decade after it is implemented. This translates into a boost to EU growth of less than 0.05 percentage points annually.
This is not much of a cure for stagnation. Even if the number were doubled its impact on growth would be too small for people to notice in their everyday lives. Furthermore, this calculation does not take account of any negative impact on growth that could result from higher prices for drugs and other products due to the stronger patent and copyright protections that will almost certainly be part of any deal. It also doesn't include losses that may be suffered if regulatory changes damage the environment or public health.
Robert Samuelson was inspired by a graph in the new Economic Report of the President to tell readers that the real problem for the middle class is not inequality but rather productivity growth. His point is that if we had kept up the Golden Age (1943-1973) rates of productivity growth it would have mattered much more to middle income families living standards than the rise in inequality since 1980.
This is true in the sense of if I were six feet five inches, I would be taller than I am, but it's not clear what we should make of the point. We don't know how to have more rapid productivity growth (at least not Golden Age rates), so saying that we should want more rapid productivity growth is sort of like hoping for the second coming. As Samuelson notes, we do have policies that would likely improve growth, more spending on infrastructure, education, and research and development, but no one seriously thinks such policies would get us back to the golden age growth rates of 3.0 percent a year. (Samuelson includes tax reform on his list. While a cleaner tax code probably would boost growth, it's worth noting that tax rates were much higher and the tax code contained more loopholes in the golden age.)
As a practical matter we may not be able to boost productivity growth, but we can change the policies driving inequality. At the top of this list, if we maintain low levels of unemployment as we did in the late 1990s, then middle income and lower income wages will rise in step with productivity growth. This would require generating demand through fiscal policy and lower trade deficits from a lower valued dollar. It also means not having the Fed cut off growth with higher interest rates.
If we also structured labor laws so that it was possible for workers to organize unions, had a minimum wage that kept pace with productivity growth (as it did in the golden age), and didn't protect high-end professionals (e.g. doctors, dentists, and lawyers) from domestic and international competition, then it would be reasonable to expect middle class incomes to keep pace with the economy's productivity growth. If we can only sustain the 1.5 percent annual productivity growth of the slowdown years (1973-1995) this would still imply income gains of almost 60 percent over three decades. While it would of course be better to have golden age productivity growth, since we don't know how to get back such rapid growth, why not pursue the policies that we know will be effective in restoring middle class income growth?
That's the question that millions of readers of the NYT will be asking after seeing an analysis of the deal between Greece and the European Union that told readers:
"Moreover, the finance ministers made clear that Greece will not get any more cash until it satisfies them it can keep a lid on spending."
In fact, Greece has already cut government spending by almost 15 percent in real terms from 2008 to 2014, according to the International Monetary Fund (I.M.F.). This spending cut is equal to almost 9.0 percent of Greece's potential GDP. This would be the equivalent of a cut in annual spending of $1.6 trillion in the United States in terms of its economic impact.
The piece also asserts that "leaders in the rest of Europe do not want to join or, more important, finance the Greek-led revolt." Actually the financing is going from Greece to the rest of Europe since Greece is now running a primary budget surplus. That means that the government is collecting enough revenue to finance its spending, excluding interest payments. It is the size of the interest payments, which go primarily from Greece to the European Union, European Central Bank, and I.M.F. that is at issue. Greece is not asking for additional money from the rest of Europe. In the event that Greece leaves the euro the payments on its debt will almost certainly stop altogether, so the question is how much financing the rest of Europe gets from Greece, not how much financing Greece gets from Europe.
The myth of the "young invincibles" has come back to life in the editorials of the Washington Post. Folks may recall that this was the story where Obamacare would live or die depending on whether young healthy people signed up for the program. The small grain of truth to the story is that the premium for young people was slightly higher than an actuarially fair premium while the premium for those in the oldest Obamacare age band (ages 55-64) was slightly lower. This means that as a group, the young provide a modest subsidy to the old.
However the differences in costs within each age band swamp the differences across age bands. There are millions of people in the oldest age band who have little or no medical expenses each year just as there are millions of young people who have no medical expenses. Obamacare needs the former group at least as much as it needs the latter (arguably more, since the older group pays premiums that are three times as high).
The Kaiser Family Foundation did the calculations to show this point. Even a large skewing by age will make little difference in the cost of the program. It matters much more if there is a skewing on health status.
Anyhow, perhaps this study will find its way over the WaPo editorial board at some point.
The NYT reported that efforts by rich Chinese to get some of their wealth out of the country have led to downward pressure on the value of the country's currency. It noted that the central bank is trying to counteract some of this pressure by selling some its foreign exchange reserves to buy up yuan. It then tells readers:
"A weaker renminbi could produce greater tensions with the United States, by widening that trade imbalance. The Obama administration is in a tricky position, however. It has long argued that Beijing should guide the value of the renminbi less and let market forces prevail. But following that logic now and letting the renminbi fall further could make it even harder for American producers to compete."
This is not accurate. As the article notes, China's central bank holds $3.8 trillion in foreign exchange reserves. This is close to four times what a country with an economy the size of China's would be expected to hold. The holdings of dollars and other reserves prop up the dollar against the yuan even if China's bank decides to sell off some of its holdings.
In this way, it is very similar to the situation of the Fed with respect to quantitative easing. Even if the Fed sells off some of its bonds, the net effect of its policy is still to lower interest rates, as long as it still has a large stock of long-term debt on its balance sheets.
The NYT completely abandoned its commitment to put numbers in context in an article on the budget cuts proposed by Illinois' new governor, Bruce Rauner. The piece tells readers that the governor had proposed cuts of more than $6 billion. Since most NYT readers are not familiar with the size of Illinois' budget, this is not providing very much information. In fact, the cuts (actually $6.7 billion) would be equal to approximately 17.5 percent of baseline spending (see page 2-23). It refers to a cut of $1.5 billion in state Medicaid spending. This is just under 20 percent of baseline spending on the program.
The piece notes a projected shortfall of $110 billion in the state's pension plans. This is equal to approximately 0.8 percent of the state's projected income over the pension's 30-year planning period. The piece refers to a plan to cut pension benefits by $100 billion. This would imply cuts of more than $200,000 per active employee. (This calculation does not apply any discounting since it's not clear if any discounting is applied to the $100 billion figure.)
To paraphrase a line from an iconic American toy doll, "currency values are hard." That is probably the best way to describe the Washington Post's editorial against including rules on currency values in trade agreements.
The Post's essential argument against including rules on currency values is that some measures whose main purpose is not to affect currency values may nonetheless affect currency values. Its example is the Fed's quantitative easing (QE) policy, which by lowering interest rates also had the effect of lowering the value of the dollar. (It's not clear why the Post singles out QE, since any Fed cut in interest rates would also lower the value of the dollar, other things equal.) The Post then argues that other countries could have contested QE policy as an unfair effort to lower the value of the dollar.
If the Post editorial board really believes this argument then it would be opposed to almost any possible trade agreement. Almost all trade agreements prohibit subsidies on exports. For example, the United States and other parties to trade deals are prohibiting from giving a 20 percent subsidy to steel exports so as to help their domestic steel industries. That's about as basic as it gets.
But what about providing public education and training for the workers in the steel industry, is that a subsidy? How about having the government pick up the tab for the roads and ports used to export the steel? How about tax abatements and land condemnations for the construction of new steel factories? How about providing below-market interest loans through the Export-Import Bank? All of these are arguably forms of export subsidies and in fact raise far more difficult questions than quantitative easing.
If the Washington Post's editors really can't tell the difference between a policy whose primary purpose and effect is boosting aggregate demand in the United States by lowering interest rates and policy that directly lowers the value of the dollar by purchasing trillions of dollars of foreign currency, then surely they can't tell the difference between education and infrastructure policy and export subsidies.
In short, the Washington Post editorial board apparently thinks our trade officials lack the competence to do trade policy. If they took their own logic seriously they would recommend just canning trade deals altogether; they are too complicated.
There is one point worth noting on this issue that the WaPo editorial doesn't quite make. If the Obama administration cared about currency values there are measures it could take now. For example, it could push the Fed to actually buy up $1 trillion of currencies that are under-valued against the dollar. For currencies that are not freely traded it can try to put indirect pressure on their value by buying up futures or by offering to buy the currency directly from holders at a price above the pegged exchange rate. For example if the yuan is being targeted at a price of 16 cents, the Treasury could offer to pay 25 cents per yuan.
There is nothing that prevents the United States from going this route, although it would obviously be seen as a hostile step by our trading partners. Presumably the threat of going this route would lead to serious negotiations on currency values and end up with an agreement that resulted in a lower valued dollar.
Yes folks, the news just keeps getting worse. The NYT had an article touting India's economic prospects, which it contrasts with China. It told readers:
"China’s investigations of multinationals, persistent tensions with neighboring countries and surging blue-collar wages have prompted many companies to start looking elsewhere for large labor forces."
The piece also includes a box with a figure showing that the number of people in China between the ages of 15-24 (prime factory worker age) is projected to fall from 250 million in 2009 to roughly 160 million in 2019. It adds the information that, "a sharp increase in college attendance has made the problem more acute." Needless to say, this story is being told from the standpoint of businesses seeking low cost labor.
It's fine for the NYT to run such pieces, but it would also be worth having a piece that described the impact that surging blue collar wages and a sharp increase in college attendance are having on the standard of living of hundreds of millions of people in China. From the standpoint of businesses looking for cheap labor this might be bad news, but from the standpoint of those who would like to see poor people lifted out of poverty, this sounds like very encouraging news. It would be great to see more coverage from the NYT from the perspective of workers in China.
A NYT piece on the release of new data showing Japan's economy grew at a 2.2 percent annual rate in the fourth quarter gave an excessively pessimistic view of Japan's economic performance under Prime Minister Shinzo Abe. The article tells readers:
"The economy did not grow at all in 2014, with two quarters of recession almost exactly canceling out two quarters of expansion, according to Monday’s report. Growth in the two years since Mr. Abe began his campaign has added up to a modest 1.6 percent, slightly less than the 1.8 rate recorded in 2012, the year before he took office."
As the article notes, the reason the economy did not grow in 2014 was because of a sharp increase in the sales tax that had been planned before Abe took office. While it says that the resulting downturn was a surprise to economists, this is exactly what standard economics would predict. The sales tax increase was clearly foolish policy (Abe has put off another hike that had been scheduled this year), but the economy clearly would have grown at a healthy pace in the absence of this rate hike.
It is also worth noting that Japan's employment to population ratio (EPOP) rose by 2.2 percentage points from the fourth quarter of 2012, when Abe came to power, to the fourth of 2014. By comparison, the EPOP in the United States has risen by 1.1 percentage point over the same period. News reports have been nearly ecstatic over the rate of job growth in the United States.
That would have an appropriate headline for a NYT article on the fact that many members of Congress may refuse to support fast-track trade authority without some rules on currency. At one point it refers to comments by Bruce Josten, a senior lobbyist at the U.S. Chamber of Commerce and supporter of fast-track, who argued that the administration could not effectively write rule on currency values:
"Would the Federal Reserve’s program of 'quantitative easing' — basically printing money to keep interest rates low — be an actionable offense under a strict currency regime? What about large government spending programs financed by international borrowing?"
It is difficult to believe that anyone involved in these negotiations would have difficulty distinguishing between policies explicitly focused on boosting the U.S. economy and policies that have the explicit purpose of lowering the value of the dollar. (If Mr. Josten is confused, quantitative easing is when the Fed buys U.S. government bonds. If the main purpose was to lower the value of the dollar the Fed would be buying the bonds of other countries.)
Fred Bergsten and Joe Gagnon, two prominent economist at the very pro-trade Peterson Institute for Economics have developed guidelines for defining currency manipulation that negotiators should be able to learn from if they are confused on the topic. As a practical matter, defining currency manipulation is almost certainly much simpler than many other topics covered in the Trans-Pacific Partnership (TPP), like defining "bio-similar" drugs so that patent protections can be extended to them or defining the types of regulatory takings that could be actionable under the investor-state dispute resolution tribunals established by the pact. (For example, can a company claim damages for a higher minimum wage?)
There are several other errors in the article. At one point it tells readers:
The NYT seems to be backsliding again in its commitment to put numbers in context. A NYT article on the prospects of tax reform threw around many big numbers which would almost certainly be meaningless to nearly all of its readers.
I will pick on one here, because it doesn't seem to make any sense. According to the article, President Obama's proposal to end the tax deductions for money placed in 529 accounts in future years would have saved the government $1 billion over the next decade. (These accounts allow people to deposit after-tax dollars and have the money accumulate tax free, if used for educational purposes.) I have seen this figure cited elsewhere, but it is surprisingly small.
According to a recent GAO report, there were 11 million accounts in 2011 with a total balance of $167 billion. The report estimates that the lost revenue due to the accounts was $1.6 billion in 2011. If we adjust upward for 2015 based on the nominal growth over the economy, the implied lost revenue for the current year would be just under $2.0 billion. This would almost certainly be an understatement, since the sharp rise in the stock market would mean that the holdings in 529 accounts would have grown far more rapidly than the economy over the last four years. Furthermore, since the top tax rate has been raised, the implicit tax savings from these accounts would be higher for the same amount of holdings in 2015 than in 2011.
If the one-year cost of the program is $2 billion, then how can ending future deductions only save $1 billion over ten years? President Obama proposal did protect the tax sheltered status of current deposits, but unlike retirement accounts, there is a limited period of time over which people can accumulate money in 529 accounts, basically from when a child is born until they complete their college education. This means that by the end of the ten-year budget horizon, most of the 529 money with grandfathered tax exempt status would already have been spent.
If the counter-factual assumes that 529 withdrawals grow in step with projected economic growth over the next decade, then they would be costing the Treasury over $3 billion in lost taxes in 2025. If 70 percent of this represents money contributed in 2016 and later, then the implicit savings in 2025 alone from President Obama's proposal would be more than $2.1 billion. If this calculation is anywhere close to accurate, how can the 10-year savings be just $1 billion?
Another way to think about this is the cost per account. If the number of accounts does not rise from the 11 million in 2011, then the implicit tax cost per account holder over 10 years is $91 or $9.10 per year. Is this plausible? Did hundreds of thousands of middle class families really get outraged over a proposal that would have cost them 18 cents a week in higher taxes?
Something in this picture is not adding up. The $1 billion figure over 10 years (0.002 percent of projected spending) doesn't make sense. If the paper had been tried to put this number in a context that made it meaningful to readers it might have gotten the number right.
As regular readers know, the Washington Post editorial board has problems with economics. They were foremost among the Very Serious People who warned about financial crises and soaring interest rates if we didn't tame the deficit. They still regularly issue demands for what they consider fiscally responsible policies (e.g. cutting Social Security and Medicare).
Anyhow, today they used their lead editorial to wag their finger at supporters of the Affordable Care Act (ACA) for not acknowledging that it would lead many employers to cut workers' hours. The issue is a provision in the law (which has yet to be applied) that would require large employers to provide insurance for workers who work more than 30 hours per week or to face a fine.
The editorial noted a directive from Staples to its store managers to restrict part-time workers to less than 25 hours as evidence of this ACA effect. The piece then cited work by Ben Casselmen to support its "Iron Law No 1: Incentives influence behavior":
"In 2009, 9.7 percent of part-timers worked between 25 hours and 29 hours and 7.7 percent worked between 31 and 34 hours. In about mid-2013, just before the employer mandate’s original implementation date, the gap between those numbers began to widen, hitting 11.1 percent and 6.6 percent, respectively, by year’s end."
Are you impressed by that iron? Let's add some more details.
It speaks to the state of economic debate in the United States that we have prominent voices arguing both that we face a future in which productivity growth will be near zero (Robert Gordon) and that productivity is about to soar through the roof so that most of us will not have any work to do (Erik Brynjolfsson and Andrew McAfee). If we envisioned the same debate in climate science, a substantial group of climatologists would be warning of an impending ice age even as others raise concerns about global warming. Needless to say, this sort of split would encourage most people to disregard the pronouncements of climatologists about anything, which is perhaps what the public should do in the case of economists.
When confronted with two sharply divided views about the world, the NYT doesn't help matters by adding a large dose of confusion, as it did in printing a column by Daniel Cohen, a French economist. Cohen's ostensible contribution is to tell us:
"both sides in this debate are right: We’re living an industrial revolution without economic growth. Powerful software is doing the work of humans, but the humans thus replaced are unable to find productive jobs." He then goes on to say that we will have to adjust to a world without growth because living standards will not be rising.
Apparently Cohen does not realize that he has taken Brynjolfsson and McAfee's side in this debate. The problem he has described is one of too much productivity growth. Workers find themselves without jobs because there is not enough demand for goods and services.
To see this point, imagine in the world Cohen describes that we ran the printing presses overtime and handed out $1 million in cash to every man, women, and child in the country. (Yep, we'll give a $1 million to deadbeat welfare cheats, hardworking middle income people, and even Bill Gates.) Now all you right-thinking people out there will want to scream that this will lead to massive inflation. After all, we're just printing money.
But the problem that we supposedly see is that the robots are doing all the work and there is no demand for most of our labor. If we there is more demand for goods and services now that we have been given our handouts, then we will ask the robots to work harder and a few of the formerly unemployed will get jobs doing robot maintenance or other such tasks. What in this story would cause prices to rise? Would the robots demand a pay hike?
If Brynjolfsson and McAfee are right, and we are not seeing growth, it's because boneheaded policymakers (I didn't say the European Union) are pointlessly restraining demand. In this context it is foolish to talk about "when the growth model fails." What we should be talking about is teaching economics 101 to the people determining economic policy.
Since no one asked, I think Brynjolfsson and McAfee are probably closer to the mark than Robert Gordon in that I see no reason to believe that our ability to achieve large gains in productivity is hitting any sort of limit. Nonetheless, I also don't expect a quantum leap in productivity growth. If we could get anywhere near the 3.0 percent annual productivity growth of the golden age (1947-1973) I would be very impressed.
David Brooks cast his column today as a battle between the economic agendas put forward by Larry Summers in a recent report for the Center for American Progress and Marco Rubio in his campaign book, American Dreams. After a brief summary of key points Brooks asks,
"The questions for Summers are: Have we forgotten the lessons of the last quarter-century? Do we think government is smart enough to intrude into millions of business decisions? Do we worry that in making hiring more expensive we will get less of it, and wind up with European-style sclerosis and unemployment levels?"
What lessons of the last quarter century does Brooks have in mind? The major economy with the best record on employment at this point is Germany, with an employment to population ratio (EPOP) that is almost 4 full percentage points higher than in the United States. Its unemployment rate is currently 4.9 percent. There are few countries in which the government intervenes more in the corporate governance process than Germany.
In fact, even France has a higher EPOP among prime age workers (ages 25-54) than the United States. The United States has a slightly higher overall EPOP because we expect students to work and we expect people to retire later. In terms of employers being willing to hire prime age workers, France does better than the United States.
The problem is not that Summers has forgotten the lessons of the last quarter century, the problem is that Brooks is inventing lessons that fit the policies he wants to promote rather than the data.
That's not my line, it's the headline of an AP article in the Washington Post. The exact words were, "cheaper gas lowers retail sales; spending up elsewhere." Yes folks, once again we see the march of surprised economists.
The immediate cause was a report from the Commerce Department showing a drop in retail sales of 0.8 percent in January that followed a drop of 0.9 percent in December. These declines do not quite fit with the story of a soaring economy led by a consumption boom. So now in the hunt for culprits, this AP article has apparently fingered lower gas prices.
Back in the good old days before this report was released we used to think that lower gas prices would be a spur to consumption as it freed up money for other purchases, but I guess we have an audible here:
"The modest gain suggests Americans are still cautious about spending their windfall from lower gas prices. ...
"Economists were disappointed by the weak showing, but most expect that consumers will eventually spend much of the extra cash left over from lower prices at the pump.
"'With lower gasoline prices leaving households with more to spend ... the labor market on fire and consumer confidence back at its pre-recession level, we had hoped to see a much stronger performance,' Paul Ashworth, an economist at Capital Economics, said in a note to clients."
There are two important data points that were apparently missed by the surprised economists. First, the labor market is very far from being "on fire." The percentage of unemployment due to people voluntarily quitting their jobs is still at extraordinarily levels. This is a key measure of workers confidence in the state of the labor market. Nominal wage growth has been just 2.2 percent over the last year, virtually unchanged from the prior three years.
The other data point apparently unavailable to surprised economists is the saving rate. Contrary to what they routinely assert, the saving rate is actually quite low, meaning that consumption as a share of disposable income is already quite high. People have need to save, for example for things like retirement. Some folks may have heard stories about the retirement income crisis. This refers to the fact that workers approaching retirement no longer have defined benefit pensions and have little savings.
For this reason, we should not expect some big surge in consumption going forward. If we expect to see a sharp uptick in growth we will have to look to some other component. Since there ain't many choices out there (the textbook says GDP is equal to consumption, investment, government spending, and net exports), some of us are less optimistic than the surprised economists.