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...
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  • 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.
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  • 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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The Washington Post ran a map showing which countries in Europe use the euro and which use other currencies. The map is wrong. It shows Montenegro and Kosovo as using currencies other than the euro. This is not accurate, both countries do use the euro as their official currency although they have not have been accepted into the euro zone.

This is important in the context of the discussions on Greece because it illustrates the point that Greece cannot be forced off the euro. The European Commission and the European Central Bank can impose incredibly onerous conditions on Greece, but they cannot prevent the country from using the euro if it so chooses. The decision to leave the euro could only be made by the Greek government, not its creditors.

Recent comments

  • Guest - Ellen1910

    @Chris Herbert These questions seem to bespeak a certain naivete, but because I'm an economics naif, myself, I've decided to throw out some responses and await correction from the regular commenters. 1) Overvalued Euro? Greece doesn't export enough to non-euro zone economies to make it an issue --...
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  • Guest - dax

    When people say Greece will be off the euro, they mean Greece is out of the eurozone. It's shorthand. If Greece is no longer in the eurozone at dayT, its banks will not have real euros which are fungible with other euros at day T+1, but a Greek euro or drachma which is worth much less. That's the i...
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  • Guest - chmoore

    It looks like Wikipedia is more accurate about this than the Washington Post. The Post better shape up; or else Redford & Hoffman will never write for them again.
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A NYT article reported on a new commitment by China to reduce its emissions of greenhouse gases. At one point it referred to China as the world's second largest economy. Actually, using a purchasing power parity measure of GDP, which is the one most economists would use to measure an economy's size, China passed the United States last year and is now close to 4 percent larger. (China's economy would be about 6 percent larger if Hong Kong is included.)

In the context of GHG emissions it is important to note that a substantial portion of China's emissions are associated with producing items for consumption in the United States and elsewhere. China has an overall trade surplus and a large surplus on manufactured goods.

Recent comments

  • China may be the largest economy, until the cost of externalities is considered. Importing US pollution along with funny paper makes the entire operation viable from a US point of view. Who wants to be number one if we must tolerate Chinese air, water an land pollution?
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  • The fact that so much of China's economy depends on exports makes a carbon tariff an attractive way to get them to reduce emissions. China emits as much CO2 as the US, Europe and Japan combined. They're up to almost 1/3 of the world total. The developed countries have actually been reducing in re...
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  • Guest - Ellis

    What's wrong with the Chinese economy being larger than that of the U.S. It's population is five times bigger, isn't it? Don't you want to see Chinese living standards increase? Don't you want to see the economy develop?
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They're really lowering the bar big time over at the Washington Post. An editorial condemning the Greek government and urging Greek voters to accept the last offer from its creditors told readers, "the Greek economy had started to perk up prior to Mr. Tsipras’s ascendance."

The Greek economy did grow in 2014. According to the I.M.F., the per capita growth rate last year was 1.4 percent. Since per capita income in Greece is down by almost 25 percent from its 2007 level, at the 2014 growth rate the country will be back to its 2007 income level by 2035.

The piece also called on the government for further cuts in what it described as Greece's "unsustainable pensions." These pensions have already been cut by more than 40 percent and now average less than 700 euros (@ $800) a month. The pensions may well be unsustainable under the macroeconomic policies being imposed by Greece's creditors, but this is primarily because these policies have pushed Greece into a depression. The result has been a sharp reduction in the number of workers paying into the pension system and a big increase in the number of workers collecting pensions, since many have been forced by economic conditions to retiree early.

Using the I.M.F. projections from April 2008 as a benchmark, the policies pursued by the euro zone leadership will have the cost the region more than $10 trillion (@ $30,000 per person) by the end of 2015. In this context it is interesting that the Washington Post condemns the Greek government as being irresponsible.

Recent comments

  • Guest - Dryly 41

    You have to feel sorry for people who don't understand that for every irresponsible borrower there is an irresponsible lender.
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  • Guest - pieceofcake

    AND furthermore - I think the Greek Game Theorists have now proven beyond any doubt that gambling is NOT a sustainable economical system. -(to say it jokingly) - but like a lot of American Progressives - I don't blame them - they got horrible advice from -(ironiously) from the same American progress...
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  • Guest - pieceofcake

    'But the one per centers and even the top ten per centers -- the ones who are being rewarded by this society -- are over saving. And the corporations, hoarding their great piles of cash, are not helping the situation.' I agree - but about a general solution to the problem I don't believe in telling ...
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The NYT had a bizarre front page article about the limited effectiveness of monetary policy in the euro zone and elsewhere. The headline of the piece refers to "trillions" of dollars being spent by central banks, a line repeated in the first sentence:

"There are some problems that not even $10 trillion can solve.

"That gargantuan sum of money is what central banks around the world have spent in recent years as they have tried to stimulate their economies and fight financial crises."

In fact, central banks have not spent this money, they have lent this money, mostly by buying government bonds. This matters hugely because lending is a much more indirect way to boost the economy than spending.

Lending by central banks is supposed to boost growth by lowering interest rates. This encourages borrowing in the public and private sectors. This helps to explain the growth in debt in recent years. Rather than indicating a troubling situation, this was actually the point of the policy. Rather than focus on the amount of debt countries, companies, and individuals have incurred, it would be more reasonable to examine their interest burdens. These are mostly quite low.

For example, Japan's interest burden is less than 1.0 percent of GDP in spite of having a debt to GDP ratio of more than 200 percent. This is due to the fact that the interest rate on even its long-term debt is well below 1.0 percent.

Recent comments

  • Guest - jim

    in this vein, isn't it important that greece only has a 2.6% interest burden? this is lower than spain, portugal, italy, ireland. therefore, greece is solvent so what the europeans are doing is akin to suffocating the patinet. they refuse to recognize a write down on the greece debt which is nothi...
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  • Central banks went the route of lending rather than spending because they are generally prohibited from directly spending money. This means that lending is the only route they have for boosting the economy. Central banks can spend money by buying stocks and other assets. Seems like a problem creat...
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  • Guest - djb

    buying bonds will retire the debt but the money goes to bondholders, generally wealth, and they now have cash that they need to look for a place to get a return, encouraging investment and job creation or causing interest rates banks need to offer to get their money to be reduced, which means banks...
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The Bank of International Settlements (BIS) issued a new report warning of the dangers of low interest rates. Robert Samuelson wants us to take these warnings very seriously, effectively saying that another crisis could be around the corner due to the recent build up of debt.

First, it is worth noting that warning of disaster due to expansionary monetary policy is what they do at the BIS, sort of like basketball players play basketball. The BIS has been warning for years that inflation was about to kick up if central banks didn't start raising interest rates. Of course, the exact opposite has happened, inflation rates have fallen and most central banks have been actively trying to increase the inflation rate from levels they view as too low to support growth.

The second point is that the rise in debt in a time of low interest rates is to be expected for two reasons. First, at low interest rates governments, corporations and individuals have more incentive to take on debt. This is not obviously a problem. For example, many corporations have taken advantage of extraordinarily low interest rates to issue long-term bonds. This gives them the opportunity to have cash to work with for decades into the future at very low cost. In these cases, they have the cash on hand and can easily meet their interest obligations.

Recent comments

  • Guest - Ethan

    again Well, not "send" the states and municipalities money, but "buy their bonds".
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  • Guest - Ethan

    @Guest FF Why doesn't the Fed (or the federal government) send money to the states/municipalities for use in hiring police, fire fighters, teachers, municipal records keepers, refuse collectors, streets and sanitation workers, park maintenance, etc., etc.?
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  • Guest - FF

    Dean -  I wonder if you can explain something that's been bugging me for a while.   "Helicopter" Ben Bernanke got his famous nickname for arguing that central banks could always generate inflation if they needed to by dropping money from helicopters.  Hahahahaha.  Guess we know how to run economie...
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In response to questions from people everywhere, I will share a couple of quick thoughts on the possible departure of Greece from the euro. First, several people have raised the possibility of Greece being thrown out of the euro.

There is no way that Greece can literally be thrown out of the euro in the sense of being prohibited from using the euro. Any country has the option to use any currency it chooses. This was an issue that came up in the referendum over Scottish independence. The independence movement wanted to leave the United Kingdom but to continue to use the British pound as its currency. U.K. Prime Minister David Cameron said that the Scots could not keep the pound if they left the United Kingdom.

This was not true, unless the U.K. was prepared to invade Scotland and physically prevent their banks and stores from using the pound. The Bank of England could refuse to support any of the Scottish banks, which would make it highly undesirable for them to use the pound, in addition to the fact that the U.K. would not be setting monetary policy for the benefit of Scotland, but Scotland would certainly have the option to continue to use the pound for their currency.

In this vein, there are several countries around the world that use the dollar for their currency, including Panama, Ecuador, and Zimbabwe. They did not need to get permission from the United States to use the dollar, they just opted to do it (in the case of Ecuador and Zimbabwe to end hyperinflation).

In this way, Greece will have the option to keep the euro indefinitely. It is difficult to see why it would want to if it lacks the support of the European Central Bank, since it would almost certainly mean a substantially worsening of its economy from its current Great Depression levels of output. However if Greece's leaders decide that keeping the euro is more important than reviving the economy, the eurozone authorities cannot keep them from doing it, short of an armed invasion.

Recent comments

  • Guest - Timothy

    You make an excellent point in this post, one I've tried to make repeatedly with not enough success. The press is getting this story wrong on this point at least, and the details are important. Notably, as examples, Kosovo and Montenegro, with a combined population of about 2.5 million people, both ...
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  • Guest - Blue Meme

    A related question: what's to stop Athens from not just using Euros, but also printing them?
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  • Guest - Bloix

    It might do so for some lengthy period of time because people are irrational about currency. And that might hurt the ability of Greece to recover. Greece could wind up with the worst of all possible worlds - the euro, and therefore no benefits of devaluation, but no support from the ECB.
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The Wall Street Journal passed along warnings from the Bank of International Settlements (BIS) that central banks should start to curtail monetary expansion and that governments need to reduce their debt levels. The piece tells readers:

"The BIS has issued similar warnings in recent years concerning an overreliance on monetary policy, but its advice has gone largely unheeded."

It is worth noting that the BIS has been consistently wrong in prior years, warning as early as 2011 about the prospects of higher inflation due to expansionary monetary policy:

"But despite the obvious near-term price pressures, break-even inflation expectations at distant horizons remained relatively stable, suggesting that central banks’ long-term credibility was intact, at least for the time being.

"But controlling inflation in the long term will require policy tightening. And with short-term inflation up, that means a quicker normalisation of policy
rates."

Since that date, the major central banks of the world have been struggling with lower than desired inflation and doing whatever they could to raise the rate of inflation. It would have been helpful to readers to point out that the BIS has been hugely wrong in its past warnings, so people in policy positions appear to have been right to ignore them. This is likely still the case.

 

The NYT finished a piece on the status of negotiations on Greece's debt with the comment:

"The bigger fear is that a Greek default could force the country eventually to be the first to leave the 19-nation euro currency union and threaten the regional integrity of the broader European Union."

It would have been helpful to tell readers who has these fears. After all, the current policies being imposed by the European Central Bank and the EU have cost the region millions of jobs and trillions of euros in lost output and threaten a whole generation's economic future. It is hard to see why anyone would fear the possibility that these policies may be reversed.

Recent comments

  • Guest - pieceofcake

    and wait a minute I take it all back - and I just posted the following on Paul Krugmans Blog at the NYT: 'Thank you Prof- Krugman for your help - and I'm really sorry that I got carried away a few times in the battle for our European - and thus Greece's currency. But now - as Greece has been given...
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  • Guest - pieceofcake

    'Right now early polls indicate people will vote "yes" on the referendum, for austerity.' How true - and in the coming week y'all will see how Greeks will fight for 'their' currency - the Euro - and about them being wrong I completely disagree - but at least from time to time one finds an 'US progre...
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  • Guest - Joe Emersberger

    Hi Gar Do you have any links for those polls? Joe
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That's what readers are asking after seeing a NYT piece on reactions to the Supreme Court's ruling upholding the insurance subsidies in the Affordable Care Act (ACA). The piece gives comments from a number of people including John Kasich, the governor of Ohio and a likely candidate for the Republican presidential nomination.

"More typical was the response from Gov. John Kasich of Ohio, a likely Republican presidential candidate.

"'The law has driven up Ohio’s health insurance costs significantly,' he said, 'and I remain convinced that Congress should repeal it and replace it with something that actually reduces costs.'"

There has been a sharp slowdown in the rate of health care cost growth across the country. While this slowdown preceded the passage of the ACA, the law has likely been a factor contributing to the slower growth in costs. If Ohio is actually seeing rising insurance costs due to the ACA then it would be an outlier from the experience in the rest of the country.

If this is the case, it would be interesting to know the reason for the higher costs in Ohio. Alternatively, Kasich may just be saying this for political purposes.

Recent comments

  • Guest - Sirus

    lol, Ohio's "premiums" shot up between 2004-08 200%. Unintended consequences indeed. Kasich has potholes named after him in Ohio.
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  • Guest - pete

    This is kind of an Averch-Johnson effect (regulated industries may pad costs). Health insurance companies really don't care how medical high costs go, since under the ACA they get to keep 20% of premiums. Thus, the higher medical costs go, the premiums must rise, and there is more money for insura...
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  • Guest - Last Mover

    Kasich knows little or nothing about economic cost or if he does, has developed great skills to lie about his causal role in the Great Recession. He was hired in 2001 by Lehman Brothers in part to funnel pension fund and other monies out of Ohio to Lehman. He was considered by Lehman as a naive fl...
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James Stewart has a piece in the NYT telling readers that if Greece were to leave the euro it would face a disaster. The headline warns readers, "imagine Argentina, but much worse." The article includes several assertions that are misleading or false.

First, it is difficult to describe the default in Argentina as a disaster. The economy had been plummeting prior to the default, which occurred at the end of the year in 2001. The country's GDP had actually fallen more before the default than it did after the default. (This is not entirely clear on the graph, since the data is annual. At the point where the default took place in December of 2001, Argentina's GDP was already well below the year-round average.) While the economy did fall more sharply after the default, it soon rebounded and by the end of 2003 it had regained all the ground lost following the default.

argentina 2fredgraph

Argentina's economy continued to grow rapidly for several more years, rising above pre-recession levels in 2004. Given the fuller picture, it is difficult to see the default as an especially disastrous event even if it did lead to several months of uncertainty for the people of Argentina. In this respect, it is worth noting that Paul Volcker is widely praised in policy circles for bringing down the inflation rate. To accomplish this goal he induced a recession that pushed the unemployment rate to almost 11 percent. So the idea that short-term pain might be a price worth paying for a longer term benefit is widely accepted in policy circles.

At one point the piece refers to the views of Yanis Varoufakis, Greece's finance minister, on the difficulties of leaving the euro. It relies on what it describes as a "recent blogpost." Actually the post is from 2012.

To support the argument that Greece has little prospect for increasing its exports it quotes Daniel Gros, director of the Center for European Policy Studies in Brussels, on the impact of devaluation on tourism:

“But they’ve already cut prices and tourism has gone up. But it hasn’t really helped because total revenue hasn’t gone up.”

Actually tourism revenue has risen. It rose by 8.0 percent from 2011 to 2013 (the most recent data available) measured in euros and by roughly 20 percent measured in dollars. In arguing that Greece can't increase revenue from fishing the piece tells readers:

"The European Union has strict quotas to prevent overfishing."

However the piece also tells readers that leaving the euro would cause Greece to be thrown out of the European Union. If that's true, the EU limits on fishing would be irrelevant.

The piece also make a big point of the fact that Greece does not at present have a currency other than the euro. There are plenty of countries, including many which are poorer than Greece, who have managed to switch over to a new currency in a relatively short period of time. While this process will never be painless, it must be compared to the pain associated with an indefinite period of unemployment in excess of 20.0 percent which is almost certainly the path associated with remaining in the euro on the Troika's terms. 

In making comparisons between Greece and Argentina, it is also worth noting that almost all economists projected disaster at the time Argentina defaulted in 2001. Perhaps they have learned more about economics in the last 14 years, but this is not obviously true.

 

Addendum

I should have also mentioned that the pre-default decline has been much sharper in Greece than in Argentina, over 25 percent in Greece, compared to less than 10.0 percent in Argentina. This should mean that Greece has much more room to bounce back if it regains control over its fiscal and monetary policy.

Recent comments

  • Guest - pieceofcake

    and for sure - the so called Troika did a lot of stupid things - and for sure the debt should be (offically) - forgiving - instead of pushing it so far forwrd into the future - that everybody hopes it will be soon forgotten... BUT if the other 18 European States aren't able to change NOW the mindbog...
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  • Guest - pieceofcake

    and I nearly missed that one: 'if it regains control over its fiscal and monetary policy.' God forbid - as it could become as big as a disaster if I -(ME) would regain control over my fiscal and monetary policy - I probably would bankrupt myself again with handbags...?
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  • Guest - pieceofcake

    'The disaster was joining the Euro zone in the first place.' On the other hand it makes one focus tremendoulsy - as finally all the issues come up why an economical system really doesn't work - and with all the recognized fundamental mistakes in the end the curreny actual doesn't matter THAT much an...
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Okay, that may not have been the headline, but careful readers would see this is the case. The NYT ran a piece complaining that plans by the Greek government to raise business taxes, as opposed to further cuts to pensions and other spending, could hurt business.

The poster child for this argument is Thanos Tziritis, the owner of a family business that produces and exports a wide range of construction materials. The piece goes through the various complaints of Mr. Tziritis, at one point telling readers:

"Still, it took 20 months to get all the permissions and licenses to begin construction, as papers moved back and forth between Thessaloniki and Athens.

"One reason for the delay, Mr. Tziritis said he was told, was that one of the government employees examining the request was on maternity leave and no one else was authorized to look at that specific Isomat file. The project remained in limbo for more than six months until the civil servant returned to work."

Presumably one of the reasons that no one else could fill in for the government employee examining the construction request was that Greece was forced to cut back on the number of employees. It may well be the case that Greece regulations are excessive, but until they are reformed cutting back on the number of people involved in the review process is likely to slow investment and growth, as this article indicates.

The article bizarrely implies that Greece has been resistant to making budget cuts, complaining:

"The I.M.F., in particular, is upset that its demands for spending reductions have been ignored.

"'All expenditure measures have been replaced by taxes on capital and labor,' said a fund official who spoke on the condition of anonymity. 'This is very growth unfriendly.'"

In fact, total government spending has fallen by more than one-third since 2009, according to I.M.F. data.

It is also worth noting that, in violation on NYT policy, there is no reason given for why the fund official was granted anonymity.

Recent comments

  • Guest - pieceofcake

    'The choice ultimately rests with the Greek people.' How true - how true - and I'm so glad that Prof. Krugman wrote: 'Breaking Greece' - Now we all can be asssured that it won't happen. -(the data says so - as whatever Paul Krugmans predicts about Greece - won't happen 100 percent)...
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  • Guest - Joe Emersberger

    and here is Krugman in fine form exposing years of Troika malevolence in Greece. The chart he posts really says it all. http://krugman.blogs.nytimes.com/2015/06/25/breaking-greece/?smid=tw-share&_r=0 I know some people may say its "gross incompetence" instead of malvolence but I don't think t...
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  • Guest - Joe Emersberger

    Dean Have you seen the Costas Lapavitsas op-ed in the Guardian? Greece is being blackmailed. Exiting the eurozone is its way out http://www.theguardian.com/commentisfree/2015/jun/25/greece-blackmailed-eurozone-troika-syriza-common-currency#img-1 Looks like pressure from within Syriza's most left...
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The Washington Post ran a piece on Glenn Hubbard, the chief economic adviser to President George W. Bush and now an adviser to Jeb Bush, which ignored much of Mr. Hubbard's history. For example, it told readers:

"Hubbard believes that for too long, the United States has only experienced rapid growth in the midst of what he calls 'bubble economies,' which don't deliver broadly shared prosperity to workers. For example, he blames the Federal Reserve for stoking a bubble in the mid-2000s by keeping interest rates too low for too long."

While the piece notes that Hubbard had been an adviser to Bush during part of this period, it neglects to tell readers that he never said anything about the housing bubble. In other words, Hubbard's analysis is 100 percent hindsight, he completely missed the $8 trillion housing bubble, the collapse of which has devastated the economy.

He is also mistaken in claiming that bubbles cannot lead to "broadly shared prosperity to workers." During the 1990s stock bubble, the unemployment rate eventually fell as low as 4.0 percent. During these years workers at the middle and bottom of the wage distribution saw healthy wage gains. The problem is that this growth could not be enduring, since it was based on a bubble.

It also would have been useful to remind readers that Hubbard had done excellent research indicating the Bush tax cuts would not be likely to have the promised effect of increasing investment. Hubbard's research showed that investment is very unresponsive to reductions in the interest rate. The stated goal of tax cuts directed at high income households was to give them more incentive to save and thereby lower interest rates. If investment is unresponsive to a reduction in interest rates, then this is unlikely to be an effective route to boosting investment and growth.

 

Addendum:

My colleague, Nicholas Buffie, calls my attention to a paper that Professor Hubbard co-authored for Goldman Sach's Global Markets Institute in 2004, near the peak of the bubble. The executive summary of the paper told readers:

“The ascendancy of the US capital markets — including increasing depth of US stock, bond, and derivative markets — has improved the allocation of capital and of risk throughout the US economy. Evidence includes the higher returns on capital in the US compared to elsewhere; the persistent, large inflows of capital to the US from abroad; the enhanced stability of the US banking system; and the ability of new companies to raise funds. The same conclusions apply to the United Kingdom, where the capital markets are also well-developed.” [emphasis added]

“The development of the capital markets has also facilitated a revolution in housing finance. As a result, the proportion of households in the US that own their homes has risen substantially over the past decade.”

“The capital markets have also acted to reduce the volatility of the economy. Recessions are less frequent and milder when they occur. As a result, upward spikes in the unemployment rate have occurred less frequently and have become less severe.”

Recent comments

  • Guest - MightyMike

    I question whether the stock bubble played a large role in the prosperity of the late 1990s. First, we usually here that the wealth effect from rising equity values is not very large. Most stocks are owned by rich people and they don't significantly increase their consumption in response to rises in...
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  • Guest - JF

    I saw this as a strat comm piece designed to re-position Hubbard so he can be seen to be more centrist. This is another The Washington Post apologia piece in line with its change in ownership and its alignment to speak, and subtly too, for those of high Net Worth. Check out this Texas discussion f...
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  • Guest - Bart

    If investment is very unresponsive to low interest rates, why does Yellen keep giving money away to the Banksters? Is the free money sustaining any growth in housing?
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Emily Badger had an interesting discussion of the decline of homeownership in Wonkblog. However the piece neglected to mention one of the most important reasons why people might opt to rent rather than own: the insecurity of their employment situation.

It is usually not a good idea to spend the large overhead costs associated with buying a home unless you have a secure job where you can expect to stay many years into the future. As stable jobs become rarer in the economy (median job tenure has fallen sharply over the last three decades), homeownership is likely to make sense for a smaller segment of the population. If the trend towards shorter job tenure continues we should see further declines in the ownership rate in the years ahead.

The piece also errors in implying that rental prices are rising substantially faster than other prices. For these sorts of comparisons it is best to use the owner equivalent rent (OER) measure, which pulls out utilities that are often included in the rent measure.

CPI housing fredgraph

The graph shows that this measure of rent has somewhat outpaced core inflation over the last few years, but this followed several years in which OER rose less rapidly than the core rate of inflation. Since January of 2006, the OER has risen by 3.0 percentage points more than the core inflation rate.

Recent comments

  • Guest - PeonInChief

    First, it's more likely that millennials are in the same position as younger boomers, who graduated from college during the energy crisis and the 1981-2 recession. Younger boomers are less likely to own homes than their older or younger peers, and are less likely to have children. (The Joint Cente...
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  • Productivitiy has increased tremendously. Wages have not kept up with productivity. Housing prices are spiking again. Banks can make more money in the stock market than by selling mortgages. Why would it be a surprise that millennials choose to rent?
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  • Guest - washunate

    Job insecurity is an interesting variable to consider, and I'm surprised (well, not really) the Washington Post didn't include it. Their headline itself is ridiculously misleading as the majority of households are owners, not renters. However, shorter tenure strikes me as not the most important fac...
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Michael Fletcher had a short piece highlighting the huge gulf in the economic status of whites and African Americans. While the piece rightly points out that there are no simple remedies to eliminate the gap, one of the charts suggests a policy that can make a huge difference.

The chart shows the overall unemployment rate and the unemployment rate for whites and African Americans. The unemployment rate for African Americans is consistently twice as high as the unemployment rate for whites. This means that a drop in the unemployment rate for whites of one percentage point would likely be associated with a drop of two percentage points in the unemployment rate for African Americans.

For African American teens the ratio is typically six to one. This means that a Federal Reserve Board policy of letting the unemployment rate fall as low as possible is likely to have large payoffs for African Americans, especially for young people trying to get a step up in the labor market. This may not eliminate the gap in status between whites and African Americans, but a commitment to a full employment policy may go a substantial distance in that direction.

Recent comments

  • This post shows the importance of full employment. However, the Fed and monetary policy have not been accomplish this despite years of low interest rates. The only effective policy available to the government is its own job creation via public spending--at this point unlikely, but it is important to...
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  • I agree in that to me it seems that the fed is mostly to blame, but do you think the minimum wage has any affect at all on the unemployment rate?
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  • Guest - washunate

    The Fed has been doing ZIRP for years and owns trillions of dollars of treasury and mortgage backed securities. What is the Fed not doing to promote full employment? The employment problem is that we're doing the wrong work managed in the wrong ways, not that there isn't enough total work going on. ...
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The Wall Street Journal was good enough to give us "our entitlement problem for the next generation in one CBO chart." The featured chart shows the projected discounted cost of Medicare benefits compared with the discounted value of the taxes paid in. It shows that the former is around three times the latter for the baby boom cohorts.

While this may look like the baby boomers are getting a real bonanza on their health care the real story is that the doctors and the drug companies are getting a real windfall at the expense of the rest of the country. Our health care providers earn roughly twice as much on average as their counterparts in other wealthy countries. There is little evidence they provide anything in the form of better service for this money, they just get much richer.

The doctors and other providers are able to largely limit domestic competition through their control of licensing and the setting of health care standards. They also obstruct any efforts to open up health care to international competition for example by allowing Medicare beneficiaries to buy into the health care systems of other countries (yes, this would have to be negotiated -- sort of like the TPP) or by increasing the number of foreign trained doctors who practice in the United States.

Anyhow, if we paid the same per person amount for health care as people in other wealthy countries, most of the gap between the cost of Medicare and Medicare taxes would disappear. Therefore we can more accurately say this is a picture of our health care cost problem in one graph. The power of the health care providers makes it very difficult politically to fix this problem, but it should at least be possible to talk about it.

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  • Guest - Rachel

    The US has 2.5 physicians per 1000, according to the World Bank. In contrast, Italy has 3.8, France 3.2 Germany 3.9, Argentina 3.9. Even England has more physicians than we have. And of course all these physicians are paid less than in the US. The problem, I'm afraid, is that this shortage-and-...
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  • Here is my proposal to deal with spending: This is a compromise between advocates of government provided health insurance and those against: The state would provide insurance to all Americans but the annual deductible would be equal to the family’s trailing year adjusted income minus the poverty li...
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  • Our health care providers earn roughly twice as much on average as their counterparts in other wealthy countries. This is the problem that politicians should have addressed. I like love Deans solutions but our politicians are too corrupt for them. We never should have allowed our corrupt politician...
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I see that I have to disagree with Brad DeLong again. Brad wants to see the 2008 downturn as a uniquely bad event due to the overextension of credit and the ensuing financial collapse. I see it as overwhelmingly a story of a burst housing bubble and the resulting fallout in the real sector.

First off, in this piece Brad seems to want to attribute the worldwide downturn to the collapse of the housing bubble in the U.S. This seems more than a bit bizarre, since countries like Spain and Ireland arguably had bigger bubbles and bigger collapses than the U.S.

The collapse in the U.S. may have happened first and triggered the collapse in other countries, but this would only be in the sense that the U.S. collapse might have alerted lenders to the possibility that house prices can fall. Presumably the bankers would have discovered this basic economic fact at some point regardless of what happened in the United States.

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  • Guest - Ian

    another reason the 2001 recession was mild with respect to economic growth is that consumer credit remained robust due to the housing bubble. if you look at the federal reserve measure of total outstanding consumer credit, it usually remains flat during recessions (1974, 1981, 1991, ...). In 2002, h...
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  • You are absolutely right. It is not an accident that the Great Depression, the Great Recession, and Japan's Lost Decade were all preceded by burst asset bubbles. The mechanism that links the bursting bubble to the recession is sharp drops in consumption caused by consumers seeking to recoup their de...
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  • Guest - Tom Mcinerney

    My recollection of 2001 crash is that it (1) was massive; and that in ensuing policy debates Paul Krugman {ca 2002/2003 ?} observed that (2) Mr Greenspan's move to ease monetary policy was justifiable , given the apparent risk/trend of 'deflation', which I'd not previously been aware of. Also , in ...
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The NYT had a piece on efforts to encourage doctors to assess the price and relative effectiveness of drugs when writing prescriptions for cancer patients. It notes that drug companies charge $10,000-$30,000 a month for many of the new cancer drugs. It then comments on the suggestion that doctors should take these costs into account in deciding treatment:

"Evaluating the latter cost would put doctors in the role of being stewards of societal resources. That is somewhat of a controversial role for doctors, since it might conflict with their duty to the patient in front of them."

It is important to note that doctors are not exactly in the role of deciding whether resources would be allocated to developing these cancer drugs, since that decision would have already been made. The resources devoted to developing the drugs have already been used at the point where doctors are deciding whether to prescribe them. The doctors' decision only determines how much drug companies will profit as a result of committing these resources.

This is an important distinction. Obviously profits will affect the drug companies decisions on future research, but at the point where the drug exists, it costs society very little to make it available to every patient who would benefit. It is only due to patent monopolies that we get such a sharp divergence between the price facing the patient or insurer and the cost to society.

Recent comments

  • Guest - saurabh

    The oncologists are probably not the villains here (disclaimer: I work with a bunch of oncologists). Their main interest is getting their patients treated, and the cost of drugs is a huge barrier to achieving this; it's quite common and routine for doctors to collectively demand lower drug prices, i...
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  • Guest - Tom Stickler

    Patents protect more than just drugs and software. When I think of the time and money involved in perfecting the intellectual property covered by the patents with my name attached, I am glad that no one can just copy my inventions and compete without that expense.
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  • Guest - Ethan

    An intersting article on this subject is "Overkill"by Atul Gawande in the May 11 New Yorker magazine. See also an earlier article by the same author, "The Cost Conundrum" in the May 1, 2009, New Yorker.
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An NYT article on the prospects of a deal between Greece and its creditors left this item off its list of the risks from Greece leaving the euro. If Greece were to leave the euro, its exports, most importantly tourism, would be hyper-competitive. This would likely lead to a huge increase in its business as travelers from Europe and the United States opt to visit Greece rather than other tourist destinations.

This could lead to the same sort of rebound that Iceland saw after its initial collapse. This would be hugely embarrassing to the I.M.F., the European Commission, and the European Central Bank, which have forced Greece to endure a depression and demand policies that will likely leave it with depression levels of unemployment for at least another decade.

This outcome will be especially painful for political leaders in countries like Spain and Portugal, both because they have imposed comparable depressions on their own populations and also because they will be directly hit by the loss of tourism to Greece. From their perspective, a successful Grexit would be the worst possible outcome.

Recent comments

  • Guest - pieceofcake

    And I just don't get it - I mean everybody who has the slightest idea about economics - knows ' that lower prices -(in the aggregate) increase demand - as the idea that debasing a currency increases demand. And both theories make a lot of sense and no sense at all under certain condition. For exampl...
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  • Guest - pieceofcake

    'I know that the idea of a lower price increasing demand might sound strange, but there actually is lots of evidence for this in the world.' Doesn't sound strange at all - as the American (Walmart) economy seems to be entirely based on it - while there are other options - which are based on the hig...
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  • Guest - Dean Baker

    "Sure people fly, but you're telling me a Chinese is going to switch from visiting Spain because Greece has become cheaper? " Yes Dax, you got it. Millions of people decide on a destination based on a variety of factors. Some may go to Spain no matter what because they love Spain. But many are decid...
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Robert Samuelson used his column today to note the sharp rise in CEO pay. He ends up leaving it an open question as to whether the increase in the pay gap between CEOs and average workers, from an average of 20 to 1 in the 1960s to 300 to 1 at present, reflects the fundamentals of the market. In assessing this question, it is worth considering the incentives for the boards of directors that set CEO pay.

If a CEO wants another $1 million, a director is likely to make herself unpopular among her peers, many of whom are likely to be personal friends of the CEO, if she refuses to go along. Furthermore, if the CEO were to leave because they did not get the pay raise, and the company performed poorly (possibly because of random events having nothing to do with the CEO), the director who opposed the pay increase would be likely to see their position threatened.

On the other hand, directors almost never have their positions threatened as a result of overpaying their CEO. It is very difficult for disgruntled shareholders to organize to remove a director.

In this context, it would not be surprising if CEO pay continued to rise. With such asymmetric incentives, there is not the same sort of downward pressure on CEO pay as there is for auto workers or retail workers. Therefore, it should not be surprising that if gap in pay continues to increase.

Recent comments

  • I figure that CEOs are like pro ball players. You have a few real stars and all the “B” players you are ever going to need. The stars are going to be stars anyway because that’s what they are made of and this is their one time around to show it off. The “B” players are better than the rest of us but...
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  • Guest - Procopius

    It's the sanctity of contracts thing. We saw it when AIG paid their "retention" bonuses to the guys who had already left the company.
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  • Guest - djb

    ok samuelson got everything he has whoring for the rich, now he is just really old
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