For some reason major news outlets like the NYT and WaPo chose not to report on the Federal Reserve Board's release of data on industrial output for April. This release showed that manufacturing output was flat in April leaving output roughly half a percentage point below the November level. Meanwhile capacity utilization, which is often a forerunner of investment in new plant and equipment, dropped to 77.2 percent, 0.9 percentage points below its November level.
The weakness is manufacturing is not surprising given the sharp rise in the trade deficit in the quarter and especially in March. The rise in the deficit is presumably the result of the run-up in the value of the dollar in the second half of 2014. The new data should have warranted at least a short article in these papers.
Tyler Cowen warns readers in his Upshot piece that we may be entering a new era in which growth is weak and the bulk of the workforce, including those with college degrees, see stagnant or declining wages. The warning is well taken, but what's missing is a serious discussion of the policies that are driving this outcome.
Cowen begins his story by pointing out that universities are replacing tenured faculty with low-paid adjuncts. He points out that major manufacturers are doing something similar by paying new hires much less than their incumbent workforce. He could also point to the large number of people who end up working in low paying sectors like retail and restaurants, including many with college degrees.
This is clearly bad news, but all evidence of a weak labor market. We could make the labor market stronger, for example by having the government spend more money on infrastructure, education, and other good things. We could also make the labor market stronger by getting down the value of the dollar to bring our trade deficit closer to balance. If we had balanced trade, it would generate somewhere in the neighborhood of 5-6 million jobs. That would quickly absorb the slack in the labor market and give workers the bargaining power to demand higher wages and turn down low paying jobs.
We don't see this happening because our political leaders don't want to spend more money, preferring higher unemployment. They also have little interest in addressing the trade deficit, hence the decision by the Obama administration not to include currency rules in the Trans-Pacific Partnership (TPP). In fact, the folks in policy positions are prepared to act to ensure that the labor market does not tighten; that would be the purpose of an interest rate hike by the Fed. Higher interest rates slow growth and reduce the pace of job creation.
I'm afraid that I have to take some issue with Paul Krugman's claim that the economic equivalent of accepting nonsense about WMDs to support the war in Iraq was taking seriously the deficit hawks concerns about high interest rates and soaring inflation. While Krugman is right in calling many of these people frauds and cranks, this distracts attention from the real Iraq moment in economics: ignoring the housing bubble.
The accepted view in elite circles is that the crash in 2007-2008 was some sort of natural disaster like Hurricane Katrina. It was impossible to see it coming and only the most astute observers could detect evidence of problems in little things like an explosion in subprime loans and some questionable bank practices in securitization.
This view is very comforting to the elites since almost all of them chose to ignore the evidence that there was a huge bubble and that it's collapse would be really bad news. But just as it should have been easy to see that the dog and pony show the Bush administration put on about weapons of mass destruction was nonsense, it should have been easy to recognize the housing bubble and to know that its collapse would devastate the economy.
In terms of evidence for the bubble, we had a hundred year long history in which house prices had just tracked the overall rate of inflation. Why did they suddenly hugely outpace the rate of inflation? By 2002, when I first wrote about the bubble, the gap was 30 percentage points. In 2006, at the peak of the bubble, the gap was more than 70 percentage points. If this reflected the fundamentals of the housing market, why wasn't anything going on with rents, which were just rising in step with inflation? And why did we have a record vacancy rate as early as 2002?
The Washington Post told readers that China's government is no longer acting to keep the value of the dollar up against its currency:
"Economists say that over the past several years, China’s currency has risen to a fair value, no longer providing Chinese exporters with a leg up on U.S. businesses."
After citing several economists who support the claim that the currency is at or near a market value, it then reports that it's trade surplus is within a normal range.
"Nick Lardy, a Peterson economist specializing in China, says that in 2014 China’s trade surplus dropped to 2.2 percent of gross domestic product, a level considered an indicator of fair exchange rates. At their peak in 2007, China’s exports amounted to 10 percent of GDP, he said."
There are several points worth noting. First, while it appears that China has largely stopped its large-scale purchases of foreign exchange (mostly dollars), its central bank now holds close to $4 trillion in foreign exchange. This is at least twice what would be expected for a country with an economy of China's size.
It is widely believed by economists that the Fed's holding of $3 trillion of assets is holding interest rates down in the United States. The idea is that by holding this stock of government bonds and mortgage backed securities, it is keeping their prices higher than they would be if investors had to hold this stock of assets. (Higher bond prices mean lower interest rates.) If we accept the view that holding a large stock of bonds affects their price, then it must follow that the decision of China's bank to hold a large stock of foreign reserves raises their price relative to a situation where investors held them. This would mean that China's central bank is continuing to prop up the value of the dollar against its currency, even if it is not actively buying dollars.
The point about a trade surplus of 2.2 percent of GDP being normal is also misleading. This would be a reasonable figure for a slow growing rich country like the United States. Economists usually expect fast growing developing countries like China to be running trade deficits. The idea is that capital earns a better return in a fast growing country. This pushes up the value of its currency.
Remember the billions of stories in the media last fall about how the dollar was rising because the U.S. economy was so strong? (It was growing at a bit more than a 2.0 percent annual rate.) That should be happening with China, given the huge difference between its growth rate and the growth rates in the U.S., Europe, and Japan. The rise in the value of China's currency would make its goods and services less competitive internationally, shifting its trade surplus to a deficit. The fact that this is not happening is explained by the actions of China's central bank to keep its currency from rising.
That's the inevitable question people would ask after reading his column headlined, "you can't stop the trade machine." The piece conflates trade, which obviously is not going to be stopped, with the Trans-Pacific Partnership (TPP). There is of course no direct connection, but if you're trying to promote the TPP, why not?
Whether or not the TPP passes, trade between the United States and the countries in the region will continue to grow. It's not even clear that it will grow faster with the trade deal. While the TPP will lower tariffs, most tariffs with most of the countries in the region are already low. (Six of the eleven non-U.S. countries in the TPP already have trade agreements with the U.S.)
On the other hand a major thrust of the deal is to strengthen and lengthen patent and copyright protection. This will raise the price of many items, most importantly prescription drugs, thereby reducing trade. The price increases from these forms of protectionism are equivalent to large tariffs. In the case of drugs, patent protection can raise the price by close to 100 times the free market price.
For example, the Hepatitis-C drug Sovaldi sells for $84,000 for a 3-month course of treatment in the United States. A high quality generic version is available in India for less than $1,000. This has the same effect on the market as imposing a tariff of 10,000 percent. Since the economic distortions from a tariff are proportionate to the square of the size of the patent, the distortions from patent and copyright protection on a limited number of items can easily exceed the gains from eliminating small tariffs on a large number of items. In other words, Zakaria has little basis for even asserting that the TPP will increase trade and growth.
Furthermore, the deal imposes a business friendly regulatory structure that Zakaria just assumes we should want. As Canada's finance minister recently demonstrated when he argued that the Volcker Rule violates NAFTA, these trade deals can impede our ability to regulate the financial industry. The TPP may in fact limit the ability for the federal, state, and local governments to impose regulation in a wide range of areas, including the environment, consumer safety, and labor rules. Since the terms of the agreement will be enforced in the United States by an Investor State Dispute Settlement system, not the U.S. judiciary, it is entirely possible that a wide range of regulations in these areas could be considered violations of the trade agreement.
Do newspapers like the NYT test applicants for reporting jobs on their ability to read minds? It seems they must, since so many of them seem to have this skill. Today's article on the Senate's approval of a motion to debate fast-track authority at several points told readers what various actors think or believe.
My favorite assessment of inner thoughts was in reference to demands that the Trans-Pacific Partnership (TPP) include currency rules:
"But the White House fears that making the accelerated authority contingent on currency policy alterations could scare important partners from the negotiating table, including Japan, the second-largest Trans-Pacific partner."
If we assume that NYT reporters do not actually read minds, this statement means that someone at the White House (is there a reason for anonymity?) said that they feared currency rules would scare countries away from the negotiating table. As a practical matter, the United States would undoubtedly have to make concessions on other issues in order to get Japan and other countries to agree to currency rules.
Such concessions might mean that the TPP would end up being less beneficial to companies like Nike, Boeing, and Pfizer, which would reduce their interest in the pact. However in any serious assessment the issue is whether the TPP ends up being less corporate friendly as a result of currency rules, not whether the possibility of such a deal would disappear. Of course it is possible that the Obama administration would not have an interest in pursuing a trade deal that was less friendly to large corporations who are major campaign contributors.
It is also worth noting that many large U.S. corporations would actually be opposed to a reduction in the value of the dollar against other currencies. Companies like Walmart and GE, that depend on low cost imports, would lose much of their competitive advantage if the price of the Chinese yuan and other currencies rose against the dollar.
Alan Sloan and Cezary Podkul have a piece in ProPublica that tries to explain the origins of the serious pension shortfalls in Chicago, Illinois, and several other state and local governments. The basic story is that governments went many years without making required contributions, which eventually leads to a serious shortfall.
However, there is another part of this story which is worth adding. In the late 1990s, most pensions were viewed as very well funded. This was due to the extraordinary run-up in stock prices. Many state and local governments drastically cut back their contributions to their pensions since they saw little need. The stock market was doing it for them.
The problem was that the bubble burst (which bubbles do). When the bubble burst over the period 2000–2002, it made pensions appear much less well funded. However, the bursting also led to a recession which worsened the budget situation of governments across the country. State and local governments suddenly had to make much larger pension contributions at a time when they faced large deficits. Not surprisingly, many chose to instead stick their heads in the sand and pray that the bubble would reinflate.
It is worth including this history because it points to the sort of problems created by asset bubbles like the stock and housing bubbles. The conventional wisdom at the time, espoused by folks like Alan Greenspan and the Clinton administration, was that bubbles were no big deal. Greenspan argued the best thing to do was just let bubbles run their course and then pick up the pieces. The pension problems now being faced by state and local governments across the country are among the pieces.
Everyone knows that the Washington Post supports the Trans-Pacific Partnership (TPP), but does it really have to resort to name calling in its news pages to refer to people who disagree with its position? That's what readers of its front page piece on the Senate vote to block the discussion of a bill authorizing a fast-track are wondering.
The piece referred to Senator Sherrod Brown and other staunch opponents of TPP in its current form as "anti-trade hard-liners." Of course Senator Brown and his allies are not opponents of trade, they do not advocate autarky. The correct way to refer to these people would have been "anti-TPP." Given the concern of newspapers over space, in addition to being more accurate, this also would have saved the paper two letters.
The use of the term "hard-liner" is also questionable. Are the strong supporters of TPP ever referred to as "hard-liners?" If not, then it can be argued that the use of phrase in reference to Senator Brown and his allies is more pejorative than descriptive.
David Brooks used the victory of the Conservatives in the United Kingdom to celebrate the "center-right moment" in his column this morning. To make his case he largely creates a caricature of the left to argue for the greater wisdom of the center-right. He tells readers:
"Over the past few years, left-of-center economic policy has moved from opportunity progressivism to redistributionist progressivism. Opportunity progressivism is associated with Bill Clinton and Tony Blair in the 1990s and Mayor Rahm Emanuel of Chicago today. This tendency actively uses government power to give people access to markets, through support for community colleges, infrastructure and training programs and the like, but it doesn’t interfere that much in the market and hesitates before raising taxes.
"This tendency has been politically successful. Clinton and Blair had long terms. This year, Emanuel won by 12 percentage points against the more progressive candidate, Chuy Garcia, even in a city with a disproportionate number of union households.
"Redistributionist progressivism more aggressively raises taxes to shift money down the income scale, opposes trade treaties and meddles more in the marketplace. This tendency has won elections in Massachusetts (Elizabeth Warren) and New York City (Bill de Blasio) but not in many other places."
For political purposes it is undoubtedly advantageous to imply that the "opportunity" progressives favored the market more than the "redistributionist progressives," but it is not true. Taking the case of President Clinton, he promoted trade agreements that deliberately placed manufacturing workers in direct competition with low-paid workers in the developing world, while maintaining or increasing the protections for highly paid professionals like doctors and lawyers. This had the predicted and actual effect of raising the incomes of those at the top at the expense of those at the middle and bottom. This upward redistribution was not due to market forces, but to policy design.
Similarly, Clinton allowed for the growth of huge financial firms that relied on the government for implicit too big to fail insurance. This free government insurance was a massive subsidy to the top executives and shareholders of these institutions.
Clinton also strengthened and lengthened copyright and patent monopolies. These are forms of government intervention in the market that have the same effect on the price of drugs and other protected items as a tariff of several thousand percent. In the case of drugs the costs are not only economic, but also felt in the form of bad health outcomes from mismarketed drugs by companies trying to maximize their patent rents.
And, the federal government directly intervenes to redistribute income upward when the Federal Reserve Board raises interest rates to slow job creation, keeping workers at the middle and bottom of the income distribution from getting enough bargaining power to raise their wages.
In these areas and others, David Brooks center-right politicians, as well as "opportunity" progressives are every bit as willing to use the government to intervene in the market as people like Warren and de Blasio. The difference is that the politicians Brooks admires want to use the government to redistribute income upward, while Warren and de Blasio want to ensure that people at the middle and bottom get their share of the gains from economic growth.
Their agenda is laid out in more detail in this report from the Roosevelt Institute.
I should also add that David Brooks' "opportunity progressives," Tony Blair and Bill Clinton, laid the groundwork for massive housing bubbles whose collapse sank their respective economies. It would be hard to be imagine a more disastrous economic policy, although in Clinton's case the worst could have been avoided if his successor was awake.
In keeping with the Washington elite's practice that it is fine to say any nutty thing in the world to push a trade, Nike promised to create 10,000 jobs in the United States if the Trans-Pacific Partnership (TPP) passes. As Post reporter Lydia DePillis notes, this is a dubious promise.
Her piece notes that Nike relies almost exclusively on foreign manufacturers for its products. Furthermore, it continues to go in the direction of more outsourcing as one of its suppliers just announced that it was closing a plant in Maine and replacing it with production in Honduras. Given that new facilities are highly automated, it is unlikely that even if Nike brought some production back to the United States it would result in the creation of 10,000 new jobs.
But the Nike claim largely went unexamined, other than this piece by DePillis. This is part of a pattern in which major media outlets treat any nonsense said in favor of a trade agreement as being true. This is why they don't challenge people who claim that we get jobs by increasing exports, even if the exports are car parts to an assembly plant in Mexico that replaced a plant located in Ohio. It is also why they repeatedly describe the TPP as "massive" and "huge" based on the size of the economies included in the deal, even though most of the countries in the pact already have trade deals with the United States, meaning that the TPP will have little actual effect on their trade with the U.S. (It may affect domestic regulation in those countries.)
That is what readers of the NYT must be wondering. According to the NYT, the White House strongly objected to a bill that would be attached to fast-track authority which would require the government to impose tariffs to offset the effect of currency management by other countries. (If a country deliberately reduces the value of their currency against the dollar by 10 percent, it has the same impact as imposing a tariff of the same size and providing a 10 percent subsidy on its exports.)
The article notes that Commerce Secretary Penny Pritzker called it “a terrible idea," and then tells readers:
"Josh Earnest, the White House press secretary, said any measure to counter a foreign power’s currency policies could backfire, undermining the Federal Reserve Board, which uses the flow of currency to tighten or loosen economic growth in the United States."
This assertion is bizarre because the Fed never intervenes in the currency market to tighten or loosen economic growth in the United States. Its standard tools involve raising or lowering the overnight interest rate and more recently trying to reduce long-term interest rates directly by buying up large amounts of government bonds or mortgage backed securities. These policy tools would not be affected by rules that limited central bank interventions in currency markets.
You have to admire Niall Ferguson. There aren't many people who are willing to write lengthy diatribes on topics on which they seem to know next to nothing, but some would say that is the definition of a Harvard professor.
Anyhow, he apparently believes that the victory of the Conservative Party in the U.K. election last week showed that he was correct to endorse their austerity policy and that Paul Krugman was wrong to criticize it. If he was familiar at all with the literature on the impact of the economy on elections he would know that elections are largely determined by the economy's performance in the last year before an election, not an administration's entire term. And, since the conservatives relaxed their austerity in the last two years (as had been widely noted long before the election), the economy was not performing badly in the immediate lead up to the election.
Ferguson's piece presents a cornucopia of silly mistakes, which I don't have time to address, but I will give my favorite:
"On more than one occasion during the crisis, Krugman applauded Gordon Brown for injecting capital directly into the British banks rather than relying on purchases of "troubled assets," the initial thrust of the Troubled Asset Relief Program in the United States. In October 2008, Krugman engaged in the kind of sycophancy that usually indicates a man angling for a knighthood:
'Has Gordon Brown, the British prime minister, saved the world financial system? ... The Brown government has shown itself willing to think clearly about the financial crisis, and act quickly on its conclusions. .... Governments [should] provide financial institutions with more capital in return for a share of ownership ... [a] sort of temporary part-nationalization ... The British government went straight to the heart of the problem - and moved to address it with stunning speed.'
"TARP has of course proved far more successful than the UK's nationalization of too-big-to-fail behemoths like RBS."
The small detail that Ferguson apparently missed is that TARP also went the route of giving the banks capital in exchange for share ownership in the form of the purchase of shares of preferred stock. At the time, Plan A from the Bush administration was to directly purchase the bad assets from the banks (hence the name "Troubled Asset Relief Program"). Krugman and others argued that the better route was to give the banks capital, which is what TARP eventually did, following Gordon Brown's lead. (I personally favored letting the market work its magic and then pick up the pieces after the Wall Street behemoths were buried in the ground.) In other words, Ferguson is bizarrely holding up TARP as an alternative course to the path set out by Brown, when in fact it followed the path set out by Brown.
But the real story is the overall performance of the U.K. economy, which Ferguson somehow thinks was extraordinary. The data beg to differ, even if the U.K. has done better in the last couple of years as the government relaxed its austerity. Here is the per capita GDP record of the G-7 economies since the crisis.
Source: International Monetary Fund.
As can be seen, the U.K. ties France for fifth place, only beating out Italy for last place. If we treat 2010 as the start point, it managed to close the gap with France in the next four years (which also was forced to pursue austerity since it was in the euro zone), but fell further behind Germany, Japan, Canada, and the U.S.
In 2014, seven years after the beginning of the crisis, per capita GDP in the U.K. was virtually identical to what it had been in 2007. By comparison, per capita GDP in the U.S. in 1988 was 20.1 percent higher than it had been at start of the 1981 recession. In 1997 it was 12.8 percent larger than it had been at the start of the recession in 1990. It would require some extraordinary affirmative action for conservative politicians to follow Ferguson and declare the Cameron record a success.
For folks who thought I was being unfair to use 2010 as a reference point, since Cameron only took office mid-year, you're right. The OECD has the quarterly data. The UK economy grew at a 2.0 percent annual rate in the first quarter and a 4.0 percent rate in the second quarter when Cameron took office. This slowed to 2.6 percent in the third quarter and 0.1 percent in the fourth quarter. So taking the year as a whole as the start point for Cameron is undoubtedly too generous.
I should also explain that there is a reason for using the pre-recession level of output as a reference point. In the old days (i.e. before the pathetic recovery from this downturn) economists expected economies to bounce back quickly from a recession, making up the ground lost in the recession. This is why we had years of 5-7 percent growth following the steep downturns in 1974-1975 and 1981-1982. This recession has been different in that we have not seen a steep bounce back in any country. I feel it is appropriate to apply normal economic standards to evaluate policy performance instead of using affirmative action for inept policymakers.
Robert Samuelson apparently doesn't understand much about the economy and economics. That's fine, many people don't. Unfortunately, Mr. Samuelson has an economics column in a major national newspaper and he wants to attribute his ignorance to the rest of us.
In his column today bemoaning the seeming end of a trade-off between inequality and efficiency (we could buy ourselves some more equality at the price of a loss of efficiency) he tells readers:
"We do not know enough to manipulate economic growth, productivity and income distribution. ...
"Okun’s book is emblematic of an era of overconfident economics. The underlying questions remain. Is the convergence of rising inequality and falling economic growth simply a coincidence? Or is more inequality a cause of weaker growth, a consequence of it — perhaps both? We lack definitive answers. Government must routinely act without full knowledge. That’s the point: In the real world, we often don’t know the true tradeoffs."
Actually "we" know pretty well what happened. Since the rise in the dollar in the late 1990s, the U.S. has had a large trade deficit, which creates a big gap in demand. This gap in demand was filled by a stock bubble at the end of the 1990s and a housing bubble in the last decade. When the housing bubble burst, there was nothing to fill the demand gap created by the trade deficit.
Since it is not politically acceptable to talk about large budget deficits, and there is little interest in work sharing and other policies to reduce supply, the economy is likely to remain well below full employment levels of output. When the economy is below full employment, workers lack the bargaining power to secure their share of productivity growth, leading to upward redistribution. Upward redistribution is also helped by stronger and longer patent and copyright protection, special tax breaks that cultivate niches for finance, and subsidies to top management at non-profits (e.g. universities, hospitals, and foundations) in the form of tax exempt status.
We could reverse the situation by either having the government spend more money, pushing legislation that will tighten the labor market by reducing average hours worked per worker, or by measures that will reduce the value of the dollar against other currencies, thereby reducing the trade deficit. All of these measures would boost growth and led to stronger wage growth, thereby lessening inequality.
There is very little mystery about any of this, even if Robert Samuelson finds the situation confusing.
The NYT appeared to be pushing for approval of the Trans-Pacific Partnership (TPP) in a news article that massively misrepresented the pact's importance as a mechanism for reducing trade barriers and completely ignored the ways in which it would increase trade barriers. It also failed to mention the issue of currency rules or the extra-judicial system of investor-state dispute settlement mechanisms, both of which are main reasons given for opposition to the TPP.
The first paragraph describes the TPP as:
"a massive trade accord with 11 nations across the Pacific Rim."
Later it refers to it as:
"an accord that would reach 40 percent of the global economy."
"The accord would reduce tariffs on a vast array of goods and services, and would affect about 40 percent of America’s exports and imports."
In fact, the vast majority of "40 percent of the global economy" and the "40 percent of America's exports and imports" are already covered by trade agreements with the United States. Of the eleven countries other than the United States in the TPP, six (Australia, Canada, Chile, Mexico, Peru, and Singapore) already have trade deals with the United States. That leaves Brunei, Japan, Malaysia, New Zealand, and Vietnam as countries being brought into a deal for the first time.
In an interview with Matt Bai, a political columnist with Yahoo, President Obama took issue with Senator Elizabeth Warren's claim that the Trans-Pacific Partnership (TPP) and other trade deals that could be allowed special rules under fast-track status, could unravel financial regulation put in place by Dodd-Frank.
"'Think about the logic of that, right?' he went on. 'The notion that I had this massive fight with Wall Street to make sure that we don’t repeat what happened in 2007, 2008. And then I sign a provision that would unravel it?'
“'I’d have to be pretty stupid,' Obama said, laughing."
President Obama may not want to rest the case for TPP on the strength of his status as a foe of Wall Street. He has not always been the strongest proponent of financial reform. Among other noteworthy items:
1) He has not sought the criminal prosecution of any executives at major banks for issuing or securitizing fraudulent mortgages, nor against executives at credit rating agencies for knowingly granting investment grade ratings to securities containing large numbers of improper or fraudulent mortgages;
3) He did nothing to push cram-down legislation in Congress, which would have required banks to write-down the value of some underwater mortgages to the current market value of the home;
4) He supported the stripping of the Franken Amendment from Dodd-Frank. This amendment (which was approved by a large bi-partisan majority in the Senate) would have eliminated the conflict of interest faced by bond-rating agencies by having the Securities and Exchange Commission, rather than the issuer, pick the rating agency. (The line from opponents was that the SEC might send over unqualified analysts. Think about that one for a while.)
5) He only began to push the Volcker rule as a political move to shore up support the day after Republican Scott Brown won an upset election for a Senate seat in Massachusetts.
6) The administration had to be pushed by labor and consumer groups to keep a strong and independent consumer financial protection bureau in Dodd-Frank.
If President Obama wants to push the case for TPP he should probably rely on something other than his status as a foe of Wall Street.
It is worth noting that the fast-track legislation being requested by President Obama would extend for five years. This means that if a Republican is elected in 2016, they would be able to have future trade agreements approved on a straight up or down vote by a majority in Congress. If it is difficult to see how President Obama can assure Senator Warren, and other critics of fast-track, that a future Republican president would not use this power to weaken financial regulation, if they could not otherwise get the 60 votes needed in the Senate to overcome a filibuster.
The Trans-Pacific Partnership (TPP) is often referred to in the media as a "free-trade" agreement. This is not true. Most of the pact is about putting in place a business-friendly regulatory structure, not reducing trade barriers. Perhaps more importantly, the deal will explicitly increase protectionist barriers in the form of stronger and longer copyright and patent-related protections.
These forms of protection impose the same sort of costs as any other form of protection. Markets are not smart enough to know that they aren't supposed to create distortions for protections that our politicians like (e.g. copyrights and patents) as opposed to the protections they ostensibly don't like (tariffs and quotas).
These distortions are likely to be large since copyrights and patents raise prices by many multiples of their free market price. For example, the patent protected version of the Hepatitis-C drug Sovaldi sells for $84,000 for a treatment in the United States. A high quality generic version is sold in India for less than $1,000. This gap implies that the patent would have the same effect in creating distortions as a 9000 percent tariff. Since the TPP would strengthen such protections, we can assume that the resulting distortions would increase.
In the case of drugs, because there is such asymmetry in knowledge between the drug companies and the patients and doctors, patent monopolies provide both enormous incentive and opportunity for drug companies to increase profits at the expense of patients. An analysis of the damage done by mismarketing of just five drugs found average costs of $27 billion a year between 1994-2008.
While the TPP may be increasing the incentives for drug companies to mislead the public about the safety and effectiveness of drugs, it is possible that the government's ability to restrain such abuses may get even weaker. A drug company is now suing the Food and Drug Administration (FDA), claiming that it has the right to provide information about off-label uses of its drugs. The company claims this is a free speech issue. Given recent rulings from the Supreme Court on efforts to restrict campaign spending, it is certainly possible that the Court will rule for the company.
If drug companies win the right to promote their drugs for off-label uses (i.e. provide information), then it will make the FDA even less effective in restraining abuses in the future than it has been in the past. And the TPP will give drug companies more incentive for such abuses.
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.
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.
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.
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.
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.
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.