As they say at the Post, don't let the data bother you, or so it would seem with yet another article bemoaning the lack of consumption. The proximate cause was a Commerce Department report showing weaker retail sales in June after a big jump in May. The piece explained to readers:

"The figures suggest that Americans are still reluctant to spend freely, possibly restrained by memories of the Great Recession.

"'Household caution still appears to be holding back a more rapid pace of spending growth,' Michael Feroli, an economist at JPMorgan Chase, said in a note to clients."

Here's the slightly longer term picture.

cons gdp

For the record, there is no economist who wants to argue that the consumption share of GDP should continue to rise. The logical implication of such an argument is that investment, government spending, and net exports would continue to decline as a share of GDP. So we should look at levels, not changes here. And the level is actually higher than it was before consumers were scarred by memories of the Great Recession.

Btw, the folks who think that people need to save more for retirement, which include me, think that consumption is too high relative to income, not too low. That is definitional. Savings are the income that is not consumed.

Recent comments

  • Guest - PeonInChief

    I don't understand why people have such trouble understanding that the masses are both spending more and buying less. That's because wages are stagnant, while the cost of necessities, particularly housing, have increased a lot over the last 30 years. This means, quite simply, that income is going ...
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  • Guest - Marko

    "'Household caution still appears to be holding back a more rapid pace of spending growth,' Michael Feroli, an economist at JPMorgan Chase, said in a note to clients." What he's really saying is that households are unwilling to consume by increasing their debt loads , which has been the "model" for...
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  • Guest - urban legend

    Your prescriptive point from this data -- which you have noted before -- is not very clear, Dean. You surely are not suggesting consumers should spend less to bring down the consumer spending percentage of GDP and raise the percentage of the other factors, are you? I assume the implication of this i...
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In a NYT column Steve Rattner argues that the conditions being imposed on Greece by Germany as a condition of its bailout are for its own good. While Greece undoubtedly needs to reform its economy in many ways, Rattner ignores the extent to which austerity, both within the country and the euro zone as a whole, have worsened Greece's economy. This is both true in a macro sense, in that cuts in government spending and increased taxes reduce GDP and employment, but also the resulting depression worsens other problems, like the public pension system.

Rattner includes a table showing that pensions in Greece are 16.2 percent of GDP, the highest in Europe. However pension spending as a share of GDP has risen sharply as a result of the downturn. In 2007, according to the OECD pension spending in Greece was 12.1 percent of GDP, less than France's 12.5 percent and Italy's 14.0 percent. In fact, Greece's pension spending was not very much larger as a share of GDP than Germany's 10.6 percent.

Since GDP has contracted by more than 25 percent, the ratio of pension spending to GDP would rise by roughly a third if it had stayed constant. (Pensions have actually been cut sharply under previous austerity programs.) The surge in unemployment, now over 25 percent, has also raised pension costs. Many people who would prefer to be working instead retired early and started collecting their pensions because they couldn't find jobs.

This is a direct result of the austerity that Germany has imposed on Greece and one reason why the Greeks are not as appreciative of Germany as Rattner thinks they should be.

 

 

 

Recent comments

  • Guest - Gail Williams

    Seems to me, Germany had a bunch of debt written off after TWO World wars. And Angela Merkel's East Germany was helped out by West Germany. While it is true that Greece had many unwise policies, I find La Merkel's intransigent and venomous attitude very hard to stomach. Especially since the austeri...
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  • Guest - pieceofcake

    What is so weird this dude writes: 'IN dominating the debate over how to address the Greek crisis, Germany has shown that economic success brings political influence, which it wielded last weekend to brush away requests from France and Italy for more lenient treatment of their neighbor.' And I thoug...
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  • Guest - Eric377

    Why shouldn't we come to the conclusion that Greece's pension and other public sector burdens were simply too big for what Greece wanted to pay for? A strong case is put forth that France and Italy carried higher burdens and Germany was near to Greece. So what's the difference? Why didn't Greece ...
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In her WaPo column Catherine Rampell points to the sharp decline in labor force participation rates for prime age workers (ages 25-54) in recent years and looks to the remedies proposed by Jeb Bush and Hillary Clinton. Remarkably neither Rampell nor the candidates discuss the role of the Federal Reserve Board.

There is not much about the drop in labor force participation that is very surprising. It goes along with a weak labor market. When people can't find a job after enough months or years of looking, they stop trying. Here's what the picture looks like over the last two decades.prime age lfpr

While the story would be somewhat different for men and women, we see that the labor force participation rate (LFPR) rose from the mid-1990s to the late 1990s during the strong labor market of those years. It fell with the 2001 recession and the weak recovery that followed. (We continued to lose jobs until late 2003 and didn't get back the jobs lost in the downturn until early 2005.) After the labor market started to recover, the LFPR started to rise again, but then fell sharply with the downturn following the collapse of the housing bubble.

It's great for politicians to round up their favorite usual suspects in trying to explain why so many prime age workers no longer feel like working, but to those not on the campaign payrolls, it seems pretty obvious. We don't have enough demand in the economy and therefore we don't have jobs.

This is where the Fed comes in. If the economy were to continue to create 200,000 plus jobs a month, then we can be pretty confident that the LFPR will rise again as it did in the late 1990s. However if the Fed is determined not to allow the unemployment rate to fall below some floor like 5.2 percent, then it will prevent the economy from creating large numbers of jobs. In this case, the LFPR will not rise much regardless of whether we follow the prescriptions of Bush or Clinton, since people will not look for jobs that are not there indefinitely.

It is worth noting in this respect that in the 1990s, the vast majority of economists, including Janet Yellen who was then a member of Fed's Board of Governors, did not want the Fed to allow the unemployment rate to fall much below 6.0 percent. It was only because then Chair Alan Greenspan was not an orthodox economist that were able to see that the unemployment rate could in fact fall much lower without triggering inflation. (The unemployment rate averaged 4.0 percent in 2000.)

It should seem obvious that Fed's policy will play a major role in determining the LFPR going forward. It is bizarre that it does not seem to be getting into the debate. 

Recent comments

  • Guest - Matt McOsker

    I bet the UR could go to 2-3% and not cause much inflation. I would prefer to actually find out. If the Fed is so precise, then they can deal with inflation IF it happens.
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  • Guest - washunate

    The Fed has been lowering rates for over three decades. I'm curious what exactly are they not doing to promote full employment that a democratic society wants a central bank to be doing?
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  • Guest - Dave

    We believe you are correct, sir. The Fed should not raise rates any time in the next millennium! Well, not at least any time soon… We're on your side. We believe the Volcker recession was theoretically unnecessary also. The theory behind fed rates is fatally flawed. We intend to show why. But...
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We've been hearing a lot about pensions in Greece lately. These have been a major target of the creditors in their negotiations with Greece. According to a recent article in the New York Times, 60 percent of Greeks receive a pension of less than $9,500 a year. An article in today's Washington Post may lead people to ask what sort of pensions the top officials at the European Central Bank (ECB) get.

The article briefly recounts how Greece and other crisis countries got themselves into difficulties. The piece includes this strange line:

"The tipping point, though, came in 2010, when markets realized how much these governments now needed to borrow to make up for their bad economies."

Actually it was not so much a market realization as a statement by the ECB that it was not committed to standing behind the sovereign debt of euro zone members. This led to the sudden realization that the bonds issued by these countries could default.

The fact that serious imbalances were building within the euro zone should not have been difficult for numerate people to recognize. Most of the crisis countries had persistently large current account deficits. (Italy is the major exception.) Portugal's peaked at 9.5 percent of GDP in 2008, Spain's at 10.5 percent, and Greece's at 13.9 percent. These are the sorts of current account deficits that one would expect to see in a fast growing developing country like China (of yeah, they have a large trade surplus), not relatively wealthy countries that are not growing especially rapidly.

This should have led a bank that had the responsibility to maintain financial stability to take steps to try to reverse these imbalances, for example, by dampening the flows of credit that were sustaining it. However the ECB largely ignored the imbalances. When the first ECB president, Jean-Claude Trichet retired in the middle of the crisis in 2011, he patted himself on the back for keeping inflation under the bank's 2.0 percent target.

Since it is apparently possible to take away the pensions that Greek people spent their life working for, some people may want to know if its possible to take back the much higher pensions earned by top officials at the ECB.

 

Recent comments

  • Guest - Jan

    Dean, "Actually it was not so much a market realization as a statement by the ECB that it was not committed to standing behind the sovereign debt of euro zone members." You wouldn't have a link to that ECB statement by any chance? Thanks.
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Would a doctor work for Uber? Probably not, but if it turned out there were no jobs for doctors and the only way she could support her family was to work for Uber, then a doctor may work for Uber. That is an important point left out of an interesting article on growing economic insecurity for workers.

A big part of this story is the decision by the Federal Reserve Board to raise interest rates to deliberately limit the number of jobs in the economy. This disproportionately hits less educated workers, who are the first ones to be fired when the economy slows. If jobs were plentiful then employers would be forced to offer higher wages and more job security in order to attract the workers they need. The Fed's policy to keep the labor market weak in the last three and a half decades has been a major factor in the deterioration of job quality.

It is also bizarre that the article cited a study by Michael Greenstone and Adam Looney to support the case that, controlling for education, men have been seeing declines in wages for forty years. The Economic Policy Institute had been documenting this decline in the State of Working America for decades.

Recent comments

  • Guest - pete

    I was shocked when I starting meeting people in the 1990s who were jumping from hitech job to hitech job...which led to much independency. I was jealous. Flexibility in contracting ought to lead to efficiencies, in the absence of market power. Uber has zero market power regarding the signing up o...
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  • We are witnessing the commoditization of everything including the environment and human life in the face of the will to power and varying rationales: destiny, blood, markets. It is an old problem, that seems to come back at least once per generation. http://jessescrossroadscafe.blogspot.com/2015/0...
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  • I see no reason to suppose -- without additional assumption or argument -- that having greater skill grants greater power in the current labor market (as Sara Horowitz of Freelancers Union asserts). The standard line is that less-skilled workers are more easily replaced. Is a lawyer more or less ski...
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I seem to have missed the annual boastfest last year, but I will put in a few words this time. (For those interested, you can find the original set here and a 2013 sequel.)

Financial Transactions Taxes

First, one of big five predictions of things to come seems to be happening. The idea of a financial transactions tax (FTT) has made it into polite circles. Two of the declared presidential candidates openly support it, with long-time proponent Bernie Sanders leading the way. The Tax Policy Center of the Brookings Institution and the Urban Institute did an analysis showing that a tax could raise more than $50 billion a year and would be highly progressive. And Representative Chris Van Hollen, a member of the Democratic Party leadership in the House, proposed an economic plan that had a FTT as its financing mechanism.

The financial industry is of course hugely powerful. The cost of the tax to the industry swamps the cost of Dodd-Frank and any other financial reform measures currently being discussed. For this reason, the Wall Street folks will do almost anything to stop a FTT, so we are very far from having a bill passed into law or even being seriously debated. But we have made enormous progress. The FTT is no longer treated as a nutty idea.

The Death of the Young Invincibles and the Affordable Care Act

There are a few other areas where I will take some credit. First, I helped to kill the young invincibles. This is the idea that healthy “young” people are somehow essential for the smooth workings of the health care exchanges created by the Affordable Care Act. It is essential that healthy people sign up for the exchanges, but it doesn’t matter that they are young. In fact, it is actually better for the system to get an older healthy person since they will pay three times as much on average in premiums as a healthy young person.

Reporters seem to have come to understand this basic point. (A Kaiser Family Foundation study was very helpful.) There is much less talk of the need for young people to sign up for the exchanges.

The End of “Free Trade”

In another area, reporting on trade agreements seems to be improving as it is less common to hear reports refer to these deals as “free trade” agreements. There appears to be a growing recognition among reporters that these deals are primarily about putting in place a new regulatory structure. (In fact, the goal is a business friendly regulatory structure, but we’ll leave that one aside for now.) For the most part these regulations have little to do with trade and some quite explicitly involve more protection, such as patent and copyright protection.

Recent comments

  • Guest - Dan Davies

    "The financial industry is of course hugely powerful. The cost of the tax to the industry swamps the cost of Dodd-Frank and any other financial reform measures currently being discussed. For this reason, the Wall Street folks will do almost anything to stop a FTT" I've mentioned this before when we...
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  • Guest - urban legend

    Point of fact: 3x the premium of younger people is the maximum allowed by ACA. It seems doubtful that that can be an average as well. If it is an average, it means all older people are simply charged 3x what the younger people pay.
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  • Guest - skeptonomist

    A big surge in employment from Abenomics is a figment of Dean's imagination. If we look at the data going back before 2013, we see that the employment rate in Japan has been going up at a good overall pace since 2002. Of course there was a setback in the recession of 2009, but basically there has ...
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That's not quite how the paper put it, but it is in fact what it reported. The story according to the headline is "bipartisan partnership produces a health bill that passes house." According to the article the bill instructs the Food and Drug Administration (FDA) to use information from doctors' practices and drug registries in determining whether to approve new drugs rather than just relying on clinical trials. The problem with this approach is that the industry often pays doctors to say good things about their drugs. It would difficult for the FDA to know for certain that the information it is relying upon was not paid for by the company seeking approval of a drug.

The piece also includes the interesting tidbit that the cost of additional funding for the FDA, another provision in the bill, would be covered by selling off some of the country's petroleum reserve. This shows the remarkable cynicism of the deficit hawks in Congress.

Selling oil reserves is simply a shuffling of assets, it is not a way of either improving the government's financial situation or reducing the drain on the economy from the budget deficit. It's analogous to a household pawning its silverware to avoid having to borrow. There is no economic reason to prefer selling off this asset to adding debt, it is just a silly ritual that apparently is taken seriously in Washington policy circles these days.   

Recent comments

  • Guest - pieceofcake

    Well - yes - but nothing - nothing beats the following: An American economist - advocating a 'Grexit' writes about 'Killing the European Project' - and seem to agree with a stupid German bureaucrat advocating the same - but just 'temporary'. And then the man who demands a permanent Grexit criticizes...
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  • Guest - jumpinjezebel

    How can Doctors prescribe unapproved drugs in the first place to make comments on as to how well they work??
    1
  • Guest - Last Mover

    Hurray America! Another vulgar piece of celebrated compromised bipartisan legislation designed to line the pockets of the rich in America who don't compete for a living, just coast along on obscene guaranteed earnings shielded from competition, sold as grossly overpriced 21st Century Cures designed...
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That's what a NYT article seemed to be telling people. The center of the story is the fact that it appears that La Grange, Ill (population 15,550) was using grossly out of date mortality tables in calculating the pension obligations for its police and fire fighters. Without directly saying as much, the piece implies that this is a common problem with much larger pension funds and that such practices are the basis for the underfunding of many public sector pensions.

In fact, the main reason that some public sector funds face severe shortfalls is that politicians like Richard M. Daley and Chris Christie chose not to make required contributions. This is a serious problem since the country's elites apparently praise such behavior. Since ending his last term as mayor of Chicago, Mr. Daley has been appointed a senior distinguished fellow at the University of Chicago, given a seat on the board of Coca Cola, and made a principal of the investment firm Tur Partners LLC. Chris Christie is running for the Republican presidential nomination. Reporters covering his campaign rarely mention his failure to make required pension contributions, including going back an explicit commitment to state employee unions, as a liability. If the people most directly responsible for the underfunding of pensions get rewarded, then it should not be surprising that we do have some cases of major underfunding.

Bizarrely, at one point the piece suggests that the public might look to actuaries as the main target for the underfunding of public sector pensions:

"Retirees are counting on the money promised to them. Taxpayers are in no mood to bail out troubled pension funds. Some are looking for scapegoats.

"'Actuaries make a juicy target,' said Mary Pat Campbell, an actuary who responded to the board’s call for comments."

This is bizarre since Wall Street is the far more obvious target. The recession following the collapse of the housing bubble is likely to cost the country more than $10 trillion in lost output. This both directly contributed to pension shortfalls, by making it more difficult for governments to make required contributions to pensions during the recession years, and indirectly by reducing the revenue base of many governments on an ongoing basis. It is rather strange that taxpayers should look to target actuaries, most of whom make relatively modest salaries, rather than big Wall Street players who often make tens of millions or even hundreds of millions of dollars a year. 

Recent comments

  • Guest - dick c

    "Taxpayers are in no mood to bail out troubled pension funds." Isn't reality the other way around? Pensioners are bailing out taxpayers, without being asked.
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  • Guest - Ethan

    @ jamzo and @ Dishwashers As long as politicians need large sums of money for campaigns to stay in office, there will be no effective voice for the common good.
    2
  • In fact, the main reason that some public sector funds face severe shortfalls is that politicians like Richard M. Daley and Chris Christie chose not to make required contributions. Politicians have a strong incentive to over promise and under-fund pensions, as did BTW the auto company executives. S...
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The media seem to think it's a really huge deal that investors in China's stock market have not made any money since February. The Washington Post told readers that it could even threaten the regime's legitimacy in a front page story headlined, "stock slide sandbags China's leaders."

The article begins:

"For decades, the Chinese Communist Party has been able to keep control of democracy protests, dissidents, the legal system and the military, but it is now facing an even more intractable foe: a plummeting stock market.

"Invisible and fast-paced, mutinous market forces­ have defied the party-led government’s efforts to arrest the month-long slide in Chinese stock markets. If this continues, the slump in stock prices could slow the economy and undermine faith in the party’s leadership and power, experts on China and economics say."

This is an interesting assessment. Those of us who are less expert on China than experts consulted for this article might wonder how the regime managed to survive a stock market crash between October of 2007 and October of 2008 in which the market lost over 60 percent of its value. This is more than twice as large a decline as the market has experienced in the current downturn. In spite of this plunge, China's economy grew more than 9.0 percent in 2009, although it did require a substantial government stimulus program.

The piece also contains the strange paragraph:

"For decades, some enthusiasts have argued that China was the exception to the rule: that its far­sighted leaders could make the transition to a more open economy while avoiding the debt trap that every other so-called miracle economy had fallen into since World War II. That idea could be the biggest casualty of the crash, both at home and abroad."

It's not clear what the article means in asserting that every other miracle economy has fallen into a debt trap. South Korea and Taiwan have experienced rapid and sustained growth for more than five decades, with only brief periods of recessions. As a result, South Korea now has a per capita income that is roughly 90 percent of the per capita income in the United Kingdom. Taiwan's income is more than 15 percent higher. Are these countries not supposed to be "so-called miracle economies" or is this the record of economies mired in a "debt-trap?"

 

Addendum:

China's stock market rose 5.8 percent today.

Recent comments

  • Guest - skeptonomist

    A successful recovery from a downturn tends to breed overconfidence, which makes the next swing higher and the next crash worse. Ideally the Chinese government should probably be intervening on the upswings, not just the downswings. It is entirely predictable that this doesn't happen - it's not hu...
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  • Guest - pubsky

    It appears that a big factor in this sell off is the large amount of margin trading that is happening among the Chinese middle class. At this point, a bunch of scare stories about a 30% drop are nonsense; however it is worth noting that the Chinese market is different now than it was in 2008. Marg...
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  • Guest - jonny bakho

    A lot of gamblers are in the stock market trying to game the system (bad idea). Scare stories like this one attract attention from these rubes as do non-sense TV investment show. No different from other advertisements for get-rich-quick schemes. BS sells.
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Thomas Edsall had a very good piece on divisions in the Democratic Party over trade policy in the NYT this morning. The piece cites a large body of academic research pointing out that U.S. trade policy has played a large role in destroying manufacturing jobs and redistributing income upwards. It notes that this is the basis of the opposition of unions to trade policy, which has caused the overwhelming majority of Democrats in Congress to oppose the Trans-Pacific Partnership (TPP).

However the piece errors in referring to the TPP and U.S. trade policy in general as "free trade." It is absolutely not free trade.

One of the main goals of the TPP is to increase patent and copyright protection. That is protection as in protectionism. These government granted monopolies can increase the price of drugs and other protected items by several thousand percent. This has the same economic impact and leads to the same distortions as tariffs of several thousand percent. Markets do not care if the price of a product is raised due to a tariff or a government granted patent monopoly, it leads to the same distortions.

These trade deals have also done almost nothing to remove the protectionist barriers that make it difficult for foreigners to train to become doctors, dentists, or other professionals and work in the United States. The reasons that these highly paid professions have not seen their salaries hurt by trade is due to the fact that the government has protected them, not that there is some inherent impossibility in Indians training to U.S. standards and becoming doctors in the United States.

Also, a free trade policy would mean pushing for freely floating currencies. This has clearly not been a priority for the Obama administration as our trading partners, most importantly China, have accumulated trillions of dollars of foreign reserves in order to inflate the value of the dollar against their currencies, thereby supporting their large trade surpluses. The Obama administration chose to not even include currency as a topic in the TPP.

It is important to point out that our trade policy is not free trade first because it might lead some to believe that our trade policy involves pursuing some great economic principle. It doesn't. It's about redistributing money to the rich.

Second, it is important because at this point the biggest gains for "everyday people" will actually come from more free trade, not less. It's not realistic to think that the United States will erect tariffs or other barriers that will block the import of manufactured goods from Mexico, China, and other developing countries. It is reasonably to think that we might push for more market based exchange rates, less costly patent and copyright protection, and the elimination of unnecessary professional restrictions that prevent us from having lower cost health care, legal services, and other professional services. 

Recent comments

  • Guest - Dean Baker

    Washunate, I cannot follow your argument at all. I am giving you data from the 2000s that you want to say are not relevant to the 2000s. Let me try again with the basic point. Manufacturing CONTINUES to be a source of relatively high-paying jobs for workers without college degrees. This is true w...
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  • US trained engineers, scientists and IT professionals constantly face competition from foreign trained professionals. However, doctors and dentists do not have to face the same level of competition. The US board certification requirements in many areas of healthcare act as a huge barrier to entry of...
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  • Guest - Dean Baker

    Washunate, There is nothing intrinsic to factory work that it makes it good work. It just happens to be the case that for historical reasons these jobs did offer higher pay and benefits to workers without college degrees, which is roughly percent of the workforce. [Here's the data from my friends a...
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With the prospect of Grexit increasing, there have been numerous news stories pronouncing this as a disaster for Greece. There have also been many accounts telling us that Greece will not have the same positive prospects as Argentina. 

As Paul Krugman reminds us Argentina recovered fairly quickly after it broke the link between its currency and the dollar. As he points out, the real disaster was in the period leading up to the break.

While many people have emphasized ways in which Argentina has advantages in this break relative to Greece, that was not a general perception at the time. The general story back at the end of 2001 and 2002 was that Argentina faced disaster.

For example, on January 1, 2002 we got this NYT piece headlined, "Argentina drifts leaderless as economic collapse looms."

Here are the first three paragraphs:

"Without a president, a cabinet or a functioning government, Argentina drifted rudderless today, as people waited for the Peronist party to resolve its bitter internal differences over who should run the country and for how long.

"The surprise resignation of the interim president, Adolfo Rodríguez Saá, late Sunday means that by Tuesday Argentina is likely to have its fifth leader in less than two weeks, counting temporary caretakers.

"But with bank accounts partly frozen, a moratorium on payment of the foreign debt and political leaders clearly at a loss for what to do, the possibility of an economic collapse loomed as an even larger concern. All day long, nervous depositors lined up outside banks in hopes of withdrawing some of their money."

There was another dire piece on Janauary 4th after a new government had been installed. Among other things, this piece told readers:

"Though most Argentines earn their salaries in pesos, an estimated 80 percent of all debts here were contracted in dollars. That raises the specter of widespread bankruptcies if ordinary Argentines are suddenly forced to pay 30 or 40 percent more pesos to meet their obligations."

Yes, Argentina did have its own currency before the devaluation, but it faced the same sort of debt problem that Greece will face with many debts denominated in a currency that will suddenly be worth much more relative to people's pay checks.

Anyhow, this is not to claim that a break with the euro will be easy or that Greece will necessarily do as well as Argentina in the aftermath. But it is important to remember that many people were predicting absolute disaster for Argentina at the time of its default and they were proven wrong. Perhaps these folks' judgements about economics have improved in the last thirteen years, but I wouldn't bet on it.

Recent comments

  • Guest - pieceofcake

    Dear Joe - it's really hard to respond to comments like yours - as you seem not even to get the basics right. The Euro is the currency of many European states since 14 years and even if you would be already 20 years old and a European - and an American ciomes along and tells you that you are stupid ...
    2
  • Guest - Joe

    Pieceofcake - France winning wwII? that makes no sense. France is being destroyed as well. "Find 10 italians" - Well America doesn't have a monopoly on stupidity. Arithmetic is notoriously hard for most people, so it's not really surprising that people still support the euro, even though it's clea...
    1
  • Guest - pieceofcake

    'Basically it's Germany finally winning ww2.' You mean France finally winning ww2? Wait they did? And so they helped Greece to win it again - Right? And I know a little bit about Italians - and if you are able to talk 10 Italians to give up the Euro for a Mickey Mouse Currnecy they once had - just 1...
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Yes, the bottom is really falling out in China, prepare for another Great Depression there. I won't claim any great expertise on China's economy, but the exasperated reporting on the recent fall in China's stock market should also note that it followed an enormous boom. Undoubtedly many people who bought into this boom will be hurt, but it's not clear that it is a disaster for China's economy if it's stock market returns to its level of five months ago.

It is also worth noting that its market had a far sharper drop in 2008. Its economy continued to grow strongly after the crash, although it did require a large government stimulus program.

Recent comments

  • Guest - Sandwichman

    Things look a bit different if you think of the boom as a symptom of the scarcity of attractive real economy investment opportunities. The boom then sustains economic activity at a level above baseline and the crash terminates that interim stimulus. In such case the crash is not "causing" economic...
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  • Guest - pieceofcake

    'Its economy continued to grow strongly after the crash' But that's what I never understood about 'Casino Economics' or Boom and Bust models of gambling nations like the US and China? -(or Greece?) What's the rational behind 'growing' too fast and then popping? (besides the entertainment factor to...
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Steve Rose has a new piece on wage growth being published by the Urban Institute which was previewed in a blog post in the Wall Street Journal. It shows a considerably better picture than most of us are used to seeing. Whereas my friends at the Economic Policy Institute (EPI) show the real median wage for men has fallen by 7.4 percent between 1979 and 2011, Rose finds that real annual compensation for men has risen by 13.4 percent. EPI’s data show that the median hourly wage for women has risen by 24.2 percent. Rose finds a gain of 73.0 percent.

There are three issues that explain the differences. The main difference for women is the increase in average annual hours worked. Women are far more likely to be full-time full year workers in 2013 than they were in 1979. This is largely due to a breakdown of the barriers that excluded women from most types of better paying jobs and social norms that tended to confine women to working in the home. While the increased opportunities for women is clearly a positive development, we would expect pay to rise accordingly. People expect to be paid more for working forty hours a week than for working 30 hours a week. Therefore if we find that people having higher earnings because they are working more hours rather than getting higher hourly pay, it doesn’t really change the wage stagnation story.

The second issue is that Rose is looking at total compensation rather than just hourly pay. This includes payments that employers make for Social Security taxes, health care insurance and defined contribution pensions. This matters more for the 1980s, when there were substantial increases in Social Security and Medicare taxes than in the last two decades.

Looking at compensation in principle is reasonable if we want to know what workers are paid for their work, but it does raise some issues. The most important is that Rose’s measure only counts payments to defined contribution pensions, not payments to defined benefit pensions. This means that a switch from defined benefit pensions to defined contribution pensions would show up as an increase in compensation in Rose’s measure, even if no more money is being paid by the employer. This switch only explains a small part of the difference in wage growth, but it is certainly peculiar.[1]

Recent comments

  • Guest - Bob Hertz

    I am always skeptical about wage data, with these questions: - what wages are we measuring? just the hourly wages reported to the DOL? Just the hourly wages in collectively bargained agreements? - do we know anything about salaries, other than IRS returns? - millions of Americans work on some for...
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  • Guest - ezra abrams

    bury the lede what you should have said is something like: The right wing, doing its best effort to analyze the data, finds that from 1979 to 2011, the median male's income rose an incredibly paltry 13.4 % The second thing you should have said is that it is almost impossible to do this honestly, ...
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  • Guest - Scott F

    This substitution thing really bothers me. Supporters claim - with a straight face -that switching to hamburger when the cost of steak goes up results in an equivalent quality of life. If that were true, people wouldn't bother with the steak in the first place when hamburger is so plentiful and avai...
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Neil Irwin generally has insightful economic analysis in his NYT Upshot pieces, however he strikes out in his turn to power politics today. He tells readers:

"German leaders genuinely believe that a new deal along those lines would be bad economic policy for Greece. Many economists at the International Monetary Fund and American officials would argue it is entirely sensible. The fact is that the time for those debates is over for now; we’re in a realm of power politics, not substantive economic policy debates.

"The choice for leaders of Germany, France and the rest of Europe will look something like this:

"If they tolerate the Greek government’s demands, they will be setting a bad example for every other country that might wish to challenge the strictures of the European Union, telling voters in Portugal and Spain and Italy that if they make enough fuss, and elect extremist parties, they too will get a much sweeter deal. It would send the signal that a country can borrow all it likes, walk away from those debts and make the rest of Europe pay the bill, as long as it is intransigent enough."

Actually, the choice for leaders of France and the rest of Europe does not look like this.

It may be true that, "German leaders genuinely believe that a new deal along those lines would be bad economic policy for Greece." German leaders do show considerable evidence of having no understanding of economics. This is why they are taking positions that put them at odds with economists at the I.M.F. and just about everywhere else. The evidence of the last five years contradicts their claims about the economy as completely as possible, but it appears that many people in top positions in Germany are genuinely flat-earthers who simply can't accept that the world is round and that the euro zone economy is suffering from a shortfall of demand and need not worry about debt.

However, there is no reason to believe that leaders in France and the rest of Europe suffer from the same learning disability. Therefore, they may recognize that the main reason Greece has been forced to borrow large amounts of money over the last five years and run up its debt has not been its profligate spending, but rather the strangling of its economy.

Sharp cutbacks in government spending led to a huge reduction in demand. Since Greece is in the euro, there was little possibility for much increase net exports through a reduction in the value of its currency. Also, since the other euro zone countries were also pursuing austerity, they would not provide growing markets for Greek exports. In this context, it was virtually inevitable that Greece's economy would contract sharply. This means bringing in less tax revenue. It also leads to more spending for things like pensions, as workers who are unable to find jobs opt to retire earlier than they would have otherwise and start collecting their pension.

The leaders of France and the rest of Europe may understand the basic economics here. This means that rather than blessing profligate spending, a turn to favor Greece means rejecting failed economic theories that have devastated the euro zone's economy. This would mean pushing for higher spending in the core countries, especially Germany, and pursuing other mechanisms for increasing demand.

Recent comments

  • Guest - pieceofcake

    'The Euro is simply a bad idea' Now - how is it that people like to blame the Euro for fundamental problems of economies? Because these people are old enough to remember that there were different currencies before the Euro? And why don't Americans blame the Dollar for the fundamental problems of t...
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  • Guest - jm

    I'd also write that I'm sure all the banker lending the money were actually well aware of Greece's true financial condition, and of the degree of tax evasion by wealthy Greeks -- that lending money to Greece was like lending it to a ne'er-do-well brother-in-law -- and that stupid bankers are suppose...
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  • Guest - jm

    I'd write, "I don't know why the European governments don't sue Goldman Sachs for setting up the fraudulent securities deal that enabled the Greek politicians to conceal the nation's financial condition so as to qualify for entry into the Euro." But I think I know why.
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Yep, some things never change. Robert Samuelson tells us the tragic story of Greece: it needs to reduce its debt, but to do so it has to raise taxes and/or cut spending. That slows growth, which raises unemployment and also lowers its GDP, quite possibly raising its debt-to-GDP ratio. After telling us that there is no easy exit from this problem for Greece, Samuelson goes on:

"But it’s important to note that Greece’s predicament, though extreme, is shared by many major countries, including the United States, Japan, France and other European nations. ...

"When only a few countries are over-indebted (meaning they cannot borrow from private markets at reasonable interest rates), this isn’t necessarily true. Countries can dampen domestic consumption and rely on export-led growth to take up the slack and limit unemployment. Nor is debt automatically bad. It has obvious productive uses: to fight severe recessions; to pay for wars and other emergencies; to finance public “investments” (roads, schools, research).

"Unfortunately, this standard view of government debt — we’re not talking about household and business debt — does not fully apply now. The reason is that numerous countries face similar problems."

So Samuelson thinks that many countries cannot borrow at reasonable interest rates? That's not what I read in the newspapers.

Let's see, according to the Economist, the United States can borrow long-term at less than 2.3 percent interest. That's less than half of the rate during those wonderful Clinton years when we were paying down the debt. Canada can do even better, paying just 1.7 percent. Those no-good-lazy-croissant-eating French types can borrow at a less than a 1.3 percent rate. The frugal Germans have to pay just 0.8 percent, a bit more than the hugely indebted Japanese who can get away with paying less than 0.5 percent.

In short, almost everyone other than Greece can borrow at extremely low interest rates. (Those high rates are their euro zone dividend.) Rather than being some difficult conundrum as Samuelson tries to tell his readers, this story is about as simple as it gets. The world is suffering from a huge shortfall in demand. We need people, businesses, and/or governments to spend money.

Unfortunately, the deficit gestapos are preventing more spending for reasons that defy logic but undoubtedly make sense to them. Anyhow, this is a really simple story, even if there is a lot of money to be made in trying to make it appear complicated.

Recent comments

  • "It has obvious productive uses: to fight severe recessions; to pay for wars and other emergencies" WTF???
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  • Guest - pieceofcake

    'Did you never claim that Krugman advocated that Greece leave the Euro?' Let me see? I think I wrote: 'This article advocates for Greece to leave the Euro with the words: 'in any case there is now a strong argument that Greek exit from the euro is the best of bad options.'Before it rightfully criti...
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  • Guest - mhz

    " Perhaps I have? - Perhaps I don't? Why don't you try to find it out?" We did try to find out by asking you for specific cites where Krugman advocates for Greece to leave the Euro. Perhaps I misunderstood. Did you never claim that Krugman advocated that Greece leave the Euro? In your first...
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Philosophers have debated the nature of knowledge for millenniums, but it turns out that the Washington Post has the secret. In a mostly useful article on the high and rising prices of prescription drugs it told readers:

"Patents are necessary to encourage companies to innovate, but they also slow the progress of cheaper generic versions of drugs to market, and allow drug companies to charge much more in the interim than they could if they had more competition."

Hmm, patents are necessary to encourage companies to innovate? There is no other mechanism? Do U.S. defense contractors innovate? They may get patents, but they are mostly paid on contract. If there is a reason that people will refuse to innovate for money, but will only innovate with the incentive of a patent monopoly, it would be interesting to know what it is.

As a practical matter, patents are an incredibly inefficient mechanism for financing drug research for reasons mentioned in this article and others. If the research costs were paid upfront all of these amazing new drugs would be cheap to patients and we would not have to waste time fighting over who would pay the tab. (At the point the drug has been developed, the costs have already been paid. Why not make the drug available at the marginal cost? That is the economist's approach.) 

Paying for research upfront would also have the advantage that all the findings would be in the public domain. This means that doctors would be better informed about which drug might be best for their patients. It would also mean that money would not be wasted pursuing paths that had already been shown to be dead ends. In addition, since no one is getting huge patent rents from having people use their drugs, upfront funding would take away the incentive to deceive the public about the safety and effectiveness of drugs, which has led to so much needless suffering

Rather than trying to tell people that we need patents to finance research, a lengthy piece like this could at least have noted that many economists, such as Nobel laureate Joe Stiglitz, have argued for more efficient alternatives to the patent system. This is exactly the sort of article where this issue should be raised.

Recent comments

  • Guest - chmoore

    One of the earliest patent laws, in 1624 England was titled, "Statute of Monopolies" - at least at that time they were honest about the actual intention, as opposed to all the current fluff about 'innovation'. Also interesting is that there's a real thriving business which is specifically about buy...
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  • Guest - Last Mover

    America has been brainwashed into believing the power to monopolize and the power to compete are the same thing. This has allowed the following myths of free market fascism in part to bring America to its economic knees for the benefit of the ultra rich: 1) Creation and innovation are not possible...
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  • Guest - djb

    "Patents are necessary to encourage companies to innovate, but they also slow the progress of cheaper generic versions of drugs to market, and allow drug companies to charge much more in the interim than they could if they had more competition." such a quandary these articles always make people fee...
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The NYT headlined a front page piece, "health insurance companies seek big rate increases for 2016." The piece told readers insurance companies "are seeking rate increases of 20 percent to 40 percent or more, saying their new customers under the Affordable Care Act turned out to be sicker than expected." It then goes on to list specific instances where insurers are seeking large rate increases.

There are several problems with this story. First, it does not try to give any sort of weighting which would give a basis for the assessing the typical increase seen by people getting insurance through the exchanges. This matters both because some plans have more people enrolled than others and also because the percentage increase makes a much bigger difference for older people with high average premiums than for younger people. The average cost for a plan for people in the oldest age group (55–64) is three times as much as the average for people in the under 35 age group. If people in the latter age group see a 20 percent rise in their premiums it will imply a much smaller dollar increase than for the former group.

Since the article made no effort to assess the number of people in plans requesting large premium increases nor the amount of the premiums, there is no way to assess the increase in the premium for the typical person. The article does refer to a study by the Kaiser Family Foundation, and notes that it finds relatively small increases for the second lowest cost plan. However, it does not give readers the amount of increase found in this study and points out that to avoid a large increase it may be necessary to change plans, which could also mean changing doctors.

The Kaiser study found that the premium for the second lowest cost silver plan (the benchmark for subsidies in the exchanges) is projected to rise by 4.4 percent between 2015 and 2016 in the eleven cities it examined. It also is important to note that even staying in the same plan does not guarantee that a patient can continue to see their doctor, since doctors often leave plans.

The article also misrepresents the issue of the health of beneficiaries telling readers:

"Some say the marketplaces have not attracted enough healthy young people."

Actually, it doesn't matter whether people are young, it matters whether they are healthy. A healthy older person pays on average three times as much to insurers as a healthy young person and gets the same amount back in payments. Also, the losses described in this article would be largely offset by the backstops put in place in the ACA for insurers that enroll less healthy patients.

As the Kaiser report points out:

"Some of this remaining uncertainty is mitigated by the ACA’s “3 R’s” programs. These programs – risk adjustment, reinsurance, and risk corridors – redistribute risk among insurance carriers so that plans that enroll disproportionately sicker or higher-cost enrollees can be prevented from having to significantly raise premiums."

There is a real issue here, since people should not have to be constantly changing plans to ensure that they have affordable insurance, however this article does little to indicate the extent to which this is actually a problem, although it is likely to scare many readers.

 

Thanks to Robert Salzberg for calling this article to my attention.

Recent comments

  • Guest - Richard Genz

    This article got my attention. Dean B's comments make sense, but in my view they don't negate the main point of the story: many ACA premiums may have been set substantially too low. Dean B. and commenters are not mentioning that Oregon has *approved* large rate increases for companies that cover l...
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  • Guest - EMichael

    I am trying to figure out how anyone can think the ACA is "quite regressive". Anyone?
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  • To say that Pear apparently phoned in the article is probably an understatement. This two sentence quote is at the end of the first paragraph of the introduction to the Kaiser paper: " The ACA’s rate review provision requires premium increases over ten percent to be made public. As a number of indi...
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Remember the robots that are going to take all our jobs leaving us unemployed? Apparently they don't have robots in Europe. That's the story readers would get from a mostly useful set of charts in the Washington Post comparing Greece and Germany.

Underneath the chart comparing the populations of the two countries the article tells readers:

"Despite the difference, both countries share a troubling trend: a shrinking population. Europe is experiencing a demographic time bomb as the continent ages and birth rates fall, leading to questions about whether there will be enough workers to power a dynamic economy in the decades to come."

This is of course 180 degrees at odds with the robots making us all unemployed story. That is a story of too many workers. The Post is telling us here a story of too few workers. It is possible for one or the other to be true, but not both. Only a D.C. policy wonk could possibly take both problems seriously.

As a practical matter, we are likely to see productivity growth in the future comparable to what we have seen in the past. At the low end, it would be around 1.5 percent a year. At the high end we could envision getting back to the Golden Age (1947–73) rates of growth of 3.0 percent. The low end would still leave us easily able to care for our aging population and enjoy rising standard of livings. (Guess what, we have always had an aging population.) The high end should allow for more rapid improvements in living standards but there is no more reason to think that it would lead to mass unemployment than did the Golden Age productivity growth.

Recent comments

  • Guest - pieceofcake

    It's always mindboggling for a European to read how US papers -(and economists) avoid to talk about the real fundamental economic issues - and how it's all about 'growth, 'growth, 'growth or more about 'Ayn Rand' against 'social, empathetic, and sustainable economical concepts.
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  • Guest - FF

    If the top 1% keeps taking all the benefits of economic growth then these can both, indeed, be problems at the same time.
    1
  • Guest - Last Mover

    We saw that Germany is far better off than Greece, but that doesn't explain why. Well, Germany has a fundamentally stronger economy than Greece. It is more competitive and productive, which allows it to export substantially more goods and services. Greece, by contrast, isn't competitive, paying work...
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Since several commentators have raised questions about the similarities between the debt situations of Greece and Puerto Rico, it is worth pointing out some important ways in which they differ. Puerto Rico gets the benefit of several important federal government programs which will continue regardless of the finances of its own government. This means that if its own government ceases to exist due to financial paralysis, the people of Puerto Rico can still count on their monthly Social Security checks, their Medicare payments for their health care, and food stamps for low-income families.  The people of Greece do not receive any comparable benefit from the European Union.

The banks and financial system in Puerto Rico is also supported by the FDIC, the Fed, and Fannie Mae and Freddie Mac. This means that if every bank in Puerto Rico goes belly up because its economy is a wreck, all the depositors can still count on getting their money back up to the FDIC limit. If the housing market collapses, people will still be able to buy homes because Fannie Mae and Freddie Mac are prepared to buy up the mortgages.

The bulk of aid to Greece has taken the form of the I.M.F., the E.U., and the E.C.B. making payments to Greece's creditors. This was initially the banks who were bailed out of their bad loans and more recently to themselves. It has not gone to help the Greek people. If the Syriza government were offered terms comparable to those Puerto Rico now has, the only fight would be over how quickly they could get a pen to sign the deal.

This doesn't mean Puerto Rico doesn't have very serious economic problems as a result of being tied to the U.S. dollar, but it has a range of supports that are beyond the dreams of the people of Greece.

Recent comments

  • Guest - Luis Munoz

    Greetings Mr. Baker, I am a fan of your articles and follow you on twitter. I am not an economist but I do love to read about it and your writings always help me to learn and understand more. You are right, of course, about all those points that you mention. So people who are retired and live off t...
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  • Guest - pieceofcake

    AND if a lot of Greeks -(not only farmers) - will vote for YES on sunday - the reason might be that they really like - these so called 'pots' of the EU where all kind of 'aid' can be applied for - and nobody in Greece wants these 'pots' to dissapear - and the US never ever will have such a empatheti...
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  • Guest - pieceofcake

    'Puerto Rico received $ 8 billion dollars individual SS payments alone in 2012' Now I get it - you guys compare SS payment -(which in every European State is payed by the State) - as some kind of 'aid' or benefit from the US mainland? while I'm talking about real 'aid' -(like aid for Greek farmers) ...
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It is always cute when a major news outlet decides to blame problems on a policy it doesn't like in a new story. That is what the Wall Street Journal did today in a news story that told readers Puerto Rico's main problem is having the same minimum wage as the rest of the United States.

While the minimum wage is clearly high relative to labor productivity in Puerto Rico, its economic performance over the last four decades cannot be reconciled with a story where the minimum wage is the main culprit. Puerto Rico's minimum wage converged to the U.S. minimum wage over the period 1978 to 1983. In spite of this sharp increase in the minimum wage, Puerto Rico's unemployment rate fell sharply from the 1970s to the 1980s as its economy experienced strong growth (figures 3 and 4). While the unemployment rate in Puerto Rico remained higher than in the United States, the general direction was downward until the recession hit in 2007.

This simple story suggests that the minimum wage cannot be the main culprit. It is certainly possible that the minimum wage may have led to somewhat higher unemployment than would otherwise be the case, but the cause of the Puerto Rico's economic crisis must be elsewhere.

 

Note: An earlier version described the article as a front page story. The article did not run on the front page of the paper.

Further Note: The WSJ had a much fuller account of Puerto Rico's economic problems earlier in the week.

Recent comments

  • This Wall Street Journal article is riddled with problems. The Federal Reserve Bank report that both the WSJ and Dean Baker refer to clearly places more emphasis on issues like energy costs and poor infrastructure. There is the added issue that Puerto Rico 1,000 miles from the nearest part of the US...
    1
  • Guest - pieceofcake

    “I don’t see how anybody can believe that the timing of this was coincidence,” said Mark Weisbrot, an economist and a co-director of the Center for Economic and Policy Research in Washington. “When you restrict the flow of cash enough to close the banks during the week of a referendum, this is a ver...
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  • Guest - pieceofcake

    but at least Puerto Rico doesn't have to deal with 18 other 'commenwealthes' - where in some of them the standard of living is so much lower - that the poorer ones don't want for pay for the richers lifestyle. So all will be good right - and the richer US States gladly will pay for Puerto Rico?...
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The introduction to a Morning Edition segment on the response in Spain (sorry, no link) told listeners that Spain was undergoing austerity to pay down its "massive debt." This is inaccurate. Spain did not have anything that can be remotely described as massive debt before the austerity policies imposed on the country by its creditors.

Prior to the collapse of the country's housing bubble, Spain's debt to GDP ratio was 26 percent, just over one-third of the U.S. level. It was running surpluses of more than 2.0 percent of GDP, the equivalent of a budget surplus of roughly $350 billion a year in the United States. (Its worth noting that Greece's debt to GDP ratio was a much more manageable 107 percent of GDP before the crisis and austerity pushed it to 170 percent of GDP.)

The segment also is a bit out of line with reality in touting Spain's economic success under austerity. It boasted that Spain had the strongest growth in the euro zone. This is an extremely low bar. Spain's growth rate did not cross 3.0 percent last year and is not projected to do so this year. By contrast, it averaged almost 4.0 percent in the last two years before the crash. Countries recovering from steep downturns are expected to have faster than normal growth.

According to the I.M.F.'s growth projections (which have consistently proven to be overly optimistic) Spain's per capita income will not surpass its 2007 level until 2018. This is a considerably worse than the situation faced by the United States in the Great Depression. The OECD puts Spain's unemployment rate at 22.7 percent as of April.

 

Recent comments

  • Austerity is an extremely bogus concept. At a micro level it mean reducing costs by reducing the level of labor and capital going into producing product. This is supposed to reduce the cost, price and retained earnings from production, thus lowering prices between competitors. Nowhere have I seen th...
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  • Guest - Nick Batzdorf

    "Massive" doesn't belong in news stories anyway. The exceptions prove the rule.
    1
  • Guest - Paul Mathis

    Shouldn't the U.S. be Paying Down Its "Massive Debt" Too? Since Pres. Reagan took office, our national debt has increased 18 times over and is now at a record high. The interest rate on our 10 yr. Treasury bond is higher than Spain's and our inflation rate is higher too. OTOH, Spain's unemployment...
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