That was the main takeaway from a NYT article on his trip to Nike. According to the article, he made many claims about the Trans-Pacific Partnership (TPP) and opponents of the deal which are clearly wrong.

For example, the article tells readers:

"he [President Obama] scorned critics who say it would undermine American laws and regulations on food safety, worker rights and even financial regulations, an implicit pushback against Ms. Warren. 'They’re making this stuff up,' he said. 'This is just not true. No trade agreement’s going to force us to change our laws.'"

President Obama apparently doesn't realize that the TPP will create an investor-state dispute settlement mechanism which will allow tribunals to impose huge penalties on the federal government, as well as state and local governments, whose laws are found to be in violation of the TPP. These fines could effectively bankrupt a government unless they change the law.

It is also worth noting that rulings by these tribunals are not subject to appeal, nor are they bound by precedent. Given the structure of the tribunal (the investor appoints one member of the panel, the government appoints a second, and the third is appointed jointly), a future Bush or Walker administration could appoint panelists who would side with foreign investors to overturn environmental, safety, and labor regulations at all levels of government. (Think of Antonin Scalia.) 

President Obama apparently also doesn't realize that the higher drug prices that would result from the stronger patent and related protections will be a drag on growth. In addition to creating distortions in the economy, the higher licensing fees paid to Pfizer, Merck, and other U.S. drug companies will crowd out U.S. exports of other goods and services.

Obama is also mistaken in apparently believing that the only alternative to the TPP is the status quo. In fact, many critics of the TPP have argued that a deal that included rules on currency would have their support.

This issue is hugely important, since it is highly unlikely that the U.S. economy will be able to reach full employment with trade deficits close to current levels. (It could be done with larger budget deficits, but no one thinks this is politically realistic.) Without a considerably tighter labor market, workers will lack the bargaining power to achieve wage gains. This means that income would continue to be redistributed upward.

The only plausible way to bring the trade deficit down is with a lower valued dollar which would make U.S. goods and services more competitive internationally. The TPP would provide an opportunity to address currency values, as many critics of the trade agreement have pointed out. It seems that Mr. Obama is unaware of this argument.

Recent comments

  • Guest - harumpfer

    "President Obama apparently also doesn't realize that the higher drug prices that would result from the stronger patent and related protections will be a drag on growth. " Mebbe. But does he realize this will eliminate a lot of people who are sick and can't afford professional care and can now be w...
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  • Guest - Paul

    He knows exactly what he'$ doing $ince he wa$ bought and paid for!
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  • Guest - Barbara Smith

    If President Obama is confused about the TPP, imagine how little your (my) Democratic Congress critter knows about the issue.
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Wow, the Social Security trustees have no better grasp of the economy than Alan Greenspan and the clowns at the Fed, the Congressional Budget Office, and other economic forecasting outfits! That is the implicit punch line of an article NBC ran with the headline, "Social Security may be in worse shape than we thought: study."

The gist of the piece is that the Trustees projections have been overly optimistic since 2000. This is true. The trustees failed to recognize that the stock market bubble would collapse and throw the economy into a recession in 2001 and that the recovery from this recession would be very weak. Nor did they recognize that the housing bubble would collapse and throw the economy into an even deeper recession in 2007-2009 and the recovery would be even weaker.

It is reasonable to blame the trustees for missing these really huge bubbles, the collapse of which and the resulting damage were predictable. However, they erred in the same way as the vast majority of the economics profession. This does not excuse these huge errors. These people and their staffs are paid very well -- say compared to people who don't make mistakes cleaning rest rooms. However, it is extremely misleading to imply that the trustees are uniquely wearing rose-colored glasses in their view of the economy. It's also worth noting that they erred on the pessimistic side when the economy had a growth and employment boom in the late 1990s.

The piece then tells us about a preferred approach using an infinite horizon rather than Social Security's 75-year forecast period:

"Kotlikoff [Boston University economics professor, Larry Kotlikoff] wants the administration to calculate unfunded obligations using the "infinite horizon," which accounts for funding after 75 years. Under this accounting system, SSA's projected unfunded liabilities would be $24.9 trillion (instead of the $10.6 trillion projected in 2088)."

Presumably the point is to make readers really scared with a liability of $24.9 trillion! Scaring people could be the only possible motivation, since almost no one reading this piece has any idea of how much money $24.9 trillion is over the infinite future.

It would not have been difficult to make the number understandable to readers, since it can be found expressed as a share of GDP right in the trustees report. Table V1.F1 shows that $24.9 trillion is equal to 1.4 percent of future GDP. By comparison, the increase in military spending associated with the wars in Iraq and Afghanistan was equal to 1.6 percent of GDP at its peak.

If the concern is that mistaken assumptions will generate misleading numbers then that concern should be far greater with an infinite horizon calculation than a calculation for a 75-year horizon. After all, our knowledge of the 22nd and 23rd century is really not very good. (That is where most of the infinite horizon shortfall comes from.) Of course, people alive today also don't get to make policy for people living 100 and 200 years from now. Assuming the country remains a democracy, the people alive at the time will decide what their social insurance programs look like.

If the point is to inform people and not to scare them, NBC might have celebrated the sharp reduction in the infinite horizon shortfall in Medicare. Back in 2008 the Trustees (Table III.B10)    projected it would be $34.4 trillion (in 2008 dollars). The most recent report puts the shortfall at just $1.9 trillion (in 2014 dollars) or 0.1 percent of GDP. The change implies a reduction in the infinite horizon shortfall of almost $36 trillion (in 2014 dollars). This should be cause for real celebration for those arguing that infinite horizon projections are the way to go.

We look forward to the NBC piece on this good news.

 

Correction:

Andrew Biggs called my attention to the fact that the main point in the underlying article is that people are living longer than had been projected by the Social Security trustees, not that the they had over-predicted economic growth. As a consequence, we should expect more people to collect benefits, which worsens the program's finances. There appears to be good evidence for this view.

A flip side is that if people are living longer than projected, and therefore presumably healthier, then we may expect more people to work later in life, which would improve the system's finances. The article did not attempt to assess projections on retirement ages.

It is worth noting that whether or not workers share in the gains of economic growth over the next two decades, will swamp the impact of any conceivable increase in Social Security taxes that might be used to fund the program. Wages will be on average more than 40 percent higher in three decades according to the Social Security trustees projections. If the tax rate were raised by 3 full percentage points, it would take back less than 10 percent of the increase in wages.

Recent comments

  • interesting , and also looking forward to NBC's input especially on plan f medicare.
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  • Didn't Greenspan talk about a bubble but believe that there was nothing he could or should do about it? I am convinced by Scott Sumner, that even if there really was a bubble the fed should have been able to keep NGDP growing fast enough for its busting to not have caused 9% unemployment. If velocit...
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  • Guest - skeptonomist

    Let's go back to the SS basics one more time. There is no real need for any advanced planning at all for the unfunded liabilities of SS. Ignoring the baby boom, the program collects money from the payroll tax and pays it out immediately. There is no economic or moral reason why the taxation and s...
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A post by Paul Krugman on the price of credit default swaps (CDS) on bonds issued by the United Kingdom reminds me of the dark days of the financial crisis when otherwise serious people used the price of CDS on U.S. Treasury bonds as a measure of the risk of a default by the U.S. government. With the price of the CDS rising, we had some of these people getting very concerned about the prospect of a default.

As the more calm among us tried to explain, it's not clear that the price of a CDS on U.S. Treasury bonds measured anything. A person holding the CDS can only get paid off, if the U.S. government defaults on its debt and the bank that issued the CDS is around to make the payment. If there is a real default (I don't mean a delay of a few hours or days over debt ceiling fights), it is hard to imagine what banks would still be standing to make good on the CDS they had issued.

In other words the probability that the U.S. government would default and there would be bank in a situation to meet its CDS obligations is very close to zero. This is why the price of a CDS issued on U.S. Treasury bonds is virtually meaningless as a measure of default risk.

Recent comments

  • Guest - Robert Weiler

    I think Joe Hufford is essentially right which means that what a CDS on US debt is really measuring is the non zero probability that Congress could do something really stupid.
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  • Guest - Joe Hufford

    The US and the UK both issue their own currency. So there is exactly zero risk of being forced to default. Zero. There may be a risk that they *choose* to default. Since few would argue that our government is run by sane people, choosing to default is a possibility. Sovereign governments neither hav...
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  • Guest - dax

    The UK government could certainly default while many banks (e.g. American banks) stayed in business. So the parallel with the US is not clear.
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Most Post readers know that the paper is prepared to say pretty much anything to push the Trans-Pacific Partnership (TPP) and other trade deals that are likely to have the effect of redistributing income upward. Therefore it is not surprising to see a column by Edward Alden, a senior fellow at the Council on Foreign Relations, lecturing the labor movement that they should support President Obama's trade deals.

Alden's basic point is that rather than oppose a trade deal that would likely further the upward redistribution of income, labor should demand conditions that ensure workers will benefit.

"They could insist, for example, on linking trade to new investments in infrastructure that would help U.S. exports flow to world markets. Or they could demand funding for comprehensive worker retraining programs like those in Europe, rather than the paltry Trade Adjustment Assistance that isn’t available to 99 percent of the unemployed."

This sounds great. My guess is that most unions would gladly sign on to a deal that included $2 trillion in spending on infrastructure and education over the next decade as a quid pro quo for TPP. Or, if we're making comparisons to Europe, how about a package that made U.S. look more like European welfare states, with the government largely picking up the tab on health care, college education, and childcare. Also, no more dismissal at will. If an employer wants to dump workers who have been with the company for twenty five years, how about six months of severance pay. That's small by European standards, but a big step over what they get now (i.e. nothing).

Anyhow, if Alden could produce a deal with these provisions from President Obama and the Republican leadership in Congress, I'm sure those dunderheads in the labor movement would quickly sign on. Of course, my guess is Alden is instead arguing that the labor movement should settle for a few largely meaningless trinkets, and pretend that they are a big deal. As a practical matter that is all that would be on the table.

At the beginning of the piece Alden quotes president Obama:

"The Chamber of Commerce didn’t elect me twice — working folks did."

This is partly true. President Obama did win because of votes from workers, but like his Republican opponents he raised huge amounts of money from rich people. No presidential candidate can win election in the United States without raising large amounts of money from rich people. This likely explains the structure of the TPP (which increases protection in areas that benefit corporations) and the president's determination to get it through Congress.

Recent comments

  • Guest - Procopius

    I haven't read Alden's article, so maybe he actually said something sensible, but what is summarized here doesn't make any sense to me. From whom should labor make the demands Alden recommends? The U.S. Trade Representative? President Obama? The corporate lawyers who drafted and helped negotiate the...
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  • Guest - watermelonpunch

    I don't know that it's very impressive getting votes from workers whose only other choice was the guy who fired them. Obama's enthusiasm for the TPP makes him sound like either he's a pod person taken over by aliens or you know, owes some favours.
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  • Guest - Last Mover

    Here's an idea, require for a baseline that TPP follow the same transparent standards that apply in a retail store where buyers and sellers trade. In the grocery section for example would be a recognizable dozen eggs, gallon of milk and loaf of bread available at respective prices. What a radical ...
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Matt O'Brien gets the story right. By most measures the stock market is above its normal levels, but given unusually low interest rates, it is not unreasonably priced. The price to earnings ratios are only slightly higher than in 2007, when almost no one thought the market was in a bubble. Back then the interest rate on 10-year Treasury bonds was over 5.0 percent, compared to around 2.0 percent today. That makes today's market look like a decent buy, but don't expect high returns.

One point is worth qualifying in O'Brien's piece. He notes Greenspan's famous irrational exuberance remark and says it didn't do much beyond its immediate impact (markets did fall). This is likely because Greenspan backed away from it with doublespeak about how market valuations may be justified if profits accelerated. It would have been interesting to see what would have happened if he doubled down and continued to hit on the point, backed by data from the Fed. Janet Yellen's foray into attacking bubbles this way last summer suggests that it can work.

 

Recent comments

  • Guest - Vedicculture

    Stocks have barely moved since 2000. A bubble is like 98-99 when it rocketed.
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  • Guest - pieceofcake

    'Stocks are High, but Not Bubbly' Oh . Yes!! Please tell everybody - as parts of my family are are already totally freaking out that 'teh correction' -(some call a 'pop') - will be more than 20 percent - and I tried to clm them down - as they still have time -(autumn?) - until the FED gives the si...
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USA Today got its numbers seriously wrong in pushing the case for the Trans-Pacific Partnership (TPP). Its editorial told readers:

"Democrats, however, are wedded to unions who blame trade, and trade agreements, for the decline in manufacturing jobs.

"Theirs is a simplistic view that ignores the fact that manufacturing output has nearly doubled since the late 1990s, showing that technology is the real job killer."

It's USA Today, not the unions, who are being simplistic here. The data they are relying on refers to gross output. This would include the full value of a car assembled in the United States even if the engine, transmission, and the other major components are imported. It also doesn't adjust for inflation. If USA used the correct table it would find that real value added in manufacturing has risen by a bit less than 41.0 percent since 1997, compared to growth of 45.8 percent for the economy as a whole.

The story here is a one of very basic marcoeconomics. The $500 billion annual trade deficit ($600 billion at an annual rate in March), implies a loss of demand of almost 3.0 percent of GDP. In the context of an economy that is below full employment, this has the same impact on the economy as if consumers took $500 billion every year and stuffed it under their mattress instead of spending it. USA Today might try working on its numbers and economics a bit before calling people names.

Recent comments

  • Guest - liberal

    EconProf blithered,The problem with unions and the other usual suspects is one of the boy who cried wolf. They've opposed all previous trade agreements, good and bad alike. So now when there are substantive issues, few listen. LOL. Sure. Just like how no one takes the business lobby seriously, be...
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  • Guest - EconProf

    The problem with unions and the other usual suspects is one of the boy who cried wolf. They've opposed all previous trade agreements, good and bad alike. So now when there are substantive issues, few listen. Manufacturing has declined to only one in ten private sector jobs, so few citizens see their...
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  • Guest - djb

    its good to know that usa today doesnt have any right wing, supply side, wall street bias
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The sharp jump in the March trade deficit reported this morning means that GDP in the first quarter will be revised into negative territory. The $51.4 billion trade deficit reported for March, was $15.5 billion increase from the $35.9 billion deficit reported in February. Some of this is undoubtedly noise in the data (the February number was surprisingly low), but some of the rise is likely due to the impact of the higher dollar which is making U.S. goods and services less competitive internationally.

This is a really big deal, much bigger than the news about greater or smaller than expected budget deficits that can often be found on the front page. There is no easy mechanism to offset the demand lost as a result of a trade deficit that was running at more than a $600 billion annual rate in March. It is difficult to see how the economy can get to full employment with a trade deficit of this size, without the government running large budget deficits or an asset bubble spurring demand.

Recent comments

  • Guest - Doc at the Radar Station

    It would be great if you could comment in rebuttal to this sort of stuff: http://jpkoning.blogspot.com/2015/05/is-this-us-dollar-in-midst-of-longest.html
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  • Guest - macroduck

    Well, there actually are a couple of mechanisms. One is that final demand can absorb some of the deficit. Since we have already seen retail sales for March, but not PCE, there is some room for final demand to absorb some of those imports. The other sponge for imports is inventories. That is much mor...
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  • Guest - pete

    Shipping issues? The West Coast was closed for a bit then reopened with a bang. Not sure when the accounting takes place for purchases and sales via ships.
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Catherine Rampell used her column to note the decline in birthrates among millennials. She identifies the weak economy as a main factor behind the drop. However she warns that this drop in birthrates is "bad news for older folks" because:

"for economic reasons — including cultivating the next generation of Americans to work and pay for the benefits of their many, many elders — we still need more babies."

This is not true. If we have fewer people entering the labor force, we would expect that they would move into higher productivity, higher paying jobs. This might mean that fewer people would be willing to work at near minimum wages at McDonalds or Walmart (we would therefore have fewer McDonalds and Walmarts) and would instead work at higher paying jobs in health care, manufacturing, or other sectors. A worker earning $60,000 a year in the health care sector can afford to pay much more to support retirees than a worker earning $20,000 a year at Walmart. The impact of a smaller number of workers can easily be offset by an increase in the productivity per worker. 

Fewer children will also mean less demand on public services (e.g schools) and infrastructure. It also means less environmental damage.

It is also worth noting that Rampell's concern about too few children goes 180 degrees against the concern that robots will take the jobs. In other words, if you are concerned that we won't have enough workers, then you must think the robot worriers are nuts.

It is a problem if people feel they are unable to have children for financial reasons because we should want people to have good lives. That means having children if they want them. It is definitely not a problem for the rest of us if they don't have children.

Recent comments

  • Guest - Ben

    Low birth-rates in America will never be a problem for America as long there are more people wanting to emigrate to America then we wish to allow. Need more young workers to support an aging populace? Just allow more immigration from young workers with an education paid for by some other country. ...
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  • @Last Mover, be careful she is not"Dumb-As-Dirt". She is very smart. It is just that her goal is to get read. You probably did not mean she really is stupid, but this is my call in life to remind people journalists and politicians are not stupid they are quite smart but their incentives and goals ar...
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  • BTW on the healthcare front the state of Florida has made moves to make fewer RNs. My son's girlfriend could not get into the RN program despite good grades, even while the Federal government has a special program let RN's into the country to alleviate the shortage of RN's. Our Government is soooo c...
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The advocates of the Trans-Pacific Partnership must really be desperate. Why else would they continue to make such ridiculous assertions? (And why does the Post print them?)

Thomas McLarty puts on the show today. McLarty was President Clinton's chief of staff when they pushed NAFTA through Congress. He used his column to tout all the jobs created through exports as a result of NAFTA. He never once mentions the jobs lost to imports. In fact, the United States went from having a modest trade surplus with Mexico, to having a trade deficit of $54 billion in 2014.

While this rise in the trade deficit may not be all or even mostly attributable to NAFTA, in the context of an economy that is below full employment, a trade deficit of this size would be expected to lead to a loss of roughly 600,000 jobs.  

Recent comments

  • Guest - yancey

    Those jobs created would be in the knowledge economy was my understanding. Wasn't that the Clinton assessment of the future US economy?
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  • Guest - Last Mover

    The only possible conclusion from dumb-as-dirt claims as this on the benefits of trade is the import side of the equation must be free. Yes, free imports at zero prices are why they are not counted. Then the argument is consistent to count only exports and jobs created. Who knew? All this time W...
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Robert Samuelson begins his argument for the Trans-Pacific Partnership (TPP) by telling readers:

"The trouble with our trade debates is that people assume they’re only about economics."

I suppose this means that the advocates of TPP think they are losing the economic argument so now it is a matter of national security. (Just out of curiosity, I wonder how many of the foreign policy experts arguing for the necessity of the TPP supported the Iraq war.)

Anyhow, we do get some economics in Samuelson's piece, which deserve comment. He refers readers to a study by the Peterson Institute which shows that the increase in U.S. GDP by 2025 could be $85 billion, a bit less than 0.4 percent. It's worth noting that this study took no account of the higher prices in drugs and other products due to stronger and longer patent and copyright protections.

The higher prices would be expected to slow growth in the same way that increases in protectionist barriers in general slow growth. The impact could be large. For example, if a country is forced to pay the $84,000 patent protected price for Sovaldi, the hepatitis C drug, rather than the $900 generic price, it will be a drain on its purchasing power and an impediment to growth.

The Peterson Institute analysis also does not take account of the costs that would result from rent-seeking behavior due to stronger and longer patent protection. A recent CEPR analysis found that the mismarketing of just five drugs imposed annual costs of $27 billion a year in the form of increased mortality and morbidity between 1994 and 2008. 

Samuelson also turns to a peculiar analysis by Robert Lawrence to question the widely accepted view among economists that trade has cost manufacturing jobs and lowered wages for workers without college degrees. The study argues that we have seen nothing unusual in the sharp loss of manufacturing jobs as the trade deficit exploded in the last 15 years, claiming that the manufacturing share of employment has continued to decline at a trend rate of 0.4 percentage points a year.

This is bizarre, because we might expect manufacturing to decline at constant rate, not a constant percentage of total employment. If manufacturing employment fell by 0.4 percentage points when manufacturing accounted for 20 percent of total employment, the drop would be 2 percent. If it declines by 0.4 percentage points when manufacturing is 10 percent of total employment, the loss of jobs is 4 percent of manufacturing. There is no reason we would expect this pattern to hold. The implication is that if manufacturing employment were 4 percent of total employment then we would see 10 percent of total manufacturing employment to disappear in a single year.

Lawrence also criticizes Paul Krugman's analysis showing that trade with China has lowered wages by complaining that his model is "simplistic." He seems unaware of the research by David Autor and others that support this assessment.

 

Recent comments

  • Guest - Peter Principle

    By arguing for an alleged trade deal on "geopolitical" grounds, Samuelson simply proves (once again) that he is an imperial ideologue, not an economics writer.
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  • I am mystified by the mental gymnastics required to reconcile the dogma of those on the right that profess such strong "State's Rights" arguments when the Federal Government supposedly oversteps it's bounds but yet are so willing to give up all rights to corporate rule. To those of you out there th...
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  • Guest - skeptonomist

    Economic projections are rarely worth the paper they are written on (or the electric power used to read them electronically), but the actual economic record is unambiguous - there have been no economic benefits from globalization for most people in the US. There have obviously been no wage gains si...
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A NYT piece analyzing White House efforts to push the Trans-Pacific Partnership (TPP) began with the sentence:

"When President Obama defends the Trans-Pacific Partnership, a far-reaching agreement to tear down trade barriers between the United States and 11 other nations, he often argues it would cure the ills inflicted on American workers by trade pacts of the past, particularly the North American Free Trade Agreement."

The problem with this sentence is that the TPP is not obviously, "a far-reaching agreement to tear down trade barriers." The barriers to trade in most cases are already low. The main focus of the TPP is putting in place a new regulatory structure, which is likely to be very business friendly. The most obvious evidence of the business friendly nature of this structure is that the TPP would establish an extra-judicial legal system for enforcing the agreement. This system can only be used by foreign investors to sue governments; it is not open to governments, workers, or communities to sue foreign investors.

The deal also does much to increase barriers in the form of stronger patent and copyright protection. These barriers will raise prices and reduce trade.

For these reasons, it is a major distortion of reality to describe the TPP as "a far-reaching agreement to tear down trade barriers." While the proponents of TPP may like to characterize the deal this way in order to appeal to the principle of "free trade," it is not an accurate description of the agreement. 

Recent comments

  • Guest - Bill Mantis

    I'm waiting for a fuller explanation from Obama on what he's referring to when he declares, "some past trade agreements have not lived up to their hype." Which deals? What hype, specifically, coming from where or from whom? And then maybe we can get an itemized list on how this trade deal is differ...
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  • Guest - John Wright

    Per http://www.huffingtonpost.com/2015/04/30/hillary-clinton-trans-pacific-partnership_n_7173108.html, Hillary Clinton is opposed to ONE part of the the TPP, "which would give corporations the right to sue sovereign nations over laws or regulations that could potentially curb their profits. " So it...
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  • Guest - pieceofcake

    'This is not a full analysis but a challenge.' You don't need a full analysis to understand that by giving up so much of manufacturing the US commited the major economical mistake - and all these ridiculous efforts of money machinists to somehow even it out with monetary tricks -(like low interest ...
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Actually, I don't know that he is, but he would be if he were consistent. Earlier in the week, he complained that I thought there should be rules on currency manipulation in the Trans-Pacific Partnership (TPP). The gist of his argument is that if another country wants to deliberately under-value its currency, so that we can buy their exports at a lower price, our response should be "thank you very much." In effect the currency manipulator is subsidizing our consumption.

This is of course true and the same logic applies to export subsidies. If Japan, Australia, or some other country wants to provide a 20 percent subsidy on exports of cars, computers, or other goods and services, then they are making those items cheaper for U.S. consumers. Worstall would presumably want us to say "thank you very much" and leave it at that.

But those dunderheads negotiating the TPP are banning export subsidies. They will make it a trade violation if Australia wants to subsidize our consumers. I assume Worstall is very angry about this.

There are two points here. First there is a small one about optimal allocations in the economists' perfect world of full employment. Even though U.S. consumers may benefit in this world from the stupidity of other countries subsidizing our consumption through their export subsidies, this is not an optimal allocation. In principle, the world economy would be larger if governments did not subsidize exports and instead let the market make allocations. Note, this argument applies with equal force to currency values that are deliberately set below market rates by governments seeking trade advantages.

The other more important point is that we're typically not living in the economists' perfect world of full employment, and certainly have not been there lately. In a context of an economy that is below full employment, both an export subsidy and under-valued currency have the effect of increasing the U.S. trade deficit and reducing U.S. employment. (There appears to be some serious confusion on trade and jobs by Worstall and his friends. If foreigners use the dollars they get from their exports to buy U.S. government bonds, shares or U.S. stock, or real estate, it does not create jobs in the United States, except for the small number of people involved in the sale of financial assets.)

Anyhow, in the world where we live there can be, and is now, a very direct link between the trade deficit and jobs. If we run a larger trade deficit, neither Worstall nor his friends have some magic formula that can fill the gap in demand that would be created. This is why it is important to have rules in the TPP on currency values. We simply have no mechanism for replacing the demand we are losing through a $500 billion plus annual trade deficit.

 

Addendum:

I see Tim has responded. I think I see the problem. Tim seems to believe the economy is always at full employment so that lack of demand is not a problem. If the economy were always at full employment, he would of course be right. There is no obvious reason we shouldn't be happy if other countries are willing to subsidize our consumption. (There may still be some issues about market power and potential monopolization, but we can skip those for now.)

However in the world I live, the economy is often nowhere near full employment. This means that anything that reduces demand (like a larger trade deficit due to a rise in the value of the dollar) reduce output and employment. We can offset this loss of jobs and output through larger government budget deficits, but as a practical matter, we don't. This is why I am concerned about an over-valued currency, but if I thought unemployment wasn't a problem, I'd be with Tim.  

Recent comments

  • Guest - Gerry Flaychy

    Dean, I understand that. But what I want to say is that peoples in USA do also have the choice to spend their money in local goods and services, or, in assets, say, Treasuries. If they choose Treasuries rather than goods, than the demand for consumer goods is diminished, and in consequence, the lack...
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  • Guest - Dean Baker

    Gerry, when people spend money on goods and services produced in the United States it directly generates demand here. The people who get this money may respend it creating more demand. When China buys bonds or stocks, it does not directly create demand, but there can be the same indirect effect of ...
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  • Guest - chmoore

    It seems to me there's a lot of false equivalence going on. If trade subsidies (whether direct or currency based) result in benefiting mostly the owners of the supply chain for foreign goods and services, along with throwing a bone to the low wage workers who work there; that is NOT the same as cre...
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In the United States it's considered fine to just make crap up when talking about the government, especially when it comes to programs for poor people. That is why Ronald Reagan ran around the country telling people about the welfare queen who drove up to the welfare office every month in her new Cadillac to pick up her check. 

Today, David Brooks does the welfare queen routine in his NYT column, telling readers:

"Since 1980 federal antipoverty spending has exploded. As Robert Samuelson of The Washington Post has pointed out, in 2013 the federal government spent nearly $14,000 per poor person. If you simply took that money and handed it to the poor, a family of four would have a household income roughly twice the poverty rate."

Of course if NYT columnists were expected to be accurate when they talked about government programs, Brooks would have been forced to tell readers that around 40 percent of these payments are Medicaid payments that go directly to doctors and other health care providers. We pay twice as much per person for our health care as people in other wealthy countries, with little to show in the way of outcomes. We can think of these high health care costs as a generous payment to the poor, but what this actually means is that every time David Brooks' cardiologist neighbor raises his fees, David Brooks will complain about how we are being too generous to the poor.

The other point that an honest columnist would be forced to make is that the vast majority of these payments do not go to people who are below the poverty line and therefore don't count in the denominator for his "poor person" calculation. The cutoff for Medicaid is well above the poverty level in most states. The same is true for food stamps, the Earned Income Tax Credit (EITC), and most of the other programs that make up Brooks' $14,000 per person figure. In other words, he has taken the spending that goes to a much larger population and divided it by the number of people who are classified as poor.

If Brooks actually wants to tell readers what we spend on poor people, it's not hard to find the data. The average family of three on TANF gets less than $500 a month.  The average food stamp benefit is $133 per person. If low income people are working, they can get around $5,000 a year from the EITC for a single person with two children at the poverty level. (They would get less at lower income levels.)

These programs account for the vast majority of federal government payments to poor people. It won't get you anywhere near David Brooks' $14,000 per person per year, but why spoil a good story with facts?

 

Addendum:

Folks seem anxious to count Medicaid spending as spending on the poor. That's fine by me. The point I was making is that we pay twice as much as people elsewhere in the world for care that is no better because doctors and other providers get paid twice as much.

That seems worth noting in an assessment of how generous we are to the poor. To take an overblown analogy, suppose terrorists took some number of poor people hostage and demanded tens of millions of dollars for their release. We can include our ransom payments as money spent on the poor and say again how generous we are.

In this case, the folks playing the role of the terrorists in making big money demands are the doctors and other health care providers. In other words, they are David Brooks' cardiologist neighbor who gets well over $400,000 a year in large part due to payments from the government. You're welcome to see this as generosity to the poor, I see it as generosity to David Brooks' cardiologist neighbor.

 

 

Recent comments

  • Guest - Ogden Wernstrom

    In the US, there's a big difference between what many specialties earn and what a family physician or general practitioner earns. A cardiologist is the second-highest paid of the specialties in the Medscape Physician Compensation Report 2014. The cardiologist average was $351,000, almost-exactly ...
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  • Guest - Josh

    I'm not sure Brooks even read the David Simon interview. What had a rather concrete cause in the actions of Martin O'Malley is then somehow attributed to the "invisible bonds of relationships" breaking down. What a joke this guy is...
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  • Guest - Robert F

    So a poor person with bipolar illness has a psychotic break and is hospitalized on an involuntary commitment for 2 weeks at a cost of $30,000.Is he $30000 better off than he would have been if he never had a psychotic break?I don't think so.
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E.J. Dionne and Harold Meyerson both had interesting columns in the Post this morning, but they suffer from the same major error. Both note the loss of manufacturing jobs and downward pressure on the wages of non-college educated workers due to effects of trade. But both speak of this as being the result of a natural process of globalization.

This is wrong. The downward pressure on wages was the deliberate outcome of government policies designed to put U.S. manufacturing workers in direct competition with low-paid workers in the developing world. This was a conscious choice. Our trade deals could have been designed to put our doctors and lawyers in direct competition with much lower paid professionals in the developing world.

Trade deals could have focused on developing clear standards that would allow students in Mexico, India, and China to train to U.S. levels and then practice as professionals in the United States on the same terms as someone born in New York or Kansas. This would have provided enormous savings to consumers in the form of lower health care costs, legal fees, and professional services more generally. The argument for free trade in professional services is exactly the same as the argument for free trade in manufactured goods. 

The big difference is that doctors and lawyers have much more power than autoworkers and textile workers, therefore the politicians won't consider subjecting them to international competition. However that is no reason for columnists not to talk about this fact.

More generally, the heavy hand of government is all over the upward redistribution of the last three and a half decades. We have a Federal Reserve Board that has repeatedly raised interest rates to keep workers from getting jobs and bargaining power. A tax system that directly and explicitly subsidizes many people getting high six or even seven-figure salaries at universities, hospitals, and private charities and foundations. We have government subsidies for too big to fail banks.

Anyhow, inequality, like the path of globalization, is not something that happened. It was and is the result of conscious policy. We won't be able to deal with it effectively until we acknowledge this simple fact.

Recent comments

  • Guest - Eric377

    I don't know if D. baker has ever expressed an opinion on it, but I read this plus the comments and wonder why something like E-Verify isn't thought of as a no brainier, bipartisan quick policy change. So long as it is the poor unfortunate sods who used to make doo-dads in Rome, NY, the current sys...
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  • Guest - Bob Hertz

    Seems to me that for every auto worker who makes less money today, there is a government or health care or educational worker who makes more money. In other words, the new high paying jobs are coming out of the protected sectors. Tyler Cowen makes this point, and he is not alone among economists. Ac...
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  • Guest - liberal

    pete blithered, Think of globalization as a push toward a more fair distribution of capital and labor, a process which was hindered until recently by foreign mercantilist ideas. That's pretty rich coming from someone who's opposed to land value taxation. It's the same old same old---I'm all for r...
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I hate to be picking on Matt O'Brien again, but come on, this is setting the bar pretty goddamn low. He began a piece reporting on a consulting gig that Bernanke will have the bond fund Pimco by telling readers:

"If anyone deserves two seven-figure sinecures, it's Ben Bernanke."

I won't go over the full indictment of Ben Bernanke and will give him credit for a reasonably good job trying to boost the economy post-crash in the wake of the outraged opposition of the right-wing, but let's get real. The housing bubble and ensuing crash were not natural disasters like Hurricane Katrina.

The bubble was the result of bad policy. It is the Fed's responsibility to prevent harmful bubbles whose crash will disrupt the economy. While Bernanke only took over as Fed chair in January of 2006, after the bubble had already grown to very dangerous levels, he was sitting at Greenspan's side at the Fed through most of the process. (He did head over for a brief stint as head of President Bush's Council of Economic Advisers.) Through this whole period was completely dismissive of those who raised concerns about the bubble and junk loans that were fueling it.

This incredible negligence has had a devastating cost for tens of millions of people in the United States and around the world. And for this he deserves two-seven figure sinecures? This sounds like a case of the soft bigotry of incredibly low expectations.  

Recent comments

  • Guest - liberal

    JSeydl wrote, Anyway, Chicago Econ got a lot wrong, but one big thing it got right is that people ultimately respond to incentives. If they "got it right," they'd apply the theory about incentives to economists themselves, which they haven't done AFAICT.
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  • Guest - Sherparick

    I wonder if you had comments about Professor Feldstein who is going on about the Fed not raising interest rates to choke off the current "risky" recovery because of "bubbles" (he suggests the bubbles are to be found in the stock market and long term Government bonds). http://www.marketwatch.com/st...
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  • Guest - Dean Baker

    Joe, he makes many good points in the piece, but I really have a hard time stomaching Bernanke as a hero. Again, he helped get the economy back on its feet with QE, against a lot of political pressure, but to overlook his responsibility for the collapse is kind of a serious oversight....
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I usually confine my comments to economic reporting, but I can't let my blog sit idle when the Washington Post commits major journalistic malpractice on a story of national importance. The Post ran a major front page story with the headline, "Prisoner in van said Freddie Gray was 'trying to injure himself' document says." As the article indicates, the basis for the story is a document which includes the statement by another prisoner, presumably someone still in police custody. The Post tells readers:

"The Post was given the document under the condition that the prisoner not be named because the person who provided it feared for the inmate’s safety."

There are two big problems with this sentence. The Post does not know that the person who provided the document actually feared for the inmate's safety. The Post knows that the person who provided the document said that they feared for the inmate's safety. News reporters know that people sometimes do not tell the truth. This is why they report what people say, they do not tell readers that what people say is necessarily true, unless they have an independent basis for this assessment.

The other problem with this sentence is that it does not tell us why the person who provided the document is not identified. Did he/she also fear for their safety? A simple explanation would go a long way here.

It is possible that the document accurately reflects what another prisoner heard and his comments in a sworn statement, but it is also possible that this is largely fabricated. The story is obviously very helpful to the Baltimore police and since it likely originated in a context where the Baltimore police completely controlled the situation (presumably there were no independent observers when the prisoner was giving his statement) and this unidentified person controlled what was given the Post, it must be viewed with considerable skepticism.

Making this statement the basis of a front page story and not indicating to readers the need for skepticism, given the source, is incredibly irresponsible.

 

 

Recent comments

  • Guest - Who got cought blowing bubbles by the pond ?

    And further more would you like to explain the incentive for keeping people OUT of prisons, when they are on the STOCK EXCHANGE ??? So, prison = people = human trafficking, = PROFIT = you vile incomprehensible companies that quite literally profit from another's suffering. The most vile, incompre...
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  • Guest - Blowing bubbles

    Hmmm so this vile newspaper owns Amazon ? That's very interesting. Goodbye Amazon. Any company or origination that could add insult to injury of such a vile case is beyond human comprehension. Is a company I want no association with any corporations that make bold life changing statements before tho...
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  • Guest - Procopius

    Oh, yeah, Freddie Gray had his eye on the big bucks he could get from suing Baltimore as a paraplegic. Also, too, his larynx was "crushed." I don't see how he could intentionally do that to himself.
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The NYT has a column today by Uki Goni, warning of the bad things that will face Greece if it defaults. The default by Argentina in December of 2001 provides the basis for his warnings.

"Economic activity was paralyzed, supermarket prices soared and pharmaceutical companies withdrew their products as the peso lost three-quarters of its value against the dollar. With private medical insurance firms virtually bankrupt and the public health system on the brink of collapse, badly needed drugs for cancer, H.I.V. and heart conditions soon became scarce. Insulin for the country’s estimated 300,000 diabetics disappeared from drugstore shelves.

"With the economy in free fall, about half the country’s population was below the poverty line."

There is no doubt that the people of Argentina suffered serious hardship due to the default. However it is important to recognize that they were suffering severe hardship even before the default. The economy contracted by 8.4 percent since its peak in 1998, and contracted by 4.4 percent in 2001 alone. The unemployment rate had risen to more than 19.0 percent. Even worse, there was no end in sight. 

There is no doubt that 2002 was worse for the people of Argentina as a result of the default, but by the second half of the year the economy returned to growth and grew strongly for the next seven years. (There are serious issues about the accuracy of the Argentine data, but this is primarily a question for more recent years, not the initial recovery.) By the end of 2003 Argentina had made up all of the ground loss due to the default and was clearly far ahead of its stay the course path.

 

Book2 19771 image001

                         Source: International Monetary Fund.

This raises the question of whether the pain associated with the default was justified by the subsequent recovery. Clearly Mr. Goni thinks it is not. In this respect it is worth bringing in a hero among American policy wonks, Paul Volcker. Volcker is given enormous praise by economists (not me) for bringing on a recession in 1981 that brought inflation down from near double digit levels. This recession caused enormous pain of the sort described by Mr. Goni (people lost their houses and farms and couldn't pay for necessary health care, unemployment rose to almost 11.0 percent), but the economy did bounce back in 1983. The vast majority of policy types think this pain was well worth it as a price to bring down inflation. 

For further background, it is worth noting that the economy had been growing prior to Volcker's decision to bring on a recession. Argentina's economy was already contracting and virtually certain to continue to contract prior to the decision to default. In other words, there was no pain free path available to Argentina, whereas the U.S. economy likely would have continued to grow, albeit with higher inflation, without Volcker's actions. (For cheap fun look at this paper showing the I.M.F. consistently over-projecting growth prior to default and then hugely under-projecting growth post default.)

Clearly Greece looks much more like Argentina than the United States in 1981. Its economy has already contracted by more than 20 percent, with unemployment now over 25 percent. And, there is little hope for improvement any time soon under the stay the course scenario. This should make the default route look more attractive, since the country has little to lose.

That doesn't mean default will be pretty. People will suffer as a result, but at least default offers a better path forward. The striking takeaway from Goni's piece is how the notion of short-term pain for long-term gain can be made to look so appalling in a case where it was almost certainly necessary, whereas a similar choice is widely applauded in the United States in a case where it almost certainly was not. (For any Brits reading this, plug in "Thatcher" for Volcker.) It would probably be rude to point out that the 1981-82 recession was associated with a sharp upward redistribution of income away from workers at the middle and bottom of the wage distribution.

 

Note: Typos fixed, thanks folks.

Recent comments

  • Guest - Bill Mantis

    The axes on the graph are not labeled.
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  • With private medical insurance firms virtually bankrupt and the public health system on the brink of collapse, badly needed drugs for cancer, H.I.V. and heart conditions soon became scarce. Insulin for the country’s estimated 300,000 diabetics disappeared from drugstore shelves. In case someone ot...
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  • Guest - RabidGandhi

    Dean, thanks for your excellent blog. There is a small sector here in Argentina for whom the crisis was 2001, and not the previous decade of mass poverty and unemployment that ended in 2001, so I appreciate you pointing out the flaws in Goñi's OpEd. Even so, Greek FinMin Yanis Varoufakis has rep...
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Takeda, a Japanese drug company, agreed to pay $2.4 billion to settle suits claiming it concealed evidence that its diabetes drug, Actos, increased the risk of cancer. Concealing evidence of a drug's dangers is a predictable result of government-granted patent monopolies. Since patent monopolies allow drug companies to sell their products at prices that are often several thousand percent above the free market price, they provide drug companies an enormous incentive to mislead the public about the safety and effectiveness of their drugs. The damage caused as a result of these misrepresentations is likely comparable to the amount of research financed through patent monopolies.

 

Typos corrected, thanks to Robert Salzberg.

Yes folks, hold on to your hats, Thomas Friedman supports the Trans-Pacific Partnership (TPP). Friedman fans will recall his famous comment:

"I was speaking out in Minnesota — my hometown, in fact — and a guy stood up in the audience, said, 'Mr. Friedman, is there any free trade agreement you’d oppose?' I said, 'No, absolutely not.' I said, 'You know what, sir? I wrote a column supporting the CAFTA, the Caribbean Free Trade initiative. I didn’t even know what was in it. I just knew two words: free trade.'"

Actually, Friedman does provide useful insight into the issue when he cites President Obama referring to the TPP as a "effort to expand trade on our terms." The key question is who is "our." In these remarks President Obama made a point of mentioning the effort to increase the prices U.S. drug companies get for their drugs. That's great news for people who own lots of stock in Merck or Pfizer, but not good news for anyone else. In addition to paying more for drugs, workers in the United States are likely to see their exports crowded out by higher royalty payments to Merck and Pfizer. This form of protectionism is likely to be a drag on growth and jobs.

In addition, the Obama administration decided not to include rules on currency values. This could have helped to address the problem of an over-valued dollar. This is the main cause of the U.S. trade deficit which remains an enormous drag on growth and obstacle to full employment. If the "our" referred to workers in the United States, currency rules likely would have been at the top of the list of items to be included.

And the investor-state dispute settlement tribunals, which will allow corporations to sue governments in the U.S. and elsewhere, is also a big triumph for corporate interests. These extra-judicial tribunals could penalize any level of government for consumer, safety, labor, or environmental regulations that are deemed harmful to foreign investors.

So Friedman may be right about "our terms," but his "our" is likely not the "our" that includes most people in this country or the world.

Recent comments

  • Guest - John Wright

    This is a reposting/cleanup of a comment I made to the incorrect post. It is probably time to re-post the link to "Thomas Freetrademan" from December 19, 2001 https://prospect.org/article/datsun-and-shoe-tree Note, this is credited to Nicholas Confessore of the NYTimes, so employees of the Times...
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  • Guest - John Wright

    I meant to post a comment to the Tom Friedman commentary but it showed up in the previous "Trans-Pacific Partnership is Secret, not "Secret" " column.
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  • Guest - Dave

    We know Thomas is a wanker, and we know that Thomas is one of Obama's favorite columnists on trade and economics. Obama and Friedman share the top title of the long defunct, "Worst economist in the world" contest. He's suggesting a policy that increases the divide between rich and poor at the same...
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That is an important correction to the David Ignatius' Washington Post column touting the Trans-Pacific Partnership (TPP) as a way to revive Japan's economy. Unlike President Bush, who published a draft text of the Free Trade of the Americas Agreement before requesting fast-track authority, President Obama has chosen to keep the draft text of the TPP secret. This is not an allegation of TPP critics, it is a fact in the world.

Another point worth mentioning in this context is that when President Obama argued that he was pushing the TPP to help U.S. drug companies, he was effectively saying that he was hurting U.S. workers. There are two reasons this is likely to be the case. Several provisions of the deal will likely raise drug prices in the United States, for example by extending the period of data exclusivity for biosimiliar drugs (12 years in the leaked draft chapter, versus 7 years now). A decision by a future Congress to have Medicare negotiate drug prices may also be a violation of rules that effectively limit countries' ability to put in place new price controls.

The other issue is that the more money that foreigners pay Pfizer, Merck and other U.S. drug companies for their patents, the less money they will have to buy airplanes and other items produced in the United States. Unless a worker in the United States owns stock in a drug company, they would be better of if foreigners paid less for drugs rather than more. (The drug companies do employ workers, but the marginal increase in employment from higher company profits is likely to be very small.)

In terms of the effort to revive Japan's economy, it is worth noting that OECD reports that Japan's employment to population ratio among people between the ages of 16-64 has risen by 3.1 percentage points since 2012. The ratio in the United States has only increased by 1.4 percentage points over the same period.

Recent comments

  • Guest - John Wright

    It is probably time to re-post the link to "Thomas Freetrademan" from December 19, 2001 https://prospect.org/article/datsun-and-shoe-tree Note, this is credited to Nicholas Confessore of the NyTimes, so employees of the Times do make light of TF. And TF makes the usual genuflection before the Alt...
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  • Guest - Bertie

    Here's what they're doing about "transparency" in Europe. http://www.euractiv.com/sections/trade-society/us-open-ttip-reading-rooms-across-eu-314175 The US government will open “reading rooms” in its embassies across the European Union, so that national politicians can read secret documents relate...
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  • The TPP is SO GOOD for us, Our President can't let us know what's in it. We'd be too happy! / sarcasm ~
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That is the only possible conclusion that an informed reader can reach. After all, we all know that Representative Ryan is a huge champion of fiscal responsibility, balanced budgets, and sound money. We also remember how he denounced Ben Bernanke and the Fed for their policy of quantitative easing. He issued strong warnings about the debasement of the currency and hyperinflation.

There is no way that this celebrated fiscal hawk and sound money proponent could praise a country for running large deficits and printing money like there is no tomorrow. But there it is on the Washington Post's oped page, someone claiming to be Paul Ryan is praising Japan for having a large stimulus and the fact that they "cranked up the printing presses" in reference to the policy of quantitative easing by Japan's central bank.

For those keeping score, Japan's ratio of net debt to GDP is more than 50 percent higher than in the United States. The ratio of gross debt to GDP is more than twice as high. The I.M.F. projects that Japan's deficit for 2015 will be 6.2 percent of GDP, which would be more than $1.1 trillion in the United States.

To say this applause for Japan's economic policy is inconsistent with Ryan's past pronouncements on economic policy would be the understatement of the century. If we had a serious press corps in the United States, reporters would be pressing Ryan over this colossal flip flop. Of course Ryan wrote this column in the hope of advancing the Trans-Pacific Partnership, and we know that the media have a policy that inanities in the advancement of trade pacts are not subject to scrutiny.

Recent comments

  • Guest - quantity63

    Once again, the radical liberal press (whatever the hell that means) is persecuting a good, honest, godly feller who is just trying to making a living by using his position as "representative of the people" to advance the interests of the oligarchy.
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  • Guest - djb

    abe is great!!!, he is a real leader!! he is a once in a generation leader who can prove his worth by passing tpp "But the structural reform Abe promised has been slow to arrive. And no surprise, the lack of reform has meant a lack of results. Over the past six years, the United States has learned ...
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