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E.J. Dionne and Dynamic Scoring: Getting the Story Backward Print
Thursday, 08 January 2015 09:03

E.J. Dionne is upset about Republican plans to have the Congressional Budget Office (CBO) use dynamic scoring in assessing the effects of tax cuts. He tells readers that dynamic scoring:

"will make it easier for the Republicans to shower money on their favored constituencies while pretending to be fiscally responsible. Dynamic scoring, the Center on Budget and Policy Priorities noted, 'could facilitate congressional passage of large rate cuts in tax reform by making the rate cuts appear — on paper — less expensive than under a traditional cost estimate.'

"To understand the dynamic-scoring game, imagine a formula based on the idea that because infrastructure spending boosts the economy — which it most certainly does — we should pretend that an expenditure of $100 billion is actually, say, only $80 billion."

Dynamic scoring means taking account of the growth effects of tax cuts and incorporating them into budget estimates. This is actually a very reasonable thing to do. When Douglas Holtz-Eakin, a conservative Republican economist, was head of CBO, he put out an analysis of the impact of dynamic scoring on budget estimates. The analysis found that the impact of a simple estimate of the impact of a tax cut on growth was small and in fact negative.

The analysis did find larger positive impacts if the tax cut assumption was coupled with other assumptions, such as a later tax increase, which would give people more incentive to work in the period of low taxes. However these modeling exercises showing growth were not in fact analyzing the policy being considered, which was simply a tax cut.

The issue created in this context has nothing to do with dynamic scoring, it is a question of honest scoring. That should be the real concern. If the Republicans want to follow Holtz-Eakin's analysis and incorporate the negative impact that tax cuts have on growth then there is no reason for anyone to object. However if they just want CBO to make up numbers, their plan is objectionable. But the issue is not dynamic scoring.

This brings up the other side of the equation raised by Dionne. Government investment in infrastructure, education, and research and development does in fact have an impact on growth and CBO should be taking it into account in its projections. Under CBO's current methodology, if the government stopped spending any money on improving and maintaining the infrastructure or on educating our children it would show up as a boost to the economy.

In CBO's models, the reduced government spending would free up resources, some of which would end up as private investment. That would lead to higher productivity and more growth. There is something seriously wrong with modeling that implies we could grow the economy better if we stop maintaining our roads and educating our kids.

Finally it is worth taking issue with the use of "fiscally responsible." The absurd conceptions of fiscal responsibility in place in Washington today are costing the jobs of millions of kids' parents. This policy, which is ruining the lives of mutiple generations, should not be characterized as "responsible." Washington politics may make it impossible to beat back deficit fetishism, but there is no reason that serious people should treat it as reasonable policy.

 
The It's Hard to Get Good Help Crowd Bemoans the Fact Europe is Becoming Less Crowded Print
Wednesday, 07 January 2015 04:35

The horror, the horror! Europe has a declining ratio of workers to retirees, just as has been the case for the last fifty years.

That is the message Arthur Brooks gave us in his NYT column this morning, although he left out the part about the last fifty years.

"Start with age. According to the United States Census Bureau’s International Database, nearly one in five Western Europeans was 65 years old or older in 2014. This is hard enough to endure, given the countries’ early retirement ages and pay-as-you-go pension systems. But by 2030, this will have risen to one in four. If history is any guide, aging electorates will direct larger and larger portions of gross domestic product to retirement benefits — and invest less in opportunity for future generations."

Brooks' source shows the share of the over 65 age group in the population rising from 18.8 percent in 2015 to 23.7 percent in 2030. If that sounds really scary consider that it has risen from 15.7 percent in 2000 to the current 18.8 percent over the last 15 years. In other words, this is a trend that has been taking place for a long time: people are living longer. This is usually viewed as good news.

Even as the ratio of older people to working age population has risen in Europe and elsewhere, people have seen rising living standards due to productivity growth. This is why we can all have enough to eat even though only less than 2.0 percent of the workforce is employed in agriculture. (Remember the robots who are taking our jobs? That is a story of rising productivity. It's a story where we have too many people who want to work.)

Read more...

 

 
Pay by the Mile Auto Insurance: A Testament to the Lack of Creativity of Environmentalists Print
Tuesday, 06 January 2015 08:57

It is often said that the environmental movement has less creativity than a dead clam. Nothing demonstrates this point better than the lack of interest in promoting pay by the mile auto insurance.

I am reminded of this issue by a piece on Morning Edition that discussed how the recent drop in gas prices will be associated with thousands of more deaths in traffic accidents. The point is simple: people will be driving more and faster, therefore there will be more accidents and more deaths.

This brings up pay by the mile insurance since the point of the piece is that high gas prices gave people an incentive to drive less and more slowly. If insurance were on a pay by the mile basis it would also give people an incentive to drive less and ideally more safely.

The arithmetic is straightforward and striking. The average insurance policy is around $1,000 a year. The average driver puts in roughly 10,000 miles a year on their car. (These are rough numbers, but last time I checked they were in the ballpark.) This comes to 10 cents if insurance were paid on a per mile basis.

If a typical car gets 20 miles a gallon, then having insurance paid on a per mile basis is the equivalent of a $2.00 a gallon gas tax in discouraging driving. That should be a big deal and the sort of thing that environmentalists should be pushing for, since it is likely far more politically feasible than a $2.00 a gallon gas tax.

Just to be clear, this is not on average increasing insurance costs. It will redistribute them from people who drive relatively little to people who drive a lot. (Insurers already have some differences based on miles driven, but they don't come close to reflecting the actual difference in risks -- as they will tell you.)

Also, charging per mile doesn't prevent insurance companies from factoring in driving records or distinguishing between rural and urban miles. The insurers know where people live and they know their driving records. These could be easily factored in when setting the per mile rates.

Anyhow, a modest subsidy for people to buy pay by the mile policies could go a long way in changing incentives and reducing driving and greenhouse gas emissions. (Note the adverse selection goes in the right direction here. Low mileage drivers would opt for pay by the mile policies leaving high mileage high risk drivers in the conventional insurance pool.)

This should have been an obvious policy to push for those who want to stop global warming, but it might require a bit of new thinking.

 
Which Way Is Up Problems on the Euro Print
Tuesday, 06 January 2015 08:29

A NYT article on the recent drop in the value of the euro against the dollar carried the bizarre headline, "falling euro fans fears of a recession." The headline is strange, because the drop in the euro will not cause a recession. In fact, it will help the economy by boosting net exports from the euro zone, as the article itself states.

Several other points in the article are also seriously confused. It asserts:

"There is also the fact that eurozone countries tend to be net importers of oil and natural gas — which is usually priced in dollars — meaning that their weak currency may not buy as much fuel in the future."

The fact that oil is typically priced in dollars really has nothing to do with the time of day. The price of oil has fallen by roughly 50 percent over the last year measured in dollars. The euro has fallen by a bit more than 10 percent, which means that oil has fallen by roughly 45 percent measured in euros.

The fact that the euro zone produces relatively little oil is a huge benefit in this story relative to the United States. While consumers in both the U.S. and the euro zone will be benefited by the plunge in oil prices, the United States has areas of the country like Texas, North Dakota, and Alaska, that are heavily dependent on oil production. These regions will be badly hurt by the drop in oil prices.

The article also notes that Europe may be hurt by a slowdown in growth elsewhere in the world, referring to the "region’s dependence on trade." Actually the euro zone as a whole doesn't depend much more on trade with the rest of the world than the United States. The vast majority of trade of euro zone countries is with other euro zone countries, therefore a slowdown in growth elsewhere in the world will not do more harm to the euro zone than the United States.

 
The Growth Projections for the Trans-Atlantic Trade and Investment Pact Are a Joke Print
Monday, 05 January 2015 08:08

Bob Kuttner has a column in the Huffington Post warning of the dangers of the Trans-Atlantic Trade and Investment Pact (TTIP). Kuttner correctly points out that the deal is not really about reducing trade barriers, which are already minimal, but rather about locking in place a business-friendly structure of regulation (wrongly described as "deregulation").

At one point Kuttner refers to projections that the TTIP will increase GDP in the EU and U.S. by 0.5 percent. It is important to note that this projection is for the period after the deal is fully implemented, more than a decade after it is signed. That means the projection implies an increase in the growth rate of less than 0.05 percentage points annually, an amount far too small to be measured accurately.

It is also worth noting that this projection does not incorporate any negative impact from the protectionist parts of the TTIP. The deal is likely to strengthen patent and copyright protections, leading to higher prices for drugs, software, and other products, all of which will be a drain on consumers and a drag on growth.

 
Robert Samuelson, the NAIRU, and the Accuracy of Economic Predictions Print
Monday, 05 January 2015 07:43

Robert Samuelson gave his assessment of where the economy stands in his column this morning. At one point he tells readers that if the economy creates 230,000 jobs a month, by the end of the year it will be approaching full employment.

Even if the economy adds 230,000 jobs a month in 2015, by the end of the year it will still be more than 3 million jobs below what the Congressional Budget Office (CBO) and other forecasters projected before the downturn. That would imply that the economy would still be far below full employment.

Of course it is possible that CBO's projections about the labor force from 2008 were wrong, but this raises the obvious question of when CBO stopped being wrong. It is not obvious that it has learned more about the economy and the labor market in the last seven years, therefore it is not clear that its current assessment of the labor market should be treated as more accurate than its assessment from 2008.

Also, contrary to what is asserted in the article, Japan has been seeing rapid growth in employment under its new stimulus policies. In fact, its employment to population ratio has risen more than twice as much as the U.S. ratio since the end of 2012 when it adopted these policies. It is likely to again see healthy growth in 2015 now that it has put off a scheduled increase in the sales tax.

 
Confusion on the Internet Is Not the Answer Print
Sunday, 04 January 2015 08:54

The Washington Post once again displayed its contempt for economics when it published Michael Harris' book review of The Internet Is Not the Answer, a new book by Andrew Keen. Many of the central points in the review are seriously misleading or just outright wrong.

The best example of the latter is the claim in reference to the turning over of the backbone of the Internet from the government to the private sector in the 1990s:

"It was, in the words of venture capitalist John Doerr, 'the largest legal creation of wealth in the history of the planet.'"

Handing over the Internet to the private sector was not a creation of wealth, it was a transfer of wealth. The wealth already existed -- it was the backbone of the Internet. It simply went from being held by the public to being held by private individuals. This is comparable to creating wealth with patent monopolies. At the point where a patent is issued, the wealth already exists. However the patent allows it to be privately appropriated rather than shared by the public at large.

Harris compounds the confusion when he approvingly cites Keen's assessment of Amazon:

"But Keen argues that 'the reverse is actually true. Amazon, in spite of its undoubted convenience, reliability, and great value, is actually having a disturbingly negative impact on the broader economy.' He points to what he describes as Amazon’s brutally efficient business methodology, which has squeezed jobs out of every sector of retail, according to a 2013 Institute for Local Self-Reliance report that Keen cites. The report says brick-and-mortar retailers employ 47 people for every $10 million in sales, while Amazon employs only 14. Perhaps the question Keen is getting at is this: Are we consumers, or are we citizens? It’s a frustratingly complex inquiry."

There are two different issues here. The first is the extent to which Amazon has led to productivity growth. In general this is a good thing for the economy. Companies like General Motors and U.S. Steel have adopted labor saving technologies over the last century. This has reduced prices for consumers and allowed workers to enjoy higher standards of living. There is no obvious reason we should want people to have to waste time working in retail stores if we can adopt technologies that save us the trouble. Insofar as Amazon has helped to increase productivity, this is a good thing.

Read more...

 

 
The NYT Apparently Welcomes Job Loss and Lower Wages Print
Saturday, 03 January 2015 08:32

That's what readers of a NYT article on the drop in the value of the euro would conclude. The piece told readers that the recent rise in the dollar is:

"A strong dollar is a welcome reflection of a United States economy that is growing and adding jobs at a faster clip than many of its peers."

Of course a strong dollar will make U.S. goods and services less competitive internationally, leading to a rise in the trade deficit. the drop in the trade deficit in the third quarter added 0.8 percentage points to the quarter's growth. It is likely that the rise in the deficit in the fourth quarter will subtract at least that much from the growth rate. In an economy that, according to the Congressional Budget Office, is still operating at a level of output that is almost 4 percentage points (@ $600 billion a year) below its potential level of output, and is down close to 6 million jobs from its trend path, it is bizarre to call a rise in the dollar that will slow growth as "welcome."

This article gets many other issues wrong as well. It tells readers;

"To jump-start growth and avoid deflation, many analysts say the most powerful policy arrow in Mr. Draghi’s quiver is to talk the euro sharply downward, which would bolster exports, increase the price of imports and ultimately, it is hoped, stimulate an increase in inflation."

There is no reason to believe that Mr. Drago is in particular trying to avoid deflation unless he is a member of some bizarre cult of zero worshippers. Having the inflation rate cross zero doesn't make any difference, the problem is that the inflation rate in the euro zone is too low. Draghi wants to raise the inflation rate, it's that simple.

The piece also notes a shift in bank reserves from euros to dollars and comments that it, "could signal a long-term preference on the part of central bankers for high-yielding dollars in favor of less lucrative euros."

Actually central banks usually are not especially interested in the returns on their reserve holdings and they certainly are not making long-term plans since they shift their holdings all the time. If there is a return issue at hand, some central banks may have made the bet that the euro would fall in the short-term against the dollar. Now that the euro has lost considerable ground, they may make a decision to start shifting back to euros from dollars.

Remarkably in the discussion of relative currency values the piece never refers to the trade deficit in the United States. This deficit is the primary cause of the secular stagnation, or lack of demand, that many economists have now determined to be the country's main economic problem. The trade deficit pulls more than $500 billion in demand out of the economy every year. From an economic standpoint it has the same impact as if people suddenly decided to cut back their annual consumption by $500 billion. There is no easy way to replace this demand domestically, which is why the United States economy remains severely depressed more than seven years after the recession began.

 

 
European Union Imposes a Tax on Digital Transactions Equal to 0.006 Percent of GDP Print
Friday, 02 January 2015 08:11

The NYT reported that the European Union (EU) will start collecting a tax on digital transactions in 2015 that is expected to raise $1 billion this year. For those who are not very familiar with the size of the EU economy, it is projected to be close to $19 trillion in 2015, which means that the revenue from this tax will be a bit less than 0.006 percent of GDP.

 
Is That $224 Billion Over One Year or Ten Years? Print
Friday, 02 January 2015 06:31

That's what millions of readers of Ron Haskins' column in the NYT on designing effective social programs will be asking. The column tells readers:

"When John M. Bridgeland led Mr. Bush’s Domestic Policy Council, he was amazed to find 339 federal programs for disadvantaged youth, administered by 12 departments and agencies, at a cost of $224 billion."

The piece doesn't indicate whether this spending is for one or ten years. (My guess is the latter, but I'm not really sure without looking at the research to see what is included.) Also, unless folks have a good memory, they are unlikely to know how important this spending was to the government and the economy. The budget was just under $1,800 billion in 2000, which would make the spending close to 12 percent of the budget for one-year. Projected spending for the ten-year budget horizon was over $20 trillion, which would have made the spending in question close to 1.0 percent of projected spending.

Ron Haskins is a serious researcher raising an important point, but it would be helpful if this number were expressed in a way that provided meaningful information to readers.

 
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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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