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Enough Magical Thinking on Trade Print
Tuesday, 22 July 2014 15:22

In his Financial Times column Adam Posen gets out the old trade magic story, throwing away conventional economics to make bizarre arguments about trade's wondrous impact on the U.S. economy. Among other things, he tells readers:

"Econometric studies have established that when US companies invest abroad, the net result is increased employment, stronger demand and more investment at home. This makes sense, since it should on average be the more competitive businesses that have the resources and opportunities to expand abroad, and investing should increase their productivity. This conclusion applies specifically to US companies that have invested in Mexico. Recent research has found that, on average, for every 100 jobs US manufacturers created in Mexican manufacturing, they added nearly 250 jobs at their larger US home operations, and increased their US research and development spending by 3 per cent."

Hmmm, maybe we should subsidize the export of jobs. If we could export another 4 million jobs to Mexico, we could add 10 million here and close the employment gap. I doubt you will get many people, especially those familiar with economics, to agree that anything like this makes sense.

In fact econometric studies have shown that, consistent with economic theory, trade has been a source of downward pressure on the wages of the 70 percent of the workforce that lacks a college education. The basic story is that we put our manufacturing workers in direct competition with low paid workers in the developing world while protecting our doctors, lawyers, and other highly paid professionals. The predicted and actual result is lower pay for the vast majority of U.S. workers.

In additional to the negative impact of current trade patterns on wages, there is also the simple problem of the massive loss of demand due to the trade deficit. We currently import $500 billion a year more than we export. This is $500 billion that is creating demand in Canada, the European Union, Mexico, and elsewhere, rather than in the United States. Is there some story as to how domestic consumption or investment is somehow larger because of this trade deficit? If so, it would be worth a Nobel Prize if someone could lay it out with a straight face.

The $500 billion trade deficit, coupled with a standard multiplier of 1.5, translates into $750 billion of lost annual output (roughly 4.5 percent of GDP). This in turn would come to about 6 million jobs. That is close to enough to get us back to full employment. That would give workers enough bargaining power to secure real wages. So yes, trade is a big deal.

It is also worth noting that the "trade" deals currently on the table, the Trans-Pacific Partnership and the Trans-Atlantic Trade and Investment Pact, have little to do with trade. Both are primarily about putting in place a pro-corporate regulatory structure that would almost certainly not pass in Congress through the normal process or in any other democratically elected parliament. It will also include increased protectionism in the form of stronger patent and copyright protections. These will have the effect of raising prices, slowing growth, and costing jobs. 

 

 

 
Researchers Who Know Economics Worry About Per Capita GDP Growth, Not Overall Growth Print
Tuesday, 22 July 2014 08:05

The Washington Post had an interesting piece reporting on how many young couples are putting off having children for economic reasons. At one point the piece told readers:

"Births have slowed so sharply that researchers note that future economic growth could be stunted by a smaller labor pool. Immigration is often seen as a fix. But the downturn crimped supply lines for both babies and new foreign faces. The change was so dramatic that the Census Bureau in 2012 was forced to revise the 2050 U.S. population projection it made just four years earlier, dropping it by 9 percent, to just under 400 million."

Contrary to the impression given by this paragraph, the prospect of slower population growth should be good news for most people. It is likely to mean a relatively smaller labor supply, and therefore higher wages for most workers. It will also mean less strain on the infrastructure and on natural resources. In other words, smaller traffic jams and less crowded beaches and parks. It also will be easier to contain greenhouse gas emissions with a smaller population.

The only people who are likely to be hurt by the prospects of a smaller population are the "it's hard to find good help" crowd, since they will likely have to pay more for people they hire to clean their houses, mow their lawns, and care for the kids. Since more people do such work than pay for such work, most people will end up as winners with slower population growth.

 
That Boom In Investment: Waiting for Godot Print
Tuesday, 22 July 2014 04:44

Neil Irwin argues the case that a rise in investment would provide a much needed boost to the economy. The point is well-taken, but there is little reason to expect a marked upturn any time soon.

The basic story is, while there is some room for investment to expand, it is not especially low by historical standards. Non-residential fixed investment was 12.2 percent of GDP in 2013. This compares to an average of 12.8 percent of GDP in the years from 1970 to 2007. Irwin reports a larger gap by just focusing on investment in equipment, citing Justin Lahart pointing to spending equal to 5.2 percent of GDP over the last five years compared to 6.5 percent of GDP over the prior 50 years.

There are a few reasons for questioning the significance of this comparison. First, the figure for 2013 was 5.6 percent of GDP, which is closer to the 50-year average. Second, there has been a huge increase in investment in intellectual property products. This spending was 3.8 percent of GDP in 2013 compared to an average of 2.6 percent from 1970 to 2007. To some extent investment in intellectual property products should be a substitute for investment in equipment.

Finally, much of the investment in equipment is occurring overseas as U.S. corporations continue to shift production to Mexico, China, and other sources of low-cost labor. Equipment investment in the last recovery (2002-2007) averaged just 6.0 percent of GDP.That would likely be a more appropriate comparison than the longer period since it was also a time when U.S. corporations were shifting production abroad on a large scale. This implies relatively little increase in investment spending from current levels.

Trade really is the underlying problem that economists do not want to discuss for some reason. The country has a trade deficit of more than $500 billion annually (3 percent of GDP). This translates into demand that is going overseas rather than the United States. There is no easy mechanism to replace this demand (other than verboten government budget deficits). This means that we will likely see an underemployed economy long into the future. Hopes for a surge in investment will prove to be in vain.

 
Government Administered Saving Accounts Go Back Before 2006 Print
Monday, 21 July 2014 05:12

Steven Pearlstein has a good piece on a proposal in Illinois to have the state administer retirement accounts for workers who don't have access to one at their workplace, however he gets one part wrong. Under the proposal, 3.0 percent of a workers paycheck would be automatically deducted for a retirement account, but she would have the option to not have the deduction or to reduce (or increase) the amount. He tells readers:

"This concept goes by the name of “Automatic IRA.” It was first proposed in 2006 by two respected policy wonks, David John, then of the conservative Heritage Foundation (now at AARP), and Mark Iwry, then at the more liberal Brookings Institution (now at the Obama Treasury). It quickly won support from Democrats and Republican sponsors on Capitol Hill. In the 2008 presidential campaign, both John McCain and Barack Obama endorsed it."

Actually the idea goes much further back than this. There were many similar concepts being debated in the 1990s. My friends at the Economic Opportunity Institute in Washington State had been working on this concept in the form of Washington Voluntary Accounts since 1998. So, it's a good piece, but many more folks deserve credit on advancing this proposal.

Btw, he describes Illinois public employee pensions as "overgenerous." I'll let this one pass (workers did forgo pay for these pensions), since my mother gets one.

 
Yes, It's Another Monday and Robert Samuelson Is Yelling About the Deficit Print
Monday, 21 July 2014 03:44

Last week the Congressional Budget Office issued its new long-term budget projections. They were little changed from prior projections, but Robert Samuelson still wants to use them as a warning of impending doom.

"Under favorable assumptions, the CBO projects deficits of $7.6 trillion from 2015 to 2024. Under less favorable (maybe more realistic) assumptions, the added debt would total $9.6 trillion. The big drivers are an aging population and rising health spending. ...

"The CBO pronounces present policies 'unsustainable,' but it does not know — no one does — when and how a breakdown might occur or what the consequences might be. It warns that large deficits will crowd out private investment, reducing future living standards. It speculates that excessive debt might someday so frighten investors that they would retreat from Treasury bonds and cause a financial crisis."

Okay, there is lots to have fun with here. First, we get the really big numbers, $7.6 trillion and $9.6 trillion. Are you scared?

Next to no one reading this column has any clue as to what these numbers mean, Samuelson has opted to present them without any context to make them understandable to readers. This must have been a conscious choice on Samuelson's part because CBO actually presents the numbers in context itself. Table 1-1 tells readers that the ratio of debt to GDP is projected to rise because of these deficits from 74 percent this year to 78 percent in 2024. Are you scared now?

If you are worried about the date when we see that "breakdown" or when frightened investors retreat from Treasury bonds and cause a financial crisis, you probably plan to live a very long life. The projections show the debt to GDP ratio rising to 106 percent in 2039. That's not as high as the debt to GDP ratio that we saw at the end of World War II and still far lower than the 134 percent debt to GDP ratio faced by Italy today and the 244 percent ratio in Japan. Due to the fearful investors, Italy now has to pay 2.81 percent interest on its long-term debt and Japan has to pay 0.55 percent.

The other aspect of Samuelson's piece that provides good Monday morning entertainment is that it is totally wrong about the origins of high debts and deficits. As recently as 2008 the debt to GDP was as low as 35 percent. It didn't rise to its current 74 percent because of the moral failings of our political process as Samuelson claims, or at least not the ones to which he points. (The failings have more to do with an over-sensitivity to the profits of the financial industry.) The debt to GDP ratio soared because we actually did have a financial crisis when the housing bubble collapsed and sank the economy. Samuelson seems to have missed this one even though the economy still has not recovered with millions unnecessarily unemployed or underemployed.

The other item worth noting about Samuelson's scare story and morality play is that he never mentions that the reason we face deficits is that our health care costs are hugely out of line with the rest of the world. If we paid the same amount per capita for our health care as people in other wealthy countries we would be looking at huge budget surpluses, not deficits. The reason that we pay more than everyone else is that we pay twice as much for our doctors, our drugs, our medical supplies and blow a fortune on an incredibly inefficient insurance system.

But Samuelson doesn't like to talk about this. It's more fun to complain about greedy seniors.

 
Question for Thomas Friedman: Is Airbnb So Cool and Hyperconnected That it Can Put People in Fire Traps? Print
Sunday, 20 July 2014 16:50

It would be nice if someone could force Thomas Friedman to learn a little bit about the topics of his columns. Today he ran another ad for Airbnb, touting its hyperconnectiveness. While Friedman is ecstatic over the company's hyperconnectiveness, he fails to answer the most basic questions.

Can Airbnb guarantee that its rooms are safe? If not, can we sue and imprison its executives if people who use the service die in fires? What about the nuisance of living next to a hotel room when you paid to buy a condo or rent an apartment? Can neighbors of popular guest rooms sue Airbnb for the diminution of the value of their homes?

These questions are probably too complex for someone like Thomas Friedman, but perhaps the NYT could hire someone to seriously deal with the issues that Thomas Friedman raises.

 

Note: An earlier version raised questions about local and state taxes, which Airbnb reports it tries to collect.

 
Just Because the World's Poor Benefitted Partly at the Expensive of the Middle Class, Doesn't Mean It Could Not Have Been Otherwise Print
Sunday, 20 July 2014 06:55

Suppose a mob boss has his thugs go around and shake down a bunch of small business people. Imagine he then gives a portion of the haul to poor children. When the business people complain, the mobster then tells them they are being greedy, after all don't they care about the poor children?

This is esentially the argument that Tyler Cowen gives us in the NYT this morning. There is little doubt that hundreds of millions of people in developing countries like China and India have benefited from the growth in the world economy over the last three decades. To some extent their gains have come from displacing workers in rich countries, especially the United States. However we did not have to structure the world economy this way.

People in developing countries could also have experienced enormous gains if their doctors and other highly educated professionals were allowed to compete on an even footing with their counterparts in the United States and other rich countries. Similarly, there would be enormous gains from allowing India's generic drug industry to sell low cost drugs like generic Sovaldi in the United States and elsewhere. And, we all would benefit from taxing the financial industry like other sectors of the economy and ending too big to fail subsidies for Wall Street banks. Furthermore, in a period of secular stagnation like the present, everyone could benefit from just handing large amounts of cash to the world's poor, since it would generate demand. 

Just because the world's poor benefited at the expense of the middle class in rich countries does not mean it had to be this way. We could help poor children without having a mobster shake down small businesses to finance his charitable contributions.

 
Why Is the NYT Editorial Board So Protectionist When It Comes to Doctors? Print
Sunday, 20 July 2014 04:43

Most economists agree that trade is one of the main reasons that less-educated workers have seen a decline in their relative wages over the last three decades. The story is pretty straightforward. Trade policy has been designed to put manufacturing workers in the United States in direct competition with workers in developing countries like Mexico or China, who sometimes earn less than $1 an hour. This causes many workers in the United States to lose their job and puts serious downward pressure on the wages of workers who manage to keep their jobs.

Given this fact, it is striking that trade, or more precisely allowing more foreign doctors to practice in the United States, does not even rate mention in a NYT editorial on a prospective doctor shortage. Doctors in other wealthy countries get paid on average about half of what they get in the United States. Doctors in developing countries get paid even less. This suggests the possibility of enormous gains from allowing more foreign doctors into the country to bring wages of physicians here in line with those in other wealthy countries. (We could easily compensate developing countries for losing doctors by providing them with the money to educate two or three doctors for every one that comes here -- please think about that one for a minute before writing a silly complaint about brain drain.)  

Anyhow, it striking that the class bias in trade policy is so extreme that any policy that is designed to provide even limited protection for less-educated workers, such as the temporary tariffs on imported steel that President Bush imposed in 2002, are immediately denounced as protectionist by all right-thinking people. Yet trade can not even be discussed, even when there is potential for enormous gains, if the losers would be highly-educated professionals like doctors.

 
Fraudulent Subprime Auto Loans: The Cost of Obama's Soft on Crime Policy Print
Sunday, 20 July 2014 04:30

It is fraud when an issuer of a loan knowingly puts down false information in order for the loan to be approved. When a securitizer includes large numbers of these loans in securities, as Floyd Norris reports was the case with Citigroup during the housing bubble, this is fraud. 

The Obama administration decided not to pursue criminal cases against executives at the major banks who likely committed fraud on a large scale. As a result, most of these bank executives are almost certainly better off as a result of their decision to commit fraud, even though the fraud has been exposed, than if they had obeyed the law.

When crime goes unpunished it naturally leads to more crime. Hence the NYT reported today that subprime auto lenders are doing many of the same scams that subprime mortgage lenders did in the housing bubble days. They are issuing loans, often for more than the value of the car, based on phony income numbers that the lenders themselves wrote in. In a time of generally low interest rates, these loans can be attractive to investors and Wall Street banks are therefore anxious to purchase them and securitize them.

The scale of the subprime auto loan sector is an order of magnitude smaller than the subprime mortgage sector during the bubble days, so it does not pose the same risks to the financial system. (Also, there is not a risk of a downward spiral in car prices as was the case with house prices during the bubble.) However these loans can lead to enormous hardship for the people affected, causing many to be pursued by creditors for years or forced into bankruptcy.

 
The Washington Post Says It Doesn't Miss Lower Unemployment and Rising Wages Print
Saturday, 19 July 2014 10:14

That might not be a surprise to regular readers of the paper, but there it was in black and white in a column talking about the budget deficit. The piece notes how the deficit has gotten much smaller in recent years and therefore people are paying much less attention to it. The last line in the piece told readers;

"Well, we don’t miss the deficit. But we sure miss that clock [a debt clock used as campaign prop by Governor Romney]."

Actually, people who care about jobs and wage growth do very much miss the deficit. The spending that was cut to reduce the deficit was creating jobs. There is no magical process by which this spending will be replaced by demand in the private sector, which means that the reduction in government spending means less demand and jobs in the economy. [If the deficit hawks at the Post think otherwise they could grab themselves a quick Nobel prize in economics by showing how.] 

In addition, fewer jobs means that those at the middle and bottom of the labor force have less market power and therefore less ability to secure higher wages. This is good news for the small segment of the population that owns lots of stock and can benefit from higher corporate profits and cheap help, but it is bad news for the vast majority of people in the country. At least the Post has made clear which side they are on, just in case there was any confusion.

 
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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.

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