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Steve Rattner's Incredibly Low Expectations Print
Tuesday, 30 April 2013 04:14

It's a bit scary what passes for good news in the economy today. Steve Rattner had a NYT blogpost this morning that began by telling readers:

"On its face, Friday’s announcement that the nation’s gross domestic product expanded at a 2.5 percent annual rate in the first quarter was good news, following as it did an only marginally positive result for the previous three-month period."

Well, positive growth is better than recession, but we have to remember that we are operating at a level of output that is 6 percentage points below potential, according to the Congressional Budget Office. The potential growth rate is in the range of 2.2-2.4 percent. Even if we take the bottom end of that range, a 2.5 percent growth rate would still only close this gap at a rate of 0.3 percentage points a year. [Added note: potential GDP growth refers to the rate that the economy could grow if it were fully employed as a result of the growth of the labor force and increases in productivity. The economy has to grow faster than potential in order to make up the sort of gap in output it is now seeing.]

That means that with a 2.5 percent growth rate it would take us twenty years to get back to potential GDP. We can mark 2033 on our calendar for the celebration, just after the end of Chelsea Clinton's second term.

Apart from the new low for good news Rattner is also annoying for his persistent ability to highlight Social Security and Medicare as problems in determined defiance of the data. Social Security's costs are projected to rise by roughly 1.0 percentage point of GDP over the next 15 years as the baby boomers retire. That's roughly the same increase in costs that we saw over the last 15 years. It is a bit more than half of the size of the increase in military spending associated with the wars in Iraq and Afghanistan. What's the big deal?

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George Will is Outraged Because Amazon Will Be Taxed Like a Mom and Pop Grocery Store Print
Monday, 29 April 2013 04:59

Yes, he is. In his column today he expresses his anger over a bill that would apply the same sales tax to Internet sales that people pay now when they go to their corner store. He scoffs;

"In a burst of the bipartisanship we are told to revere, a coalition of Republican and Democratic senators rose above party differences last week to affirm class solidarity. They moved toward a tax increase of at least $22 billion to benefit the political class at the state and local levels."

Let's see, that political class would be people like Rick Perry, the governor of Texas, and Jerry Brown, the governor of California. The class solidarity here is less than obvious. It's certainly less visible than George Will's class solidarity with rich people, including those who make their money by gaming the tax code instead of doing anything productive, as is the issue here.

 

Addendum:

 

The sales tax is regressive. It would be great to see it replaced with income taxes. It's not going to happen whether or not we tax Internet sales. Taxing Internet sales makes the sales tax less regressive because low income people buy less of their stuff on the Internet than high income people. This is simple -- whine away, but the story is really really simple. If you want to make the tax system less regressive and you want to make the economy more efficient (why would we subsidize Internet sales at the expense of brick and mortar stores?), then you support having Internet sales subject to state sales taxes.

 
Morgan Stanley Director Erskine Bowles and Alan Simpson Still Want to Cut Social Security and Medicare Print
Monday, 29 April 2013 04:42

The Washington Post gave Erskine Bowles and Alan Simpson another opportunity to push their case for deficit reduction, which includes plans for cutting Social Security and raising the age of eligibility for Medicare. The Post does not mention Mr. Bowles affiliation with Morgan Stanley. This could have something to do with his persistent refusal to ever include a Wall Street speculation tax in his deficit reduction plans.

Many other countries, including the UK have long had such taxes. Much of the European Union is likely to impose a tax of 0.1 percent on stock trades and 0.01 percent on derivatives. The Joint Tax Committee of Congress has projected that the 0.03 percent tax proposed by Senator Tom Harkin and Representative Peter DeFazio would raise almost $40 billion annually. Counting interest savings, this tax alone would meet almost 20 percent of the arbitrary $2.5 trillion deficit reduction target picked by Bowles and Simpson.

It is also important to note that Bowles and Simpson's claim about using the chained CPI for the annual Social Security cost-of-living adjustment seems deliberately misleading. They tell readers:

"The plan also includes a shift to the chained consumer price index to provide more accurate indexation of provisions throughout the budget."

While the chained CPI is arguably a better measure of the rate of inflation seen by the population as a whole, there is no evidence that it provides a better measure of the rate of inflation seen by the elderly. In fact the experimental elderly index constructed by the Bureau of Labor Statistics (BLS) shows that the current measure of inflation understates the rate of inflation seen by the elderly.

If Bowles and Simpson were actually interested in accuracy (as opposed to cutting Social Security benefits), they would propose having the BLS construct a full elderly CPI. They have consistently backed away from this idea, which could lead to higher Social Security benefits.

 
Reinhart and Rogoff #61,346: Stevenson and Wolfers Edition Print
Sunday, 28 April 2013 21:46

Betsey Stevenson and Justin Wolfers are offering their assistance as referees in the debate over the Reinhart and Rogoff (R&R) spreadsheet error. They tell us:

"It has been disappointing to watch those on the left seize on the embarrassing Excel errors but ignore this bigger picture."

Of course the real story is that people on the left have seized on the embarrassing Excel error to bring about a public debate on an incredibly important debate from which they had previously been excluded. Just to remind everyone, R&R is being used as a rationale for cutting Social Security and Medicare as well as many other policies that are slowing growth and creating unemployment across much of the world. The corrected Reinhart and Rogoff spreadsheet does not come close to supporting the grand claims about the dangers of public debt they originally made, nor does it address the serious questions of causality that have followed in the wake of the discovery of their Excel error.

So we have two Harvard professors who used their status to push through work that was central to the most important economic policy debates in decades, based on analysis that was by their own admission incomplete. They also refused to make any of the data available until long after it was being widely cited in these debates. And, they routinely encouraged political figures to infer causality from debt to growth, when they were careful to deny any such claims when challenged by other economists.

And our two referees are disappointed by the conduct of those on the left.

 
Robert Samuelson Tells the Middle Class and Poor that They Should Stop Expecting to Have Decent Lives Because His Rich Friends Want All the Money Print
Sunday, 28 April 2013 20:47

That is the best way to describe Robert Samuelson's column in Monday's Washington Post. I could go through the piece in detail and offer point by point rebuttals, but what's the point in killing innocent electrons? We've been here before.

Let's just take the first and most obscene of his inaccuracies. He tells readers that the idea that the non-rich could enjoy decent living standards rest on unrealistic assumptions beginning with this one:

"First, that economists knew enough to moderate the business cycle, guaranteeing jobs for most people who wanted them. This seemed true for many years; from 1980 to 2007, the economy created 47 million non-farm jobs. The Great Recession revealed the limits of economic management."

Actually, many economists do know how to restore economic growth (it's simple, spend money), however people like Robert Samuelson and his friends at the Washington Post are doing everything they can to prevent the government from taking the steps needed to restore the economy to full employment. FWIW, they also helped to bury the arguments of those of us warning of this disaster before the housing bubble grew large enough so that its collapse would wreck the economy.

(It is bizarre that Samuelson picks 1980 as the beginning of his era of prosperity. This was actually the beginning of three decades of wage stagnation for most of the population and the end of three decades of broadly shared prosperity.)

The other points in Samuelson's diatribe are equally off the mark, but who cares. He just wants to convince ordinary people that they should get over the idea that they have any claim to the country's wealth; it's all going to the rich.

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Excel Errors, Debt, and Stimulus: Is Our Politicians Learning? Print
Sunday, 28 April 2013 16:16

That's the question we ask this week in honor of the commemoration of the George W. Bush Library. According to Politico the answer appears to be "yes."

Politico tells us that the Democrats in Congress who argue that there is no urgency to deal with the debt and that instead the focus of policy should be boosting the economy and getting the unemployment rate down are now increasingly occupying the center stage in the Democratic Party:

"These Democrats and their intellectual allies once occupied the political fringes, pushed aside by more moderate members who supported both immediate spending cuts and long-term entitlement reforms along with higher taxes.

But aided by a pile of recent data suggesting the deficit is already shrinking significantly and current spending cuts are slowing the economy, more Democrats such as Virginia Sen. Tim Kaine and Maryland Rep. Chris Van Hollen are coming around to the point of view that fiscal austerity, in all its forms, is more the problem than the solution."

The article then goes on to note the famous Reinhart & Rogoff spreadsheet error that was exposed by researchers at the University of Massachusetts, which destroyed the paper that provided the intellectual foundation for the debt crisis story. It's still too early to reach any definitive judgment, but this can be one of those rare instances where new evidence actually changes policy. If so, it will be a big deal.
 
 
Washington Post Editorial Condemns Austerity in Europe! Print
Sunday, 28 April 2013 07:36

I double-checked to see that this is in fact April 28 and not April 1. This does seem to be real, a Washington Post lead editorial on Europe that calls for Germany to ease up on austerity and to allow the peripheral euro zone countries to grow again.

I could nit-pick and point out that the editorial doesn't get everything right (nothing wrong with Germany running trade surpluses, if the surpluses were with fast-growing countries in the developing world), but we should just sit back and enjoy this one for a moment. Perhaps evidence and logic can actually have an impact on economic policy debates, even at the Washington Post.

 
A Second American Century Led by People Who Can't Do Arithmetic? Print
Sunday, 28 April 2013 07:13

That's what Richard Haass is promising in his Washington Post Outlook piece. He tells readers that the United States is still the world's largest economy and will be for long into the future.

"This country boasts the world’s largest economy; its annual GDP of almost $16 trillion is nearly one-fourth of global output. Compare this figure with $7 trillion for China and $6 trillion for Japan. Per capita GDP in the United States is close to $50,000, somewhere between six and nine times that of China."

The problem with the comparison with China is that it relies on market exchange rates. These fluctuate widely and are in part determined politically. (According to Haass's measure, China could make itself 25 percent richer relative to the U.S. tomorrow if it opted to dump $2 trillion in dollar holdings.) 

If the question is what can the economies actually produce then the right measure is purchasing power parity. Haass apparently has also neglected the fact that China now controls Hong Kong, which is not counted in its GDP measure. Turning to the IMF's data on purchasing power parity GDP we find that the United States has a bit more than three years left as Number 1:

Country20112012201320142015201620172018
China 11,305.769 12,405.670 13,623.255 15,039.001 16,647.491 18,442.890 20,440.875 22,641.047
Hong Kong SAR 357.726 369.379 386.558 411.548 438.187 467.253 498.588 532.098
United States 15,075.675 15,684.750 16,237.746 17,049.027 18,012.185 19,020.509 20,077.908 21,101.368

Source: International Monetary Fund.

Taking year-round averages, the United States is still slightly ahead of the combined projection for China and Hong Kong for 2016, but almost 5 percent lower for 2017. The projection therefore implies that China's GDP will surpass U.S. GDP sometime in August of 2016. This means that if being number one in this category matters to you, better do your partying now. (Actually, according to some estimates the time for partying may already be over since China's GDP may already have surpassed the GDP of the United States.)

The comparisons in this piece to West Europe are silly. The main reason that per capita income in the United States is higher than in Western Europe is that the average worker puts in about 20 percent more hours a year. In Western Europe 4-6 weeks a year of vacation is standard (guaranteed in law), as is paid parental leave and paid sick days. In some countries the standard workweek is also well below 40 hours.

Measured on a per hour basis there is little difference in output, although the European Central Bank is working hard to increase the gap with its current policies. Perhaps people in the United States feel better because they work longer hours, but that is not usually considered evidence of a stronger economy.

 
Government Granted Patent Monopolies Lead to Corruption #42,347 Print
Saturday, 27 April 2013 17:12

When the government grants drug companies patent monopolies that allow them to sell drugs at hundreds or even thousands of times the free market price it gives them an enormous incentive to do things like pay off doctors to prescribe drugs. Everyone who has ever taken an intro economics class understands that fact.

Unfortunately our leading economists do not seem aware of how protectionism in the prescription drug industry leads to corruption that can both raise costs and jeopardize the public's health. That's probably because they are too busy finding reasons why we can't take steps to bring the economy back to full employment.

 
Interest Burdens and Debt Print
Saturday, 27 April 2013 07:27

Since the NYT is doing Reinhart and Rogoff 24-7, I suppose BTP should follow suit. One point that some of us keep making that continually disappears into the ether (as opposed to eliciting a response from our Harvard duo or their accomplices) is that rather than being high, the interest burden of the debt is near post-war lows. It is currently less than 1.5 percent of GDP. In fact, it is less than 1.0 percent of GDP if we subtract the $80 billion that the Fed refunds to the Treasury from the assets it is holding. This means that rather than being an extraordinary burden right now, the debt is actually a very low burden.

Insofar as this point draws a response, it is generally that interest rates will rise in the future as the economy recovers. That may well be true, but we will have contracted large amounts of debt at very low interest rates. This means that even in a story where the Fed does raise interest rates as the economy recovers, the interest burden will just be rising back to levels we have seen before. In fact, in the Congressional Budget Office's projections we will not get back to the early 1990s interest burden of more than 3.0 percent of GDP until 2021. It is also worth remembering that this interest burden did not prevent the United States from having strong growth through the decade of the 1990s.

Again, the interest burden can be lowered by more than half of a percentage point of GDP if the Fed continues to hold assets, refunding the interest to the Treasury. This would require an alternative mechanism for restricting the money supply, specifically raising reserve requirements. While there are reasons for not wanting to go this route, given the large potential savings to the government (@ $80-$100 billion a year), it is an option for budget savings that Congress certainly should be considering.

btp-interest-percent-gdp

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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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