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Japan Has Not Suffered from "Crushing" Deflation Print
Monday, 16 April 2012 05:12

A NYT article that reported on the declining importance of manufacturing to Japan's economy at one point referred to:

"the crushing deflation that has burdened Japan’s domestic economy for nearly two decades."

Actually, Japan has experienced modest inflation rather than deflation for most of the last two decades. Even when prices did fall, the rate of decline has been slow, exceeding 1.0 percent only in 2009, in the wake of the world financial crisis.

Japan, like other countries, suffers from having an inflation rate that is too low. This is a problem because nominal interest rates cannot fall below zero. It would be desirable to have a large negative real interest rate at present (the real interest rate is the interest rate minus the inflation rate), but this is not possible when inflation is a low positive number or a negative number.

The fact that the inflation rate is below zero has no special importance in this story. The decline in the inflation rate from a positive 0.5 percent to a negative 0.5 percent is no worse than a decline in the inflation rate from a positive 1.5 percent to a positive 0.5 percent.

This fact can be seen clearly if we remember that the rate of inflation is an aggregate of tens of thousands of price changes across the economy. When the inflation rate is near zero many of these price changes will be negative, meaning that the prices of some goods are falling. (Computer prices have been falling rapidly in the United States for decades.) When the rate of inflation goes from a small positive number to a small negative number it simply means that the percentage of items with falling prices has risen. It is difficult to see how that could amount to some sort of calamity.

This point is important because the obsession with deflation has been a serious distraction in policy debates. Many have implied that the Fed and other central banks have been successful in their anti-recession policy because they have managed to avoid deflation. This is not true. They have in fact failed because they have not been able to lower the real interest rate as much as would be desirable given the weakness of the economy.

Republicans Show Inability to Understand Arithmetic in Energy Policy Debate Print
Monday, 16 April 2012 04:45

That would have been a reasonable headline for a Washington Post article that told readers that Republicans hope to make the price of gas a major issue in the election. The article says that they hope to blame the rise in the price of gas on President Obama's restrictions on drilling and the construction of the Keystone pipeline.

The Republicans will only have a chance in succeeding in this effort if the media help them deceive voters. The price of oil, and therefore the price of gas, is determined in the world market. Even under the most extreme assumption (e.g. oil companies get to expropriate private property to drill everywhere, with no environmental regulations) it is unlikely that we could increase the world supply of oil by more than 1 percent. 

This could lower the price of oil by 2-3 percent. That means that, other things equal, a drill everywhere policy might reduce the price of gas by 7-8 cents a gallon. If voters knew this simple fact, it is unlikely that the Republican strategy to make gas prices a political issue would have much chance of success.

It is also worth noting that domestic production of oil and gas has increased substantially under President Obama. The main impact of the Keystone pipeline (which would not have yet been operational in any case) would be to equalize gas prices across the country. It would lead to lower gas prices on the East Coast, but higher prices in the Midwest. It is not clear that voters in the Midwest would be upset if they realized that delaying the pipeline has helped keep down the price they pay for gas.

Trade Agreements that Increase Protectionism are not "Free-Trade" Agreements Print
Monday, 16 April 2012 04:18

The Washington Post did the obligatory waste-a-word to increase inaccuracy routine when it referred to a "free-trade" agreement with Colombia in a front page news story. The agreement includes a number of provisions that increase the strength of patent and copyright protection in Colombia which will raise the price of drugs and other products above their free market level. This will have the effect of dampening growth, in addition to making health care more costly for people in Colombia.

There is no reason that the Post should call this pact a "free-trade" agreement. Its proponents like to embrace this term because it gives the pact a more favorable image, however it would be more accurate to simply call it a "trade" agreement.

In discussing this agreement, Morning Edition referred to the $1 billion in additional exports that the United States is projected to get as a result of the agreement. The number of jobs in the economy depends on net exports (exports minus imports). If jobs just depended only on exports, then we could increase employment by having car parts in the United States exported to Mexico to be assembled there, and then imported back as a finished car into the United States.

The history has been that the trade deficits have increased with countries with whom we have signed trade agreements. If that pattern holds with Colombia, the trade deal will be a net job loser, even if our exports increase. It would have been helpful if Morning Edition had clarified this arithmetic for listeners who might have been deceived by the way in which the Obama administration has sold the agreement.

It is also worth pointing out that an increase in exports of $1 billion would correspond to just 10,000 jobs, even if there is no increase in imports. If the economy is generating 200,000 jobs a month, this is equivalent to a day and half of job creation.

Greg Mankiw Hides the Role of Government in Redistributing Income Upward Print
Sunday, 15 April 2012 07:52

The fact that Greg Mankiw works for Governor Romney is very clear when he tells readers:

"Whether competition among governments is good or bad comes down to the philosophical questions of what you want government to do and how much you fear government power. If the government’s job is merely to provide services, like roads, schools and courts, competition among governmental producers may be as good a discipline as competition among private producers. But if government’s job is also to remedy many of life’s inequities, you may want a stronger centralized government, unchecked by competition.

"These are two fundamentally different visions. The next election, and to some degree every election, is about which one voters find more compelling."

This is no doubt how Mitt Romney and other wealthy people would like the public to see the debate. However the reality is that the government has implemented a wide range of policies that have led to a massive upward redistribution of before tax income over the last three decades. These policies have affected every corner of the market economy.

Just to take a few biggies, the fact that drugs are expensive is entirely due to government-granted patent monopolies. We spend about $300 billion a year on drugs that would cost less than$30 billion a year in a free market. The difference of $270 billion a year is close to 5 times what is at stake in extending the Bush tax cuts to the richest 2 percent of the taxpayers. (There are alternative mechanisms for financing drug research.)

Second, the reason why the wages of autoworkers have been depressed by having to compete with low-paid autoworkers in China, but the wages of doctors have not been similarly depressed is the result of deliberate government policy. We designed our trade policy to put our autoworkers in direct competition with workers who get paid less than $1 an hour in the developing world. The predicted and actual effect of this policy is to lower the wages of large segments of the U.S. workforce.

We could have designed trade policy to make it as easy as possible for smart kids from China, India and elsewhere to study to U.S. standards and then practice medicine, law, and economics in the United States. This would put the same downward pressure on the wages of these professions as we have seen for manufacturing workers and non-college educated workers in general. This would lead to huge gains to consumers and the economy in the form of lower costs for health care, college education and other services provided by highly paid professionals. 

However trade did not go this route because doctors have much more power than autoworkers. The negative impact of international competition on distribution is aggravated by the over-valuation of the dollar which leads to the large trade deficit we are currently experiencing. The over-valuation of the dollar is another deliberate policy that had its origins in Robert Rubin's high dollar policy, with the muscle provided by the IMF in its bailout of East Asian countries from their financial crisis in 1997.

For one more example, the decision to bail out the Wall Street banks, while leaving them largely intact, meant that the top executives and traders at these institutions could continue to enjoy huge paychecks with the taxpayer acting as their insurer. This is a massive subsidy from ordinary people to some of the richest people in the country.

There are many other examples of the government engaging in policies that lead to upward redistribution of income. This is the topic of my book, The End of Loser Liberalism: Making Markets Progressive (free download available -- death to copyright monopolies). It is very advantageous to the wealthy to act as though the current distribution of income is just the natural outcome of the market, but it happens not to be true. No one should buy this garbage unless you're being paid lots of money. 

Covering Up for Representative Ryan Print
Sunday, 15 April 2012 07:44

David Leonhardt wrongly told readers that:

"Mr. Ryan’s plan would cut the top rate to 25 percent, from 35 percent, and still leave overall tax collection roughly where it has been, by eliminating tax breaks."

Ryan claims that his plan would leave tax collections roughly where it has been, however he has never identified a set of tax breaks that he is prepared to eliminate to accomplish this result. In fact, Ryan has explicitly ruled out two touching of the biggest tax breaks, which largely affect the rich, the special treatment of capital gains and dividends.

To get anywhere close to revenue neutrality without touching these tax breaks would require eliminating almost all the tax breaks that benefit the middle class, like the mortgage interest deduction, the deduction for employer provided health care, and the deduction for charitable contributions. This would amount to a massive transfer from the middle class to the wealthy.

While Leonhardt cites a poll showing widespread support for tax reform, it is unlikely that many people would support a reform that meant that they paid thousands more in taxes each year so that Mitt Romney and Warren Buffet could pay less. This outcome is only plausible if the media do not accurately inform voters about what is at stake.

Has the NYT Heard of Patents? Print
Sunday, 15 April 2012 07:32

Readers were no doubt wondering after seeing this piece on how insurers are trying to avoid being forced to pay for some new high-cost drugs. These drugs, which can make a huge difference in survival rates for cancer and other diseases, can cost tens of thousands or even hundreds of thousands of dollars a year.

The key point missing from this piece is that these high costs are entirely due to the patent monopoly given to drug companies by the government. These drugs could almost invariably be produced for less than a couple of hundred dollars a year. Needless to say, there would not be big fights between patients, insurers and the government if the drugs sold for $200 a year.

Of course we would then need an alternative mechanism to finance research, but readers will not even understand the problem if they don't realize it is the patent monopoly that creates high cost drugs, not the fundamental economics. This realization could lead to a consideration of better alternatives. 

Washington Bureaucrats Partying Like They're Google Print
Sunday, 15 April 2012 07:19

Suzy Khimm had a very nice column in the WAPO today making what should be an obvious point. The lavish party held by the Government Services Administration in Las Vegas, which has been the lead story in newspapers and news shows across the country, would be standard fare at any major corporate gathering. In fact, it would probably be considered stingy.

The outrage is that this affair was done on the taxpayers' dime. We certainly should be upset at government officials that use our money to throw themselves a party like this, but the fact that we even know about it is entirely the result of the greater disclosure required from government agencies than the private sector.

Khimm talks about how private sector values have begun to permeate the public sector as a result of increased contracting. This is undoubtedly true. But it is also worth asking whether we would ever hear about the lavish partying done by a Lockheed or the latest incarnation of Blackwater on their fat government contracts.

In principle, we are supposed to be saving money by using these contractors rather than having the government provide these services directly. If anyone believes this one, I have shares of a new social media company for you.

The world of government contracting is among the sleaziest places on earth. Friends and lobbyists are worth far more than effective and efficient service provision.

Anyhow, there is no excuse for ripping off the government with this Las Vegas party, but it would be great if the media paid as much attention to all the ripoffs carried out by private contractors. They are not hard to find.

Defending President Obama and the 1 Percent Print
Saturday, 14 April 2012 08:14

There are plenty of reasons to bash President Obama and even more to bash the richest 1 percent of the income distribution, but it is possible to go off track. The Post did so today in citing a study that shows the top 1 percent got 93 percent of the income gains from 2009-2010.

This is highly misleading because the vast majority of these income gains were capital gains due to the rebound of the stock market following its collapse in 2008-2009. Using this same measure of income, the top 1 percent suffered 49 percent of the income losses in the recession. 

While it is reasonable to include capital gains in a measure of income growth over a long-term (this is money that people have at their disposal), the short-term fluctuations give a very misleading measure of distribution of income. President Bush was not a hero to the bottom 99 percent because the stock market crashed under his watch and President Obama is not a sop for the rich because it recovered while he was in office. (Now bailing out Wall Street is a different matter.)

At one point in discussing Mitt Romney's record as governor of Massachusetts, it tells readers:

"Average weekly wages for workers rose slightly more than they did nationally while Romney was in charge. In Massachusetts, wages went up 4.1 percent from 2002 to 2006, adjusting for inflation. Nationally, they rose 3.2 percent."

Inflation in the Northeast was 1.9 percentage points higher over this period than for the nation as a whole. If the calculation of real wages used for this comparison simply used the nationwide inflation rate to measure the growth of real wages, then it would be seriously misleading. The regional CPI would imply that wage growth in Massachusetts lagged the nationwide average by roughly a percentage point, instead of exceeding it by 0.9 percentage points. (Of course, Romney's ability to influence wage growth in a 4-year stint as governor would be very limited in any case.)

There Was No Bowles-Simpson Commission Report, #45,373 Print
Saturday, 14 April 2012 07:49

Today Ezra Klein is guilty of that standard Washington insider mistake of referring to a Bowles-Simpson commission report. In his column, he contrasts the tax increases proposed by the commission (along with increases advocated by others), with the pledges by Romney to raise taxes on no one and the pledge by President Obama to not raise taxes on anyone other than the top 2 percent.

Of course there was no Bowles-Simpson commission report. The by-laws clearly state:

"The Commission shall vote on the approval of a final report containing a set of recommendations to achieve the objectives set forth in the Charter no later than December 1, 2010. The issuance of a final report of the Commission shall require the approval of not less than 14 of the 18 members of the Commission."

There was no vote taken on anything by December 1. (In fact there was never a formal vote.) And the report touted as being the commission report never had the support of more than 11 of the 18 members of the commission report.

Hence this report is accurately described as the report of the co-chairs, Morgan Stanley director Erskine Bowles and former Senator Alan Simpson. In other words, the "Moment of Truth" is a lie.

Counting and Double-Counting In Medicare Print
Saturday, 14 April 2012 07:30

Steve Rattner put his ignorance on public display again in a column in the NYT.  He told readers that counting the savings projected in Medicare as a result of the cost controls in President Obama's health care reform as lowering the budget deficit amounts to double-counting. There is a simple word for Rattner's claim: wrong.

The logic is simple. The Medicare program is counted as part of the overall budget. (If Rattner has other information on this point, he could do a great service by sharing it with NYT readers.) However, part of Medicare (Part A, which covers hospital insurance and most other medical bills of seniors) is also required to be funded by the designated Medicare tax. Any savings in this portion of the program will improve the finances of the Medicare trust fund and also reduce overall expenditures, thereby leading to lower budget deficits.

This really is not rocket science. We finance some categories of transportation spending from the Highway Trust Fund, which relies on revenue from the gas tax. If we reduced this transportation spending it both frees up money in the trust fund and also reduces the budget deficit. There is no double-counting here, it is just counting pure and simple.

It is bizarre that this accusation of double-counting keeps coming up. It is wrong and does not belong in a serious newspaper.

(btw, health care costs in the United States are a huge problem. If the elites were not such ardent protectionists, they would be looking to have free trade in Medicare and health care more generally.)

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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.