Economics just flies out the window when the business interests want to get a trade deal passed. The NYT gave us more evidence of this fact in an article on the state of negotiations on the Transatlantic Trade and Investment Partnership (TTIP).
The article tells us that the TTIP appears to be facing troubles because of the opposition of environmental and consumer groups and the recent spying scandal in Germany. This opposition is presented as sort of tragic given the need for a deal:
"From the European side, new impetus for freer trade came on Monday in the form of new industrial production data indicating that the eurozone’s incipient economic recovery might have taken a step backward."
You've got to love this one. Europe just got new data showing that industrial production was weak last month, therefore it needs to push ahead with a trade agreement, that in the most optimistic scenario will not be signed before the end of the year. It will then be phased in over the next decade. Yeah, that's a good way of addressing weak economic data from May.
What's more striking is the mix of a discussion of real trade issues with regulatory issues that business interests are using to obstruct progress on trade. The starting point of the piece is how current trade rules cause Mercedes-Benz and Freightliner to take apart cargo vans in Europe so that they can be shipped to the United States to be reassembled. Of course this is a pointless source of inefficiency and waste. The vans could be sold more cheaply to consumers if they could be shipped as is, without the needless dis-assembly and reassembly. Eliminating the rules that lead to this practice is a great story how an agreement can lead to economic gains.
But the piece goes on to tell us that the negotiators are interested in much more than eliminating trade barriers. According to the article, they want to take away Europeans' right to set their own health, safety, and pollution standards. The article tells readers that the working proposal is that if a product meets standards in either the U.S. or Europe then it can be sold in both places.
This means, for example, that Europeans would have to give up plans to impose energy efficiency requirements on cars or other products, if the U.S. Congress didn't agree to the same standards. Given that a large segment of the Congress claims not to believe in global warming, it is understandable that Europeans would not be inclined to accept this position. The same would apply to regulations of food, drugs, and other consumer products.
The article doesn't mention this fact, but much of the focus of the deal will be on increasing forms of protectionism, specifically copyright and patent protection. These policies will raise prices and slow growth. Also, if the concern was in reducing barriers that raise prices, items like the protectionism that makes doctors' pay twice as high in the United States as in Europe would be front and center. But of course reducing barriers that protect the earnings of highly paid professionals is never on the agenda in trade negotiations.
As a practical matter, if the agenda of TTIP were simply removing actual trade barriers, like the ones that provide the backdrop for this piece, the deal could probably be concluded and approved fairly quickly. However, these trade barriers are a small portion of the TTIP agenda. The weakening of consumer, safety, and enviromental regulations to make them more friendly to corporations is the main point of TTIP. Powerful business interests are happy to hold the real but modest economic gains from freer trade hostage in order to advance their regulatory agenda.
Wow, the pundit class is really worried about the Export-Import Bank reauthorization. Today's big shot comes from NYT columnist Joe Nocera.
Nocera is honest enough to acknowledge that big companies like Boeing and Caterpillar are the main recipients of support. The Export-Import bank supporters have been pushing the line that most loans go to small businesses. This is of course true, but most of the money goes to the Boeings and Caterpillars, and serious people care about the money, not the number of loans going out the bank's door.
Nocera's twist is that real beneficiaries are the customers of the big companies, not the companies:
"First, customers of these big companies get the bulk of the Ex-Im Bank’s assistance. ...
"Second, most of the arguments made against the Ex-Im Bank revolve around its help to the big companies, not the small ones. For instance, it is argued that big companies have their own means of helping customers finance deals. That’s true, but it’s the customers, not the companies, that are pushing for export credit guarantees. A Boeing source told me that it is hearing from customers and potential customers about the fate of the Ex-Im Bank. 'It’s a big deal,' my source said, especially in places like Africa, where conventional financing for aircraft is hard to come by."
Okay, this one should get be worth a big burst of laughter from a comedy show laugh track. Imagine that, a "Boeing source" told a New York Times columnist that the Export-Import Bank is really about helping the companies customers. Yeah, how could anyone question that. (This is like when companies oppose pollution regulations because they are worried about their workers' jobs.)
The story here is not very complicated for believers in economics. If there were no subsidies from the Bank, Boeing would have to accept somewhat lower profits on its deals. It would likely make up some, but not all, of the value of the Bank's subsidy. This means that the customers would be looking at slightly higher prices. Life's tough. (Let's get a list of the customers and see if they rank higher than veterans or inner city kids as beneficiaries of the taxpayers largesse.)
In some cases, the higher price will mean that Boeing will lose the deal to a competitor. That's known as capitalism, it happens all the time.
It speaks volumes that at the same time the establishment pundits are getting hysterical over the dire consequences of not reauthorizing the Ex-Im Bank, the WTO issued a ruling against the U.S. over tariffs against Chinese and Indian steel imports. This ruling is likely to cost more U.S. jobs than the shutting of the Ex-Im Bank, but odds are none of the pundits will speak against it. Draw your own conclusions.
Of course the real free trade position is to lower the value of the dollar against other countries' currencies. That is how a trade deficit is supposed to be corrected in a world of floating exchange rates, like the one we are supposed to have. However the dollar does not fall to bring our deficit into balance because many countries, most notably China, buy up hundreds of billions of dollars to keep the dollar over-valued. The over-valued dollar makes our exports expensive (like taking away the subsidy from the Ex-Im Bank) and makes imports cheaper to people in the United States, crowding out domestically produced goods.
In an economy suffering from secular stagnation, we have no market mechanism to replace the $500 billion dollars in demand (3 percent of GDP) lost to the trade deficit. Adding in a multiplier effect, this deficit costs us around $750 billion in annual output or around 6 million jobs. Unlike the Ex-Im Bank, there is real money and real jobs at stake with the value of the dollar. It would be great for Joe Nocera to write about that.
Some folks might think that a newspapers job is to convey information to its readers: not the Washington Post. At least when it comes to budget reporting the Post firmly believes in the frat boy ritual of throwing out really big numbers that will be almost meaningless to virtually all of its readers.
It gave us one such ritualistic piece on Saturday that discussed new budget projections from the Office of Management and Budget (OMB). Among other things the piece told readers:
"The White House said Friday that the federal budget deficit will fall to $583 billion this year, the smallest deficit of President Obama’s tenure and the first to dip below $600 billion since the Great Recession took hold in 2008. ...
"The White House predicts that the nation’s finances will deteriorate markedly over the next decade, with deficits rising nearly $600 billion above previous projections. ...
"When Obama took office in 2009, the economy was in free fall and the budget deficit was soaring toward $1.4 trillion, the first of four consecutive trillion-dollar deficits that drove the national debt to the highest level as a percentage of the economy since the end of World War II. ...
"Democrats hailed Friday’s White House deficit forecast, which came on the same day as a Treasury Department announcement that the government recorded a surplus of $71 billion for the month of June. ....
"Republicans, meanwhile, noted that the long-term outlook remains gloomy, with the national debt forecast to rise to more than $25 trillion by 2024 if Obama’s policies are enacted.
"On Friday, the debt stood at $17.6 trillion."
Feel well informed? The amazing part of this story is that the reporter did not even herself have to wade through the long arduous process of dividing the numbers by GDP to make them somewhat meaningful to readers. This information was actually contained in the blogpost by OMB director Brian Deese to which the piece links.
She could have told readers that the new projections show a deficit of 3.4 percent of GDP for fiscal 2014, which is projected to fall to 3.0 percent of GDP in 2015. The size of the deficit is projected to continue to fall, hitting 2.1 percent of GDP in 2024.
While the Post piece implies that the debt situation is bad news ("remains gloomy) by just giving dollar numbers without any context, in fact it is projected to edge down slightly. The ratio of total debt (including money owed to the Social Security trust fund) to GDP is currently just over 100 percent. The latest OMB numbers project the debt to GDP ratio falls to 94.1 percent of GDP in 2024. In short, for deficit hawks the reality is the opposite of what the Post article asserts.
In addition to its frat boy use of numbers, it is also worth elaborating slightly on the pieces reference to "painful but historic spending cuts." The budget cuts were painful to millions of people who were denied work since the government was reducing demand in a badly depressed economy, therefore leaving more people without jobs. They were also painful to tens of millions of workers who were unable to secure a share of the gains from economic growth in higher wages because the weak labor market left them with little bargaining power.
The cuts probably were not painful to most business owners or highly paid professionals. The former have seen profits hit a record share of GDP, likely in part due to the fact that wages are low. The latter have benefited from being able to hire cheap help, since workers have few choices in a labor market that has been kept weak by budget cuts.
It is worth noting that the burden of the debt is measured by the amount of debt service, not the size of the debt. The latest OMB reports a net interest burden in 2024 of 3.0 percent of GDP. This is slightly less than its early 1990s levels. Thanks to Robert Salzberg for reminding me about this point.
Note: Type corrected, thanks to Rodrigo.
In a Wonkblog post Matt O'Brien discusses central bank efforts to deal with bubbles. His starting point is the decision by the central bank in Sweden to begin raising interest rates in 2010, ostensibly to head off the development of a bubble there.
There are two points worth noting here. First, it is difficult to imagine what the central bankers were drinking in Sweden when they decided to start shooting at bubbles. A bubble that threatens the economy is a bubble that moves the economy. If there is a bubble in Uber stock or the price of hops, there is little consequence to the economy when the bubbles burst.
The crashes of the stock bubble and the housing bubble led to recessions because these bubbles were driving the economy. This was easy to see in the data in both cases. In the first case, the investment share of GDP hit the highest level in more than two decades as people were able to raise billions in IPOs for utterly nonsense dot.coms. Consumption surged to then record shares of income as the stock wealth effect caused spending to surge. This boost to the economy disappeared when the bubble burst.
There was a similar story with the housing bubble. Residential construction hit a record share of GDP, roughly 50 percent above its average over the prior two decades. Consumption surged to an even higher share of income, driven by the housing wealth effect. And, when this bubble burst we got the Great Recession.
There were no obvious distortions in the Swedish economy when its central bank started shooting at bubbles. Its savings rate was relatively high and the country had a huge trade surplus (as opposed to deficits in bubble driven economies like the U.S. and Spain). The bubbles that really matter are not hard to see. Economists like to pretend otherwise since almost all of them missed the last one, but that reflects the competence of economists, not the inherent difficulty in recognizing bubbles.
The other point is that central banks do have many tools other than interest rates to attack bubbles. My favorite is talk.
I know it doesn't sound sophisticated and it's not terribly mathematical, but I suspect it would have a very large impact on the housing market if Janet Yellen were to say that she thought house prices were over-valued and that the Fed would be prepared to take steps to bring prices in line with fundamentals. Note that I am referring to an explicit warning backed up by Fed research, not a mumbled "irrational exuberance" subsequently qualified by incoherent gibberish. I would certainly take such a warning seriously if I was thinking of buying a house.
I know this view is dismissed by economists, but it's hard to see the downside of trying this path. The worst I've heard is that this could damage the Fed's credibility if house prices didn't fall. Given that we have lost many trillions of dollars of output and millions of people have seen their lives ruined from the collapse of the housing bubble and the ensuing recession, the risk of the Fed's credibility seems a small price to pay in such circumstances.
Floyd Norris had an interesting piece noting the incongruity between the relatively strong job growth we saw in the first half of 2014 and the near zero or possibly negative GDP growth for the period. (First quarter growth was -2.9 percent, second quarter growth will be positive, but quite possibly less than 2.9 percent.) While it is easy to explain the drop in first quarter GDP as an anomaly driven by falling inventories and bad weather, it is still difficult to reconcile with a rate of job growth of 230,000 a month.
At least part of this story is likely due to quirks in the data. One prominent quirk that has been overlooked has been the pattern of health care spending. Much has been made of the fact that spending on health care services fell in the first quarter, something we have not seen since the 1960s. While this drop is striking, it is somewhat less so when we look at the fourth quarter data.
The Bureau of Economic Analysis (BEA) reports that nominal spending on health care services rose at a 7.6 percent annual rate in the fourth quarter of 2013. This is almost twice the average pace for the prior two years. (I use nominal since I think "real" spending is of questionable meaning in health care. If we are given more of a drug that has no beneficial effect or have more unnecessary tests or procedures, real spending will increase. If better research ends this spending, it appears as a reduction in real spending even if this might be associated with better health.)
Taken on their face, the BEA numbers show a big surge in health care spending in the fourth quarter followed by an almost unprecedented reduction in spending in the first quarter. We could believe that this accurately describes what happened in the economy, or alternatively we can believe that the fourth quarter number overstated the actual increase in spending. I would lean toward the latter view. The data are never perfect and by definition, any overstatement in spending growth in one quarter leads to an understatement of growth in the next quarter.
Anyhow, that's my story on health care spending. But the GDP growth data and the jobs data are still seriously out of line.
Paul Krugman took off the gloves in his column today. He said that much of the opposition to the Fed's low interest rate policy stems from the narrow interest of very rich people who earn lots of interest on their money. While we hear arguments, often from prominent economists, that low interest rates and other expansionary policies from the Fed risk hyper-inflation and other evil things, these arguments have repeatedly been disproven by the evidence. Krugman argues that the reason the argument against low interest rates continually reappears in different forms is the money that the 0.01 percent have at stake in protecting their interest income.
On its face this is a plausible story. Certainly the very rich have been especially prominent in making and backing absurd arguments that hyperinflation is just around the corner, or even already here, but we just can't see it because the government is hiding it.
While we are on the topic of interests determining views on monetary policy, let's take a step over to a different, but arguably more important issue: dollar policy. The key point here is that the value of the dollar is the main determinant of the trade deficit. The basic point is simple. When the dollar is highly valued in terms of foreign currency (i.e. it takes a lot of euros, yen, or yuan to buy a dollar) our goods and services become more expensive relative to the goods and services produced by other countries. This means we will import lots of items from other countries, because they are cheap to us, and they will buy few of our exports, because they are expensive to them. In other words, we will have a large trade deficit.
That is a big deal, especially now that even respectable economic types recognize the problem of secular stagnation. If we have a trade deficit of $500 billion (@ 3 percent of GDP), which we do, this is demand that we are generating in other countries rather than here. We have no simple mechanism for replacing this demand.
Most readers expect better than silly cliches from the New York Times. That is why it was striking to see an article on Svalbard, a small town in northern Norway, tell readers:
"But it [Svalbard] shuns the leftist, leveling consensus that according to conservative critics has made working almost a lifestyle choice in the rest of Norway."
Hmmm, a leveling consensus that makes working a lifestyle choice? A quick visit over to the OECD's website tells us that 75.1 percent of the people in Norway between the ages of 16 to 65 opt for the working lifestyle. That's more than 7.0 percentage points above the 68.0 percent share of this age group that works in the United States.
It's understandable that some people will say silly things about the Scandinavian welfare state, just as some people make silly statements about almost everything. However we don't expect the NYT just to repeat whatever silly assertion that a reporter happened to overhear. That is not news.
Thanks to David Dyssegaard Kallick for calling this one to my attention.
That one may be helpful if you read the NYT article on President Obama's request of $3.7 billion from Congress.
That's what millions are asking after hearing Morning Edition's top of the hour news segment (sorry, no link). The segment referred to negotiations over emissions caps for greenhouse gases. It said that China argued that it should not be subject to the same rules that apply to other rich countries.
China was presumably making the argument that it was not a rich country and therefore should not be subject to the same rules as rich countries. While China's economy is now larger than the U.S. economy on a purchasing power parity basis, since it has four times the population, on a per capita basis it is about fourth as rich. This means both that it has fewer resources to cope with the problem and that the average Chinese person is far less responsible for global warming than the average person in the United States.
It is also worth noting that in an era of secular stagnation, like the one we are in now, spending to slow global warming would increase employment and output. It is not a drain on the economy.
Neil Irwin has an interesting piece in the NYT noting how high prices for a wide variety of assets have driven returns down to historical low levels. He notes that this is a predictable outcome, and in fact an intended result, of the low interest rate policy being pursued by the Fed and other central banks.
The idea is that high asset prices make it cheap for firms to borrow to finance new investment. They also make it easier to buy a home and allow many people who had higher interest rate mortgages to refinance into lower cost ones, thereby freeing up money for other types of consumption. There is also a wealth effect whereby higher stock and house prices will translate into increased consumption. Through these channels central banks hope to provide some boost to growth.
However the flip side of this policy is that investors can anticipate lower returns on their savings, unless they want to hold exceptionally risky assets. This is the idea of there being a savings glut, or as Irwin suggests today, a shortage of adequate investment opportunities.
The idea of a savings glut is not new, Ben Bernanke first mentioned it back in 2004 when he was a member of the Board of Governors. However the implications were not fully drawn out by Bernanke at the time or by Irwin in today's piece. A savings glut implies an economy that is not producing at its capacity.
To cut through the nonsense, savings in an economic sense means not spending. From the standpoint of the economy, it is just as much savings if you put $1,000 in the stock market, a checking account in your bank, stuff it under your mattress, or burn it in your fireplace. Anything that does not involve the purchase of a newly produced good or service means saving. Saying that we have a saving glut means we have an economy that does not generate enough demand to keep the economy at full employment. This is of course the story of secular stagnation that folks like Larry Summers have recently discovered and the problem that some of us pre-mature secular stagnationists have raised for years.
The idea that the economy could be subject to an ongoing problem of inadequate demand used to be grounds for eviction from the realm of serious economists. But anyone who is willing to look at the evidence with a straight face really can't escape this conclusion.
Regular readers of Beat the Press know that I go into the stratosphere when I see a news story or column that uses numbers in the millions, billions, or trillions and doesn't provide any context, like relating it to the total budget if it's a tax or spending item. The reason for my ire is simple: everyone knows that almost no one is going to be able to assign any significance to these Really Big Numbers. Therefore such pieces are providing no information to readers.
On the other hand it is very simple to provide context to readers. Dana Milbank showed how today when he wrote about the $4.2 million dollars that President Obama announced he would spend on a new Excellent Educators for All Initiative, which is supposed to address inequities in the quality of teachers across schools. Milbank pointed out that the commitment amounted to about 0.0001 percent of federal spending. In other words, this is gesture done for show.
By writing that President Obama plans to spend 0.0001 percent of the budget on his Excellent Educators for All Initiative, Milbank is telling readers that this is not a serious plan for addressing educational disparities, it is a public relations gesture. People who just saw the $4.2 million number may be under the mistaken impression that this program could actually make a difference in the quality of education for poor children.
Of course if reporters routinely expressed numbers in context there would be less incentive for politicians to push forward with silly public relations gestures, because everyone would know they are silly gestures. That would be a direct positive effect of this sort of effort at providing readers with real information instead of treating budget reporting as a fraternity ritual in which reporters write down numbers which they know to be meaningless to almost everyone who sees them.
Last year North Carolina's conservative Republican legislature got tough. It sharply reduced the duration of unemployment benefits and made them much more difficult to collect. The changes took effect at the start of July, 2013. Their story was that unemployment insurance and other benefits discourage workers from seriously looking for jobs. If we take away this crutch of unemployment benefits, then workers will figure out how to find jobs. This both saves the government money and is better for the workers themselves since they will actually be making a living on their own.
We now have data for 10 months into the experiment (through May) and John Hood, the chairman and president of the John Locke Foundation, a North Carolina think tank, has a piece in the Wall Street Journal telling us that it is a resounding success. Hood tells readers:
"According to the U.S. Bureau of Labor Statistics, the number of payroll jobs in North Carolina rose by 1.5% in the second half of 2013, compared with a 0.8% rise for the nation as a whole. Total unemployment in the state dropped by 17%, compared with the national average drop of 12%. The state's official unemployment rate fell to 6.9% in December 2013 from 8.3% in June, while the nationwide rate fell by eight-tenths of a point to 6.7%."
Okay, let's take these in turn. North Carolina did have more rapid job growth than the rest of the nation in the period since it cut benefits, but it also has had more rapid job growth than the rest of the nation for the last four decades, before many of the benefit cutters were even born. This because it is in the South, which has been growing more rapidly than the Northeast and Midwest for quite some time. (My explanation is air-conditioning, but you're welcome to throw in other items.)
If we look at North Carolina's labor market over the last year (May 2013 to May 2014) we find that the number of jobs, as measured by the Labor Department's establishment survey, grew at 1.92 percent rate. This beats the 1.86 percent rate for the rest of the South Atlantic region, but the difference certainly is not enough to employ all the people who were cut off from the unemployment rolls. (The South Atlantic region is a grouping of states from Florida to Maryland. It has been used by government agencies for many decades.) If the argument is that the ending of benefits put the fear of God in the unemployed and made them finally get serious about working, these numbers don't do much to support the case.
The situation gets even worse if we pull out the Charlotte-Gastonia-Rock Hill area. The reason for pulling out this relatively fast growing region is that it straddles the border with South Carolina. Many of the workers who have gotten jobs with companies in North Carolina actually live in South Carolina. If unemployed workers' past employment experience had been in South Carolina, they will not have any additional motivation to find work as a result of North Carolina cutting benefits.
We can't know how many of the new workers the Charlotte metropolitan area are from South Carolina, but it is striking that if we pull out this area, North Carolina's job growth slightly lags the rest of the South Atlantic region. Excluding the Charlotte area, job growth in the state was 1.76 percent over the last year, roughly a tenth of a percentage point less than the average for the rest of the region. This means that outside of the Charlotte area, it doesn't seem that the cut in benefits did anything to increase incentives to work. As a practical matter, the differences in both directions are small, but the point is that there is no evidence that cutting benefits did anything to increase employment growth in North Carolina compared with comparable states.
Lew Daly has an interesting, but unfortunately misdirected, critique of the measurement of the public sector's contribution to GDP. He notes several areas, such as infrastructure and education spending, where the government contributes to our well-being, but which are not directly picked up in GDP as contributions from the government. While the point is true, the piece fundamentally mistakes what GDP is and also grossly understates the government's role in the economy.
First, GDP is a measure of economic activity. It is not a comprehensive measure of societal well-being and anyone who tries to use it as such is showing off their ignorance. GDP can be thought as being comparable to weight. It is difficult to imagine a doctor doing a medical exam and not wanting to know the patient's weight. It is useful and important information. If a person is 50 percent above or below their ideal weight, it likely means they have a serious health issue. On the other hand, someone could be right at the ideal weight for their body type and still be dying of cancer. Any doctor who ended their check-up with writing down what the scale shows has done some serious malpractice.
Similarly, GDP is telling us the value of goods and services the economy produced. It is not telling us whether the pollution that results is killing us, whether it all went to produce weapons and prisons, or whether Bill Gates and his kids pocket it all. We need other measures to evaluate such things, and we have them, but they are not GDP.
On the other point, the problem of assessing the government's role in the economy goes much deeper than Daly suggests. A huge amount of economic activity is undertaken through the incentives of patent, copyright, and trademark monopolies. Pharmaceuticals alone account for more than $380 billion a year in sales (2.2 percent of GDP). The bulk of these expenditures are higher prices that drug companies can charge because the government will arrest any competitors.
Floyd Norris had an interesting piece on the impact of investor purchased homes on prices at the lower end of the housing market. His takeaway is that investor purchased homes have made housing less affordable for many low and moderate income households.
While this is partly true, by focusing only on the last couple of years the piece misses much of the picture. While investor purchases have pushed prices to unusual levels in many markets, in some cases they essentially put a floor on the market, helping to stabilize prices at levels that are consistent with longer term trends. The chart below shows house prices in the Case-Shiller indices for the bottom third of the market for five cities. (This is the same series used for the charts in the article.)
There are several features of this chart worth noting. First, it is possible to see a rise in house prices (most pronounced in Minneapolis) in the middle of 2009. This was the result of the first-time homebuyers tax credit. This policy currently ranks #1 as most boneheaded policy of the century. It encouraged millions of people to buy into a market that was still inflated by the housing bubble.
A Washington Post article on the June employment report yesterday noted the jump in involuntary part-time employment:
"In June, their ranks [the number of people who are working part-time but want full-time jobs] swelled by 275,000 to 7.5 million. In 2007, 4.4 million people fell into this category."
It is important to note the longer term trend here since the month to month movements are highly erratic. The number of people working part-time involuntarily is down by 640,000 from its year ago level and by more than 1.6 million from its peak in 2010.
There are more people voluntarily working part-time, but this is a positive. (These are workers who answer a survey by saying they have chosen to work part-time, less than 35 hours a week.) The number of people voluntarily working part-time typically rises in an upturn, presumably because workers feel they have more choice about jobs and many people would rather work fewer hours to take care of children or other family members or possibly because their own health makes full-time employment difficult. The Affordable Care Act has likely increased the number of people who are working part-time voluntarily since many workers will no longer feel the need to work at a job that provides health care insurance since they can buy it through the exchanges.
It is amazing that a lengthy piece in the NYT discussing the high cost of new vaccines and the efforts of companies to promote them never discussed the possibility of alternatives to patent monopolies as a way to finance the research. Until recent years, most vaccines actually were developed with public funding, so obviously it is possible.
If the research were paid with public funding, then vaccines would be cheap since they would all be generics. And, there would not be a problem with companies misrepresenting their safety and effectiveness. Monopoly profits give companies an incentive to lie, a fact that economists generally recognize in other circumstances.
The impact of misleading promotion campaigns is especially important in the case of vaccines. Many vaccines are required for allowing children into school. In other words, the government will arrest parents who don't pay companies their monopoly profits on these vaccines. And in the loon tune land of modern economics, this is called a free market outcome.
It is painful to read Eduardo Porter's column on the prospects for slowing global warming and China's greenhouse gas emissions. It's not that Porter got anything in particular wrong; he is presenting standard projections that are the basis for international negotiations. Rather it is the framing of the trade-offs that is painful.
Porter poses the question of the extent to which China should be willing to slow its economic growth to curb its greenhouse gas emissions, as opposed to rich countries like the United States bearing more of the burden. The reason this is painful is that most folks might recall that our major economic problem at the moment is secular stagnation.
In case people forgot, this is a problem of inadequate demand. The story is that we don't have enough demand for goods and services to keep our workforce fully employed. As a result we have tens of millions who are unemployed, underemployed, or who have given up looking for work altogether. This is not just a U.S. problem but one that afflicts much of the world.
Okay, now bring in the problem of global warming. Isn't it horrible that we face this immense environmental problem at the same time that our economies are suffering from this horrible problem of secular stagnation? Arghhhhhh!
The problem of global warming is one that needs lot of work. We need people to retrofit our buildings to make them more energy efficient, to put up solar panels and wind turbines to get clean energy. How about paying people to drive free buses so that commuters have more incentive to leave their cars at home? We need to build smart grids to minimize energy wastage. The list is really long.
This issue comes up very directly in terms of our economic relations with China. Our big complaint (at least publicly) is that China is deliberately keeping down the value of its currency against the dollar in order to export more to the United States. That's a too little demand story again. But, we also want them to spend more on curbing greenhouse gas emissions. That's a perfect way to address the too little demand story.
Instead of subsidizing its exports to the United States (the effect of China's present trade policy), China could redirect these resources to subsidizing its installation of solar panels. Everyone stays fully employed and we get fewer greenhouse gas emissions.
These transitions are not all simple and easy, but the basic point is that two problems fit together perfectly. The enormous spending associated with World War II was the cure for our last depression. No one in their right mind would want to see another catastrophic war, but a massive deployment of resources to curb greenhouse gas emissions worldwide would serve the same purpose.
Come on folks, this really isn't hard.
Quarterly GDP data are erratic and profit data in particular are subject to large revisions, but hey it's still worth noting a big drop in profit shares reported for the first quarter of 2014. The data released by the Commerce Department last week showed the profit share falling from just over 21 percent of net value added in the corporate sector in the last quarter of 2013 to less than 19 percent in the first quarter of 2014. Here's the picture.
It's too early to make much of this drop in profit shares. It is also a bit disconcerting that it is all attributable to a drop in the capital consumption adjustment, the difference between accounting depreciation and economic depreciation as measured by the Commerce Department. (In other words, the Commerce Department is showing a larger gap between what firms record for accounting purposes and the actual rate of depreciation of capital.)
Anyhow, with all the appropriate caveats, this may be the first sign that the sharp rise in profit shares in this century is being reversed, or as Gerald Ford once said, our long national nightmare is over.
Neil Irwin has a piece noting housing's importance in the downturn, which gets things half right. First, housing is typically important in economic cycles, as he says, but the picture is quite different than Irwin implies.
In a typical recession housing construction falls because it is very sensitive to interest rates. Most recessions are brought on by the Fed raising interest rates to slow the economy. In these cases the decline in housing is a deliberate outcome of Fed policy, not an accidental outcome to be avoided.
In contrast, the most recent downturn was brought on by a collapse of a housing bubble. This made it qualitatively different from most prior downturns (the 2001 recession was also bubble induced) in several different ways.
First, construction was proceeding at an extraordinary rate of more than 6.0 percent of GDP before the collapse, compared to an average rate of just over 4.0 percent of GDP. This meant that housing contracted far more than it would in a typical downturn. Furthermore, because of the overbuilding of the bubble years, housing fell further than normal, hitting levels just above 2.0 percent of GDP. And, because the downturn was not brought on by a rise of interest rates it could not be reversed by a drop in interest rates.
There really should not have been much mystery about housing being in a bubble. There was a huge unprecedented run-up in house prices that broke with a century long trend in which nationwide house prices had just kept pace with the overall rate of inflation. There was no plausible basis in the fundamentals of the housing market for this run-up, with income and population growth both relatively weak. And, rent just kept pace with inflation during the bubble years.
The effect of the bubble on consumption was also predictable. The bubble created trillions of dollars of ephemeral housing wealth. This led to a surge in consumption due to the housing wealth effect, pushing the savings rate to record lows. When the bubble burst, consumption fell as the housing wealth disappeared, but the saving rate is in fact still relatively low, contrary to what is often asserted in the media. There is no reason that we should expect people to be consuming a larger share of their income than is currently the case. The only mystery about the current state of the economy is why anyone would see any mystery
The NYT had an article about a plan to allow some workers in Germany to retire early and collect full benefits from their version of Social Security. According to the article, workers who have paid into the system for 45 years will be able to start collecting full benefits at age 63 instead of the standard age of 65. (This is being raised to 67, as is the case in the United States.)
While the piece provides interesting background about the economic and political context for this decision, it gives no context for the numbers in the piece, which will therefore be meaningless to the overwhelming majority of NYT readers. For example, it tells readers that 6,000 workers have already applied for early benefits and that 200,000 are projected to be eligible. It is unlikely that many readers have a good sense of how large these numbers are relative to Germany's workforce. (According to the OECD, employment in Germany is roughly 40 million. This means that the 6,000 current applicants amount to 0.015 percent of total employment. If all 200,000 eligible workers took advantage of early retirement it would be equal to 0.5 percent of total employment.)
The piece later tells readers:
"The costs of the early retirement, estimated to grow over the next decade to €3 billion from about €1 billion, or to $4.1 billion from $1.4 billion."
It is unlikely that many readers have much sense of how important 1 billion euros is to Germany's budget today or how important 3 billion euros will be a decade from now. Germany's current budget is roughly 1.3 trillion euros, which means that the cost of early retirement is roughly 0.08 percent of current spending. The projected 3 billion euro cost would be roughly 0.18 percent of projected spending.
It should have been a simple matter for the paper to put these numbers in a context that would make them understandable to readers, instead of just putting in numbers that will be almost meaningless to everyone who reads them. The paper's Public Editor Margaret Sullivan made this point herself last fall and apparently got agreement from the NYT editors. Yet, for some reason practices seem not to have changed.
This is getting almost like the Twilight Zone. We have a journalistic practice that everyone agrees is wrong, that is easy to change, but nonetheless persists. What is going on here?
Note: this piece was corrected to say "full benefits." Thanks DC Analyst.
It seems that Matthew D'Ancona is upset that people are criticizing former Prime Minister Tony Blair, who is apparently making vast sums in a second career in the financial industry and on the speaking circuit. There are several points worth noting.
First, as is the case with Bill Clinton, his generational counterpart in the United States, the public certainly has good cause to be upset that Blair set the economy on a path of bubble driven growth, even if the bubble blew on the watch of his successor. The public also has the right to be furious that Blair, like President Bush in the United States, misled his country into war in Iraq.
Both of these factors should be enough to tarnish Blair's public standing well past his lifetime, but the immediate topic is the fortune that he is amassing in his career as a former Prime Minister. There are two issues here. First, it is difficult to avoid the perception that Blair, like Clinton and now former Treasury Secretary Timothy Geithner, are cashing in on the connections that they have made in their political careers. It seems more plausible that Blair and Geithner are attractive as employees in the financial industry because of who they know, as opposed to their business acumen. Also, the lavish speaking fees these people earn can be at least as much to curry favor as opposed to an immense desire to hear their wisdom.
But let's give Blair and Co. the benefit of the doubt and assume that there are no quid pro quos for the hundreds of millions being thrown their way. There is still a separate issue. Suppose that Tony Blair had spent his political career sounding more like Elizabeth Warren than Bill Clinton. Would the big bucks still be flowing in his direction?
My guess is that the answer is no. Blair, like Clinton and Geithner, is eligible to get incredibly wealthy in his second career because he has pursued policies that were hugely favorable to the financial industry. This is a serious problem.
If we give our political leaders credit for a tiny bit of foresight, they would recognize that they stand to become enormously wealthy if they pursue policies favorable to the financial sector and other big business interests. On the other hand, if they pursue more balanced policies they will just enjoy the retirement of a very well paid professional. D'Ancona wants us to believe that this fact could not possibly affect the policies they pursue while in office, and he is angry at those who might think otherwise.