The NYT gave us a bit of the old "he said, she said" in an article reporting on the Obama administration's latest push for reauthorizing the Export-Import Bank. It told readers:
"While opponents contend that most of the bank’s money benefits corporate giants like Boeing, General Electric and Caterpillar, the small-business owners invited to the White House underscored supporters’ counterargument that most of the bank’s beneficiaries are smaller companies. Mr. Obama’s guests included the owners of Love & Quiches Gourmet in New York, Ferra Coffee in Texas and Bob’s Red Mill in Oregon."
Of course the opponents are right. The largest beneficiaries include companies like Boeing, Caterpillar and other huge companies. In a typical year the fifteen largest beneficiaries will get more than 85 percent of the bank's loans or guarantees and often more than 95 percent.
If President Obama and other supporters of the bank were actually concerned about the smaller companies who are the bulk of the bank's beneficiaries it could presumably propose that the bank be reauthorized with a cap of something like $10-20 million on loans per beneficiary. This would ensure that the small companies who were President Obama's guests could still get their loans, without giving taxpayer handouts to some of the country's biggest companies.
The article concludes by telling readers:
"'The Export-Import Bank makes money for the U.S. government,' Mr. Obama said, referring to the loan repayments and proceeds from borrowers. 'This is not a situation in which taxpayers are subsidizing these companies.'
In a fully employed economy (i.e. one in which the Federal Reserve Board is raising interest rates to slow the pace of job creation and economic growth) a below market interest rate loan that is issued or guaranteed by the Export-Import Bank is pulling capital away from other uses. This means that companies not favored by the Export-Import Bank will pay higher interest rates on their loans because of the loans supported by the Export-Import Bank. This is in effect a tax on other borrowers to support the companies getting loans from the Export-Import Bank.
Every economist in the Obama administration knows this to be true. It would have been helpful to point this fact out to readers who might otherwise believe that the Export-Import Bank has free money as President Obama appears to be claiming.
You've got to admire those Silicon Valley boys, they hire one of President Obama's top political advisers as a lobbyist, put out misleading studies on drivers' pay, and now they are trying to get their drivers to lobby to reduce their own pay.
The context for the latter was their urging of their "partners" to come to a rally against New York Mayor Bill de Blasio's decision to freeze the number of new cars for hire that Uber and other Internet based companies can put on the city's streets. De Blasio was ostensibly putting in place this freeze to reduce congestion.
Whether or not the freeze is justified, one thing that is straightforward is that it would act to protect the earnings of existing Uber drivers in the same way that it would protect the earnings of the incumbent taxi industry. With fewer taxis on the road, there will be more passengers for each driver. This is likely to make an especially large difference for Uber drivers since its surge pricing model will lead to automatic fare increases when cars are in short supply.
This means that Uber was effectively asking these drivers to demand that the city cut their pay. I guess we'll see if it works, maybe it really is a new economy.
This one needs a really big "oy." The lead headline of the Huffington Post tells readers that "child poverty higher now than great recession." This is based on an AP story headlined "more U.S. children are living in poverty than during the great recession." This article is in turn based on the annual Kids Count Data Book that is produced by the Annie E. Casey Foundation.
It turns out that this is not quite the story as the second paragraph of the article indicates:
"Twenty-two percent of American children were living in poverty in 2013 compared with 18 percent in 2008, according to the latest Kids Count Data Book, with poverty rates nearly double among African-Americans and American Indians and problems most severe in South and Southwest."
Note the comparison is with 2008, the beginning of the recession, not the trough of the recession in 2010. By any measure the recovery from this recession has been slow and weak. (It is hard to recover from recessions caused by bursting asset bubbles.)
Almost eight years after its onset we would still need another three million jobs to restore the prime age employment rate to its pre-crisis level. And median wages are still below their pre-crisis level. But the child poverty rate is at least moving in the right direction in the recovery, even if way too slowly. And even the pre-recession level was ridiculously high. Anyhow, the real story is bad enough, it's not necessary to exaggerate.
Those folks at the Wall Street Journal are really turning reality on its head. Today it ran a column by Robert Ingram, a former CEO of Glaxo Wellcome, complaining about efforts to pass "transparency" legislation in Massachusetts, New York, and a number of other states. This legislation would require drug companies to report their profits on certain expensive drugs as well as government funding that contributed to their development.
Ingram sees such laws as a prelude to price controls. He then warns readers:
"There is no surer way to bring pharmaceutical innovation to a halt in the U.S. than letting governments decide how much companies can charge for their products or harassing them into lower prices. It also represents a fundamental misunderstanding of how pharmaceutical research works. Scientific discoveries involve trying and failing, learning from those failures and trying again and again, often for years."
Ingram bizarrely touts the "flowing pipeline of new wonder drugs spurred by a free market," which he warns will be stopped by "government price controls." This juxtaposition is bizarre, because patent monopolies are 180 degrees at odds with the free market. These monopolies are a government policy to provide incentives for innovation. Mr. Ingram obviously likes this policy, but that doesn't make it the free market.
Of course there are other ways that the government can finance research and development, such as paying for it directly. It already does this to a large extent. At the encouragement of the pharmaceutical industry it spends more than $30 billion a year on mostly basic research conducted through the National Institutes of Health. It could double or triple the amount of direct funding (which could be contracted with private firms like Glaxo Wellcome) with the condition that all findings are placed in the public domain.
This would eliminate all the distortions associated with patent monopolies, such as patent-protected prices that are can be more than one hundred times as much as the free market price. This would eliminate all the ethical dilemmas about whether the government or private insurers should pay for expensive drugs like Sovaldi, since the drugs would be cheap. It would also eliminate the incentive to mislead doctors and the public about the safety and effectiveness of drugs in order to benefit from monopoly profits.
It would be great to have an honest debate about the best way to finance drug research. The first step is to stop conflating government granted patent monopolies with the free market.
One important point that Ingram gets wrong in this piece is his claim that, "Prescription drugs account for only about 10% of U.S. health-care spending, according to the Centers for Disease Control and Prevention. This percentage has not changed since 1960 and is projected to remain the same for the next decade."
While spending on drugs is roughly the same share of health care spending as it was in 1960, this is a sharp recovery from the level of the early 1980s, when it was close to 5 percent. Furthermore, spending on pharmaceuticals rose by more than 10.0 percent in 2014, which means that currently they are growing rapidly as a share of total health care spending.
That is the conclusion that readers might draw from a piece by Neil Irwin in which he interviews Alexander Stubb, the Finnish finance minister, on the merits of the euro for Finland. Finland is often cited by euro critics because its economy is mired in recession even though, unlike Greece, it has always maintained low budget deficits and its government is not corrupt and highly efficient. The problem cited by critics (including me) is that the being in the euro prevent Finland from devaluing its currency to regain competitiveness.
Stubb dismisses the current weakness as a rough patch:
"You have to look at a longer time horizon. In his telling, the integration with Western Europe — of which the euro currency is a crucial element — deepened trade and diplomatic relations, making Finland both more powerful on the world stage and its industries better connected to the rest of the global economy. That made its people richer.
"'In the early 1990s in the middle of a Finnish banking crisis and economic depression, we were a top 30 country in the world in per capita G.D.P.,' he said. 'Then we opened up; we became members of the E.U. Now we’re always up there in G.D.P. per capita or whatever other measure you look at with Sweden, Denmark, Australia and Canada.'"
Actually, if we look at a slightly longer time horizon, we would find that Finland was actually very close in per capita income to Sweden, Germany, and other rich countries in the 1980s before the collapse of the Soviet Union in the early 1990s.
Source: International Monetary Fund.
Before the collapse of the Soviet Union, Finland's per capita GDP was roughly 95 percent of the levels in Germany and Sweden. It fell sharply in the early 1990s but was already regaining ground rapidly by the mid-1990s, before the establishment of the euro. Since the recession Finland's per capita GDP has fallen relative to both countries. It is now lower relative to Sweden, which is not in the euro, than it was at any point in the nineties, following the collapse of the Soviet Union.
Note: An earlier verison had a graph without years on the axis, as several comments notes, this has been corrected.
Uber is once again dipping its toe into the world of innovative social science. Folks may recall that earlier this year it commissioned Alan Krueger, one of the country’s leading labor economists and formerly President Obama’s chief economist, to do an analysis of Uber drivers’ pay. While Uber shared data with Kreuger on drivers’ gross receipts, it did not share data on miles driven. This meant that Krueger was left comparing the gross receipts of its drivers with the net income of cab drivers in the incumbent taxi industry. The gross receipts do not deduct costs borne by the driver, such as gas, depreciation on the car, and insurance.
Not surprisingly, the gross receipts of Uber drivers were higher than the net income of drivers for the incumbent tax industry. It’s not clear if this comparison would hold up if Krueger had done an apples to apples comparison where he deducted expenses for Uber drivers, but he couldn’t do this, since Uber didn’t give him the miles data.
In keeping with this approach to social science Uber has commissioned a new study that purports to show that it provides better service to minorities than the incumbent taxi industry. The test was to have someone order an Uber car in a heavily minority community on their smartphone, and compare the time it takes to get their pickup with the time it takes someone calling for a taxi from an incumbent company. Uber found that its service was markedly faster than the service of the incumbent industry.
Before anyone celebrates over this finding that Uber has eliminated or at least reduced discrimination in taxi service, a bit of thinking is required. To order an Uber car it is necessary to have both a smart phone and a credit card. A substantial portion of the low income and minority populations lack one or the other.
The Uber study effectively asked the question of whether Uber provides better service to a screened portion of the minority community, using a screening mechanism that is likely to weed out the poorer portion of this community. Furthermore, Uber knew of this screening, since it is how their cars are summoned. The incumbent taxi companies in its study did not know of the screening.
If we think that discrimination against minorities is a mixture of race, ethnicity, and class, the Uber study effectively used a screening mechanism that largely eliminated the class aspect of the matter, at least for the Uber drivers. In this context, the result is not very surprising.
CEPR is proposing that Uber finance a study where we compare the amount of time it takes people in minority communities to get an Uber car or a taxi ordered from an incumbent service, where the passenger does not have a credit card and orders over the phone. It will be interesting to see what we find.
"You need to rebalance, but competent policymakers can balance the economy up, near full employment, rather than balancing the economy down. And from late 2005 to the end of 2007 the balancing-up process was put in motion and, in fact, 3/4 accomplished.
"There is no reason why moving three million workers from pounding nails in Nevada and support occupations to making exports, building infrastructure, and serving as home-health aides and barefoot doctors needs to be associated with a lost decade and, apparently, permanently reduced employment. A lower value of the currency can boost exports. Loan guarantees and burden-sharing can get state governments into the infrastructure business. A surtax on the rich can employ a lot of home health aides and barefoot doctors. If these roads were foreclosed, they were foreclosed by the laws of American politics, not the laws of economics.
"And the lack of successful and rapid rebalancing–the weak post-2001 recovery–was also, overwhelmingly, a matter of choice: to use tax cuts rather than infrastructure and other social capital-building forms of spending on the government side, and to direct the dollar earnings of foreigners selling us imports into funding house construction rather than buying exports on the private-spending side."
I would agree with this mostly, but say that it misses the point. (I disagree on the 3/4 accomplished part in the first paragraph, but that is secondary.) We do not have a political environment in which we can run deficits of the size needed to correct large imbalances, nor can we address chronic trade deficits by getting the dollar down. For this reason, bubbles are really bad news because when (not if) they burst we lack the ability to address the resulting shortfall in demand.
This is really simply stuff and that is a big problem in dealing with it. Economists want things to be difficult as do the liberal billionaires who fund economic research and policy analysis. Rather than trying to figure out a way to try to make it clear that we have to get the government to spend money or to drive down the value of the dollar, we will see tens of millions spent on developing new economic theory. Oh well, at least it will help to stimulate the economy.
That's what millions of readers are asking after reading a NYT article on the fallout from Germany's hardline in negotiations with Greece over its debt. The piece noted the lukewarm support given to Greece from France and Italy. It told readers:
"France and Italy struggle with some of the same problems as Greece: low growth, youth unemployment, rigid labor markets, bloated state bureaucracies and social welfare systems too generous now, when people live longer, to be supported by current revenue."
It's hard to see the basis for this assertion. According to the I.M.F., France has a structural budget deficit of 2.0 percent of GDP, Italy's structural deficit is just 0.3 percent of GDP. Deficits of this size could be sustained indefinitely.
Both countries are running larger actual deficits at present because their economies are operating below full employment, even by the I.M.F.'s measure. (This measure is based on averaging recent output levels, so that a prolonged downturn will imply a lower level of potential output.) This suggests that the main source of budget problems for France and Italy is the contractionary fiscal policies being imposed on the euro zone by Germany and the European Central Bank, not excessive welfare state spending.
The Washington Post had a major piece describing what it called a "global competition" by oil producers to stay in business even as prices remain low. The piece seems to imply that the strategy of Saudi Arabia in this competition is to pump enough oil to keep prices low, thereby driving out competitors. They would then raise their prices once the competition is gone.
This strategy does not make sense. A prolonged period of low prices may push some of their competitors into bankruptcy, like Continental Resources, the fracking company at the center of the piece, but the oil would still be there. This means that if prices rose enough to make shale oil profitable again, then new competitors will buy up the land and the equipment of the bankrupt companies and start producing oil again. While this process will take some time, it is at most a matter of a couple of years and quite possibly considerably less.
Given the current situation in the oil market, Saudi Arabia can likely have a large market share or can have high prices. There is not a plausible scenario in which it can have both.
Just after announcing his candidacy for the Republican presidential nomination Scott Walker denounced the left for not having any real ideas for workers. According to Walker:
"They've just got really lame ideas, things like the minimum wage. Instead of focusing on that, we need to talk about how we give people the skills and the education, the qualifications they need to take on careers that pay far more than minimum wage."
In his Washington Post "The Fix" column, Philip Bump largely endorsed this perspective.
"If the purpose the minimum wage is meant to serve is to lift people out of poverty, Pew points out that Walker's right: Most minimum wages aren't high enough to do that. The minimum wage is indeed lame, in the sense that it's relatively impotent. Earning a minimum wage in 2014 was enough for a single person not to live in poverty, but not anyone with a family -- and not everywhere across the country."
There are a few points worth noting here. First, "the left" has many ideas for helping workers other than just the minimum wage. For example, many on the left have pushed for a full employment policy, which would mean having a Federal Reserve Board policy that allows the unemployment rate to continue to fall until there is clear evidence of inflation rather than preemptively raising interest rates to slow growth. It would also mean having trade policies designed to reduce the trade deficit (i.e. a lower valued dollar) which would provide a strong boost to jobs. It would also mean spending on infrastructure and education, which would also help to create jobs and have long-term growth benefits.
The left also favors policies that allow workers who want to be represented by unions to organize. This has a well known impact on wages, especially for less educated workers.
As far the denunciation of the minimum wage as "lame," this is a policy that could put thousands of dollars a year into the pockets of low wage workers. For arithmetic fans, a three dollar an hour increase in the minimum wage would mean $6,000 a year for a full year worker. Since Bump seems to prefer per household measures to per worker measures, if a household has two workers earning near the minimum wage for a total of 3000 hours a year, a three dollar increase would imply $9,000 in additional income. It's unlikely these people would think of the minimum wage as lame.
The last point is that Bump apparently doesn't realize that Walker's focus on skills and education are not new and are also shared by the left. The left has long led the way in pushing for public support for improved education. Even now, President Obama has put proposals forward for universal pre-K education and reducing the cost of college. Unions have not only supported education in the public sector, they routinely require training and upskilling of workers in their contracts.
If Walker has some new ideas on skills and education, then it would be worth hearing them, but Bump gives no indication that Walker did anything other than say the words as a way to denounce the left. In short, if Bump had more knowledge about history and current politics he would not join Walker in his name calling.
It is worth noting that as governor of Wisconsin, Walker has targeted unions, trying to weaken them in both the public and private sectors. He has also attacked the University of Wisconsin, one of the top public unversities in the country. Insofar as he is committed to a path of upward mobility for workers, these actions go in the opposite direction.
As they say at the Post, don't let the data bother you, or so it would seem with yet another article bemoaning the lack of consumption. The proximate cause was a Commerce Department report showing weaker retail sales in June after a big jump in May. The piece explained to readers:
"The figures suggest that Americans are still reluctant to spend freely, possibly restrained by memories of the Great Recession.
"'Household caution still appears to be holding back a more rapid pace of spending growth,' Michael Feroli, an economist at JPMorgan Chase, said in a note to clients."
Here's the slightly longer term picture.
For the record, there is no economist who wants to argue that the consumption share of GDP should continue to rise. The logical implication of such an argument is that investment, government spending, and net exports would continue to decline as a share of GDP. So we should look at levels, not changes here. And the level is actually higher than it was before consumers were scarred by memories of the Great Recession.
Btw, the folks who think that people need to save more for retirement, which include me, think that consumption is too high relative to income, not too low. That is definitional. Savings are the income that is not consumed.
In a NYT column Steve Rattner argues that the conditions being imposed on Greece by Germany as a condition of its bailout are for its own good. While Greece undoubtedly needs to reform its economy in many ways, Rattner ignores the extent to which austerity, both within the country and the euro zone as a whole, have worsened Greece's economy. This is both true in a macro sense, in that cuts in government spending and increased taxes reduce GDP and employment, but also the resulting depression worsens other problems, like the public pension system.
Rattner includes a table showing that pensions in Greece are 16.2 percent of GDP, the highest in Europe. However pension spending as a share of GDP has risen sharply as a result of the downturn. In 2007, according to the OECD pension spending in Greece was 12.1 percent of GDP, less than France's 12.5 percent and Italy's 14.0 percent. In fact, Greece's pension spending was not very much larger as a share of GDP than Germany's 10.6 percent.
Since GDP has contracted by more than 25 percent, the ratio of pension spending to GDP would rise by roughly a third if it had stayed constant. (Pensions have actually been cut sharply under previous austerity programs.) The surge in unemployment, now over 25 percent, has also raised pension costs. Many people who would prefer to be working instead retired early and started collecting their pensions because they couldn't find jobs.
This is a direct result of the austerity that Germany has imposed on Greece and one reason why the Greeks are not as appreciative of Germany as Rattner thinks they should be.
In her WaPo column Catherine Rampell points to the sharp decline in labor force participation rates for prime age workers (ages 25-54) in recent years and looks to the remedies proposed by Jeb Bush and Hillary Clinton. Remarkably neither Rampell nor the candidates discuss the role of the Federal Reserve Board.
There is not much about the drop in labor force participation that is very surprising. It goes along with a weak labor market. When people can't find a job after enough months or years of looking, they stop trying. Here's what the picture looks like over the last two decades.
While the story would be somewhat different for men and women, we see that the labor force participation rate (LFPR) rose from the mid-1990s to the late 1990s during the strong labor market of those years. It fell with the 2001 recession and the weak recovery that followed. (We continued to lose jobs until late 2003 and didn't get back the jobs lost in the downturn until early 2005.) After the labor market started to recover, the LFPR started to rise again, but then fell sharply with the downturn following the collapse of the housing bubble.
It's great for politicians to round up their favorite usual suspects in trying to explain why so many prime age workers no longer feel like working, but to those not on the campaign payrolls, it seems pretty obvious. We don't have enough demand in the economy and therefore we don't have jobs.
This is where the Fed comes in. If the economy were to continue to create 200,000 plus jobs a month, then we can be pretty confident that the LFPR will rise again as it did in the late 1990s. However if the Fed is determined not to allow the unemployment rate to fall below some floor like 5.2 percent, then it will prevent the economy from creating large numbers of jobs. In this case, the LFPR will not rise much regardless of whether we follow the prescriptions of Bush or Clinton, since people will not look for jobs that are not there indefinitely.
It is worth noting in this respect that in the 1990s, the vast majority of economists, including Janet Yellen who was then a member of Fed's Board of Governors, did not want the Fed to allow the unemployment rate to fall much below 6.0 percent. It was only because then Chair Alan Greenspan was not an orthodox economist that were able to see that the unemployment rate could in fact fall much lower without triggering inflation. (The unemployment rate averaged 4.0 percent in 2000.)
It should seem obvious that Fed's policy will play a major role in determining the LFPR going forward. It is bizarre that it does not seem to be getting into the debate.
We've been hearing a lot about pensions in Greece lately. These have been a major target of the creditors in their negotiations with Greece. According to a recent article in the New York Times, 60 percent of Greeks receive a pension of less than $9,500 a year. An article in today's Washington Post may lead people to ask what sort of pensions the top officials at the European Central Bank (ECB) get.
The article briefly recounts how Greece and other crisis countries got themselves into difficulties. The piece includes this strange line:
"The tipping point, though, came in 2010, when markets realized how much these governments now needed to borrow to make up for their bad economies."
Actually it was not so much a market realization as a statement by the ECB that it was not committed to standing behind the sovereign debt of euro zone members. This led to the sudden realization that the bonds issued by these countries could default.
The fact that serious imbalances were building within the euro zone should not have been difficult for numerate people to recognize. Most of the crisis countries had persistently large current account deficits. (Italy is the major exception.) Portugal's peaked at 9.5 percent of GDP in 2008, Spain's at 10.5 percent, and Greece's at 13.9 percent. These are the sorts of current account deficits that one would expect to see in a fast growing developing country like China (of yeah, they have a large trade surplus), not relatively wealthy countries that are not growing especially rapidly.
This should have led a bank that had the responsibility to maintain financial stability to take steps to try to reverse these imbalances, for example, by dampening the flows of credit that were sustaining it. However the ECB largely ignored the imbalances. When the first ECB president, Jean-Claude Trichet retired in the middle of the crisis in 2011, he patted himself on the back for keeping inflation under the bank's 2.0 percent target.
Since it is apparently possible to take away the pensions that Greek people spent their life working for, some people may want to know if its possible to take back the much higher pensions earned by top officials at the ECB.
Would a doctor work for Uber? Probably not, but if it turned out there were no jobs for doctors and the only way she could support her family was to work for Uber, then a doctor may work for Uber. That is an important point left out of an interesting article on growing economic insecurity for workers.
A big part of this story is the decision by the Federal Reserve Board to raise interest rates to deliberately limit the number of jobs in the economy. This disproportionately hits less educated workers, who are the first ones to be fired when the economy slows. If jobs were plentiful then employers would be forced to offer higher wages and more job security in order to attract the workers they need. The Fed's policy to keep the labor market weak in the last three and a half decades has been a major factor in the deterioration of job quality.
It is also bizarre that the article cited a study by Michael Greenstone and Adam Looney to support the case that, controlling for education, men have been seeing declines in wages for forty years. The Economic Policy Institute had been documenting this decline in the State of Working America for decades.
Financial Transactions Taxes
First, one of big five predictions of things to come seems to be happening. The idea of a financial transactions tax (FTT) has made it into polite circles. Two of the declared presidential candidates openly support it, with long-time proponent Bernie Sanders leading the way. The Tax Policy Center of the Brookings Institution and the Urban Institute did an analysis showing that a tax could raise more than $50 billion a year and would be highly progressive. And Representative Chris Van Hollen, a member of the Democratic Party leadership in the House, proposed an economic plan that had a FTT as its financing mechanism.
The financial industry is of course hugely powerful. The cost of the tax to the industry swamps the cost of Dodd-Frank and any other financial reform measures currently being discussed. For this reason, the Wall Street folks will do almost anything to stop a FTT, so we are very far from having a bill passed into law or even being seriously debated. But we have made enormous progress. The FTT is no longer treated as a nutty idea.
The Death of the Young Invincibles and the Affordable Care Act
There are a few other areas where I will take some credit. First, I helped to kill the young invincibles. This is the idea that healthy “young” people are somehow essential for the smooth workings of the health care exchanges created by the Affordable Care Act. It is essential that healthy people sign up for the exchanges, but it doesn’t matter that they are young. In fact, it is actually better for the system to get an older healthy person since they will pay three times as much on average in premiums as a healthy young person.
Reporters seem to have come to understand this basic point. (A Kaiser Family Foundation study was very helpful.) There is much less talk of the need for young people to sign up for the exchanges.
The End of “Free Trade”
In another area, reporting on trade agreements seems to be improving as it is less common to hear reports refer to these deals as “free trade” agreements. There appears to be a growing recognition among reporters that these deals are primarily about putting in place a new regulatory structure. (In fact, the goal is a business friendly regulatory structure, but we’ll leave that one aside for now.) For the most part these regulations have little to do with trade and some quite explicitly involve more protection, such as patent and copyright protection.
That's not quite how the paper put it, but it is in fact what it reported. The story according to the headline is "bipartisan partnership produces a health bill that passes house." According to the article the bill instructs the Food and Drug Administration (FDA) to use information from doctors' practices and drug registries in determining whether to approve new drugs rather than just relying on clinical trials. The problem with this approach is that the industry often pays doctors to say good things about their drugs. It would difficult for the FDA to know for certain that the information it is relying upon was not paid for by the company seeking approval of a drug.
The piece also includes the interesting tidbit that the cost of additional funding for the FDA, another provision in the bill, would be covered by selling off some of the country's petroleum reserve. This shows the remarkable cynicism of the deficit hawks in Congress.
Selling oil reserves is simply a shuffling of assets, it is not a way of either improving the government's financial situation or reducing the drain on the economy from the budget deficit. It's analogous to a household pawning its silverware to avoid having to borrow. There is no economic reason to prefer selling off this asset to adding debt, it is just a silly ritual that apparently is taken seriously in Washington policy circles these days.
That's what a NYT article seemed to be telling people. The center of the story is the fact that it appears that La Grange, Ill (population 15,550) was using grossly out of date mortality tables in calculating the pension obligations for its police and fire fighters. Without directly saying as much, the piece implies that this is a common problem with much larger pension funds and that such practices are the basis for the underfunding of many public sector pensions.
In fact, the main reason that some public sector funds face severe shortfalls is that politicians like Richard M. Daley and Chris Christie chose not to make required contributions. This is a serious problem since the country's elites apparently praise such behavior. Since ending his last term as mayor of Chicago, Mr. Daley has been appointed a senior distinguished fellow at the University of Chicago, given a seat on the board of Coca Cola, and made a principal of the investment firm Tur Partners LLC. Chris Christie is running for the Republican presidential nomination. Reporters covering his campaign rarely mention his failure to make required pension contributions, including going back an explicit commitment to state employee unions, as a liability. If the people most directly responsible for the underfunding of pensions get rewarded, then it should not be surprising that we do have some cases of major underfunding.
Bizarrely, at one point the piece suggests that the public might look to actuaries as the main target for the underfunding of public sector pensions:
"Retirees are counting on the money promised to them. Taxpayers are in no mood to bail out troubled pension funds. Some are looking for scapegoats.
"'Actuaries make a juicy target,' said Mary Pat Campbell, an actuary who responded to the board’s call for comments."
This is bizarre since Wall Street is the far more obvious target. The recession following the collapse of the housing bubble is likely to cost the country more than $10 trillion in lost output. This both directly contributed to pension shortfalls, by making it more difficult for governments to make required contributions to pensions during the recession years, and indirectly by reducing the revenue base of many governments on an ongoing basis. It is rather strange that taxpayers should look to target actuaries, most of whom make relatively modest salaries, rather than big Wall Street players who often make tens of millions or even hundreds of millions of dollars a year.
The media seem to think it's a really huge deal that investors in China's stock market have not made any money since February. The Washington Post told readers that it could even threaten the regime's legitimacy in a front page story headlined, "stock slide sandbags China's leaders."
The article begins:
"For decades, the Chinese Communist Party has been able to keep control of democracy protests, dissidents, the legal system and the military, but it is now facing an even more intractable foe: a plummeting stock market.
"Invisible and fast-paced, mutinous market forces have defied the party-led government’s efforts to arrest the month-long slide in Chinese stock markets. If this continues, the slump in stock prices could slow the economy and undermine faith in the party’s leadership and power, experts on China and economics say."
This is an interesting assessment. Those of us who are less expert on China than experts consulted for this article might wonder how the regime managed to survive a stock market crash between October of 2007 and October of 2008 in which the market lost over 60 percent of its value. This is more than twice as large a decline as the market has experienced in the current downturn. In spite of this plunge, China's economy grew more than 9.0 percent in 2009, although it did require a substantial government stimulus program.
The piece also contains the strange paragraph:
"For decades, some enthusiasts have argued that China was the exception to the rule: that its farsighted leaders could make the transition to a more open economy while avoiding the debt trap that every other so-called miracle economy had fallen into since World War II. That idea could be the biggest casualty of the crash, both at home and abroad."
It's not clear what the article means in asserting that every other miracle economy has fallen into a debt trap. South Korea and Taiwan have experienced rapid and sustained growth for more than five decades, with only brief periods of recessions. As a result, South Korea now has a per capita income that is roughly 90 percent of the per capita income in the United Kingdom. Taiwan's income is more than 15 percent higher. Are these countries not supposed to be "so-called miracle economies" or is this the record of economies mired in a "debt-trap?"
China's stock market rose 5.8 percent today.
Thomas Edsall had a very good piece on divisions in the Democratic Party over trade policy in the NYT this morning. The piece cites a large body of academic research pointing out that U.S. trade policy has played a large role in destroying manufacturing jobs and redistributing income upwards. It notes that this is the basis of the opposition of unions to trade policy, which has caused the overwhelming majority of Democrats in Congress to oppose the Trans-Pacific Partnership (TPP).
However the piece errors in referring to the TPP and U.S. trade policy in general as "free trade." It is absolutely not free trade.
One of the main goals of the TPP is to increase patent and copyright protection. That is protection as in protectionism. These government granted monopolies can increase the price of drugs and other protected items by several thousand percent. This has the same economic impact and leads to the same distortions as tariffs of several thousand percent. Markets do not care if the price of a product is raised due to a tariff or a government granted patent monopoly, it leads to the same distortions.
These trade deals have also done almost nothing to remove the protectionist barriers that make it difficult for foreigners to train to become doctors, dentists, or other professionals and work in the United States. The reasons that these highly paid professions have not seen their salaries hurt by trade is due to the fact that the government has protected them, not that there is some inherent impossibility in Indians training to U.S. standards and becoming doctors in the United States.
Also, a free trade policy would mean pushing for freely floating currencies. This has clearly not been a priority for the Obama administration as our trading partners, most importantly China, have accumulated trillions of dollars of foreign reserves in order to inflate the value of the dollar against their currencies, thereby supporting their large trade surpluses. The Obama administration chose to not even include currency as a topic in the TPP.
It is important to point out that our trade policy is not free trade first because it might lead some to believe that our trade policy involves pursuing some great economic principle. It doesn't. It's about redistributing money to the rich.
Second, it is important because at this point the biggest gains for "everyday people" will actually come from more free trade, not less. It's not realistic to think that the United States will erect tariffs or other barriers that will block the import of manufactured goods from Mexico, China, and other developing countries. It is reasonably to think that we might push for more market based exchange rates, less costly patent and copyright protection, and the elimination of unnecessary professional restrictions that prevent us from having lower cost health care, legal services, and other professional services.
With the prospect of Grexit increasing, there have been numerous news stories pronouncing this as a disaster for Greece. There have also been many accounts telling us that Greece will not have the same positive prospects as Argentina.
As Paul Krugman reminds us Argentina recovered fairly quickly after it broke the link between its currency and the dollar. As he points out, the real disaster was in the period leading up to the break.
While many people have emphasized ways in which Argentina has advantages in this break relative to Greece, that was not a general perception at the time. The general story back at the end of 2001 and 2002 was that Argentina faced disaster.
For example, on January 1, 2002 we got this NYT piece headlined, "Argentina drifts leaderless as economic collapse looms."
Here are the first three paragraphs:
"Without a president, a cabinet or a functioning government, Argentina drifted rudderless today, as people waited for the Peronist party to resolve its bitter internal differences over who should run the country and for how long.
"The surprise resignation of the interim president, Adolfo Rodríguez Saá, late Sunday means that by Tuesday Argentina is likely to have its fifth leader in less than two weeks, counting temporary caretakers.
"But with bank accounts partly frozen, a moratorium on payment of the foreign debt and political leaders clearly at a loss for what to do, the possibility of an economic collapse loomed as an even larger concern. All day long, nervous depositors lined up outside banks in hopes of withdrawing some of their money."
There was another dire piece on Janauary 4th after a new government had been installed. Among other things, this piece told readers:
"Though most Argentines earn their salaries in pesos, an estimated 80 percent of all debts here were contracted in dollars. That raises the specter of widespread bankruptcies if ordinary Argentines are suddenly forced to pay 30 or 40 percent more pesos to meet their obligations."
Yes, Argentina did have its own currency before the devaluation, but it faced the same sort of debt problem that Greece will face with many debts denominated in a currency that will suddenly be worth much more relative to people's pay checks.
Anyhow, this is not to claim that a break with the euro will be easy or that Greece will necessarily do as well as Argentina in the aftermath. But it is important to remember that many people were predicting absolute disaster for Argentina at the time of its default and they were proven wrong. Perhaps these folks' judgements about economics have improved in the last thirteen years, but I wouldn't bet on it.