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Patents are Not Free Trade, #24,567 Print
Saturday, 11 February 2012 09:37

The Washington Post has an interesting piece about opposition to a trade pact between the European Union and India which could limit the ability of India to supply generic medicines for treating AIDS and other diseases. The article repeatedly refers to the agreement as a "free-trade" pact.

This is 180 degrees wrong. Patent protection is the opposite of free trade. It is a government-granted monopoly. Patent protection is a government policy for supporting innovation. Just as trade protection in other areas is a form of industrial policy.

Patent protection leads to the same sort of distortions as economists criticize from other types of protection except the magnitudes are much larger with patent protection. In the case of prescription drugs, it often raises prices by many thousand percent above the free market price. Most tariffs only raise the price of products by 20-30 percent. There are arguably more efficient mechanisms for supporting research on prescription drugs.

Trade Deficits and National Income Accounting for Deficit Hawks Print
Saturday, 11 February 2012 09:12

The trade deficit jumped by $1.8 billion in December, putting the monthly deficit more than $8 billion above its year ago level. This item got almost no attention from the business press. If there were articles on the rise in the WSJ and NYT, I couldn't find them. The Post did have a somewhat respectable piece, which ran in the business digest in the print edition.

It is remarkable how little attention is given to the trade deficit by people who routinely get nearly hysterical about the budget deficit. Just to remind folks of the basic accounting identity:

                               X-M = (S-I)+ (T-G)

This means that the trade surplus is equal to the sum of the excess of private saving over private investment (S-I) and the government surplus (T-G). Or, to take the reverse, when we have an annual trade deficit of $600 billion, as is the case now, the sum of private and public savings must be -$600 billion. This is an accounting identity, there is no way around this.

That leaves two choices. We can have large negative savings on the private side, as we did in the peak years of the housing bubble when there was a bubble driven boom in construction and the saving rate fell to zero due to a housing wealth driven surge in consumption. Alternatively, we can have large government deficits.

That is it; that is the full range of choices. This means that if the deficit hawks are upset about our large budget deficit, then they should be very concerned about the growth in the trade deficit. We should have front page stories, hysterical columns and editorials, and enraged pundits denouncing irresponsible politicians for allowing the trade deficit to explode. (Meet the over-valued dollar as the leading villain the story.)

But, we don't see this. Even people who are trying to find out about the economy by taking the time to read the major newspapers carefully will not get the fundamentals about the economy. That is sad.

BusinessWeek Tries to Inject Humor Into the Stimulus Debates Print
Friday, 10 February 2012 18:57

BusinessWeek decided to take a shot at Paul Krugman. Okay Krugman, like everyone else in public debate, is fair game. But if they can find a reporter who knows a little economics they might better serve their readers by constructing a little scorecard.

Krugman (along with a few other Keynesian types out here) has staked out very clear positions on a number of key economic issues such as the size of the stimulus, the impact of deficits on interest rates, and the impact of quantitative easing on inflation. Maybe Businessweek can tell its readers whether the Keynesians have been right or whether the fresh water types carried the day.

Then, if they really want to be cruel, they can ask who warned about the housing bubble before it actually sank the economy.

USA Today and Marketing Scams on Household Income Measure Print
Friday, 10 February 2012 11:08

Short-term measures of real family income are driven primarily by sampling error and erratic movements in the consumer price index. The latter is mostly due to fluctuations in energy prices.

This is the reason that most economists, unlike USA Today, would not take seriously a report showing a large gain in median family income in the last four months of 2011. The main reason for the sharp rise in income shown in this report is likely the sharp drop in the consumer price index over this period.

It is more useful to report these data over longer periods of time so that random fluctuations play less of a role. Given the vast amount of material that is available for free on the web, it is especially difficult to understand why USA Today would place so much emphasis on a newly produced report that is being sold for $20 each.

People Do Have Ideas on Reducing Inequality of Income/Education, They Just Don't Get Mentioned in the New York Times Print
Friday, 10 February 2012 05:48

The NYT had an interesting article reporting on new research showing a sharply growing gap in educational outcomes based on the income of children's parents. While the racial gap has fallen sharply, this income gap has exploded.

The discussion of this research was quite valuable, however the second part of the article was devoted to telling readers that nothing can be done. For example, article concluded by presenting the views of Douglas Besharov, a fellow at the Atlantic Council who was formerly at the American Enterprise Institute:

"The problem is a puzzle, he said. 'No one has the slightest idea what will work. The cupboard is bare.'"

Of course there are all sorts of ideas on measures that would reduce income inequality, which would presumably also reduce the large gap in educational outcomes. For example, if doctors and lawyers were not largely protected from international competition they would no longer have the sort of incomes that would allow them to hire tutors and give other advantages to their children compared with the children of ordinary workers.

The Housing Market is Recovering from a Bubble, It Is Not In a Slump Print
Friday, 10 February 2012 05:30

The Washington Post still seems to not have seen the housing bubble. A front page article refers to a housing "slump" and discusses the possibility that the states' settlement on foreclosure practices will heal the housing market.

These sorts of comments imply that it is plausible that the housing market will somehow bounce back to its bubble levels of prices and construction. It isn't.

The bubble led to house prices in many parts of the country that were completely out of line with the fundamentals of the housing market, just as was the case with stock prices at the peak of the stock bubble in 2000. It also led to enormous overbuilding of housing.

There is no reason to expect house prices to bounce back at all, as house prices nationwide are just now returning to trend levels. Housing construction will pick up gradually as the oversupply from the bubble era is gradually reduced through population growth, but there is no plausible story where we will see some sort of boom in housing construction at a time when vacancy rates remain near record highs.

Confidence Lags the Economy, It Doesn't Predict It Print
Thursday, 09 February 2012 22:50

A NYT Economix blognote told readers that confidence about the economy is up and that this should be reinforcing leading to a stronger economy, as firms invest more and consumers spend more. The chart accompanying the note shows the opposite.

The recent levels of the Gallup Economic Confidence Index are getting back or slightly exceeding the peaks hit at the end of 2010, just before the economy nearly ground to a halt, growing just 0.3 percent in the first quarter of 2011. After 6 months of very slow growth, the confidence measure cratered. It has been rising again following the stronger growth of the last two quarters.

In short, this confidence measure looks like a very good lagging indicator, one that tells us where the economy was.

A Competent Federal Reserve Board Would Help the White Working Class Print
Thursday, 09 February 2012 05:35

So would trade policy that was not designed to lower their living standards. Nicholas Kristof devoted his column to the worsening plight of white workers without college degrees over the last three decades. He notes that the share of prime age workers with only a high school degree who have dropped out of the labor force has quadrupled since 1968.

This can be explained in part by the Federal Reserve Board to pursue policies that promoted full employment. When the economy did achieve low rates of unemployment, as was the case in the late 90s, workers at all education levels were being pulled into the labor force. There were strong wage gains at all points along the income distribution. If the Fed was actually doings its job and promoting full employment, instead of ignoring asset bubbles, like the stock and housing bubbles, the late 90s would be the norm rather than the exception.

Trade policy has also worked to weaken the economic situation of these workers since it has been designed to put them in direct competition with low-paid workers in Mexico, China and other developing countries. By contrast, the protectionist barriers that make it difficult for lawyers, doctors and other highly educated professionals from these countries from competing with our professionals have generally been left in place. The theoretical and actual result of such policies is a redistribution from less educated workers to more educated workers. 


Does the NYT Really Not Know the Difference Between Nominal and Real GDP? Print
Thursday, 09 February 2012 05:28
It seems not, since a graph accompanying an article on Greece's debt negotiations still shows countries like Spain, Greece and Italy with modest growth since the downturn began in 2007. In fact, all three economies have shrunk in when growth is adjusted for inflation. It will be interesting to see how long it takes the NYT to correct this one.
Germany Cannot Prosper in the Long-Run by Lending Money to Countries That Can't Repay Their Debt Print
Thursday, 09 February 2012 05:14

A column by Norbert Walter in the NYT defended Germany against complaints over its trade surplus by pointing out that its export industry acts as an engine for Europe's economy. He accurately points that Germany's export industry boosts demand for supplier industries in Netherlands and France. He then inaccurately asserts that:

"unemployed workers in Madrid or Athens can easily move to Munich or Cologne for work."

We know that unemployed workers in Madrid and Athens cannot easily move to Munich or Cologne because in general they don't. Prior generations of workers from Spain and Greece did often move to Germany and other northern European countries in search of work, but this practice has become much rarer in the last two decades.

Walter's argument that Germany, with an aging population, should have a trade surplus is reasonable, except the surplus should not be with other countries with similar demographics. In standard economic theory we would expect to see Germany have large trade surpluses with rapidly growing developing countries like China and India that would be easily able to repay the debt incurred.

Slow growing countries like Greece and Italy will not. Germanys cannot both want a large trade surplus with these countries and then complain about their debts. When it makes such complaints, Germany is complaining about its own behavior as much as that of Greece and Italy, since there are no borrowers where there are no lenders.

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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.