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Should We Slow Efficiency Growth? Print
Sunday, 19 February 2012 10:22

The NYT had a very good piece from Barry Schwartz, one of my former college professors, asking this question. The context is whether the Bain Capitals of the world should be allowed to downsize without any consideration for workers or the community.

The United States is the only wealthy country that allows companies to dump long-serving workers at will. It might be reasonable to require some amount of severance pay when they fire long-serving workers (e.g. 2 weeks per year of work). This would nor prevent downsizing where there are large efficiency gains, however it may prevent some cases where the gains are marginal. 

Has Anyone at the Washington Post Heard of Exchange Rates? Print
Friday, 17 February 2012 19:54

It doesn't seem so from an article that it ran on export subsidies offered in the form of loan guarantees from the export-import bank. The article highlights the purchase of Boeing plans with government subsidized loans by an Indian airline. The Indian airline then drove Delta out of a key route.

While the article talked to several economists on the wisdom of using loans guarantees to subsidize exports, it never once mentioned reducing the value of the dollar as an alternative. In fact, a decline in currency values is supposed to be the mechanism through which countries adjust to trade deficits in a system of floating exchange rates. For this reason, it is bizarre that the issue was never raised as an alternative route toward increasing net exports.

The article also implied that these loans are somehow a unique way in which the government picks winners and losers. The government has a wide range of policies (e.g. patent protection, too big to fail bank subsidies, protection for highly paid professionals) that put in a situation of picking winners and losers. This is a standard practice in the U.S. economy, not an exception as the Post article implies.

[Thanks to Joseph Seydl for the tip.]

China's Pirates, Currency, and Class Print
Thursday, 16 February 2012 03:44

David Leonhardt has an interesting piece that asks whether currency values should still be an important issue between the United States and China, suggesting that China's appropriation of U.S. technology and intellectual products should be a more important issue. There is an important class aspect to this question that the piece overlooks.

From the standpoint of manufacturing workers and those whose wages might be affected by an increased demand for manufacturing workers (e.g. those without college degrees), the lower the value of the dollar against the Chinese currency the better. For this group, it matters little that China may not pay Microsoft the fees that it is claiming. In fact, it could very well be beneficial to these workers if China does not respect U.S. intellectual property claims since it will mean that they can buy products produced in China at a lower cost.

The situation is of course the opposite with the highly educated workers who will likely get increased pay if China adopts a strong intellectual property system. The shareholders of the affected companies will benefit as well.

This disparity in interests is undoubtedly central in the Obama administration's negotiations with China. It understands that the more it can get in terms of enforcement of intellectual property claims, the less it will get in terms of appreciation of China's currency. There also is the very real market consideration that if China is paying more in royalties and licensing fees to the United States, then its currency will have a lower value than would otherwise be the case, disadvantaging U.S. manufacturing workers.

Argentina Collapsed Before Default Print
Wednesday, 15 February 2012 16:48

Ezra Klein's WonkBlog has an interesting piece asking whether Greece is going to have the dubious honor of having the largest economic downturn in modern history. The piece quotes Uri Dadush, a former World Bank official, who predicts a decline of 25-30 percent, which would beat both Argentina's 20 percent decline in 1998 to 2002 and Latvia's 24 percent decline in the current crisis.

The piece is a bit sloppy on one point, saying that Argentina's decline followed the default on its debt in December of 2001. Actually, the vast majority of the decline preceded the default. Argentina's economy had already contracted by more than 16 percent by the time of the default. It shrank by around 5 percent following the default before turning around in the second half of 2002.


                                      Source: International Monetary Fund.

This matters in the current context since many people are asking what alternatives Greece has to following the austerity path being demanded by the IMF, the ECB, and the EU. While there are reasons that a default would be more difficult in Greece's case than Argentina's (most importantly Argentina had its own currency), the post-default experience of Argentina suggests that it probably chose the better route.

WAPO TARP Logic: If it Issues a Mortgage at 1 Percent Interest, and the Mortgage is Repaid, Then It Has Made a Profit Print
Wednesday, 15 February 2012 06:08

In an editorial on President Obama's proposed bank tax, the Washington Post claimed that the country made a profit on its TARP loans. This claim is only true if we consider the interest on a below market loan to be a profit.

The TARP involved loans of hundreds of billions of dollars to banks at interest rates that were far below what they would have been forced to make in the market at the time. The Fed lent far more money to the banks through its special lending facilities.

The access to trillions of dollars of loans at below market interest rates in the middle of a financial crisis was enormously valuable to the banks allowing many to survive that would have otherwise have been insolvent. Arguably, this was the best policy for the economy, since it prevented a full-scale financial collapse that would have led to an even larger economic downturn and more unemployment. However it is absurd to pretend that the taxpayers did not give large subsidies to the banks through these bailouts.

[Addendum: The subhead for this editorial is "Why should banks have to pay for the auto industry bailout?" On this topic, Gary Burtless calls attention to the sentence, "If Treasury faces paper losses on TARP now, it is due in large part to the bailouts of insurance giant AIG, General Motors and General Motors’ erstwhile finance unit, now known as Ally Bank."

AIG is of course not part of the auto industry. There also is a very specific reason that it needed a government bailout. It had issued hundreds of billions of dollars worth of credit default swaps that it would not have been able to pay off, without the bailout.

And, guess who owned the credit default swaps? Yep, it was the banks.


Casey Mulligan Has Another Head Scratcher On Unemployment Insurance Print
Wednesday, 15 February 2012 12:59

In his Economix post today Casey Mulligan asks the question of whether unemployment benefits on net create jobs. He tells readers that:

"Even if unemployment insurance did not discourage a single person from working, the net effect of the program on hiring can be positive or negative, depending on the labor intensity of the goods and services that the unemployed buy, compared with the labor intensity of the goods and services that those who pay for unemployment do not buy."

There is a problem in this story and it has to do with timing. The people who pay for unemployment insurance (UI) are in fact the same as the people who receive it. It is paid for as deduction from wages. The issue is not a difference in consumption patterns between the payers and receivers, the issue is the timing of the benefits.

At the point in a business cycle where large numbers of people are receiving benefits (like now) the UI system will be running a deficit. This allows unemployed workers to receive benefits, which they will overwhelmingly spend, without an offsetting current payment from other workers. This means that there is no matching deduction from the demand of workers who are still employed.

Over time, there may be offsetting increases in the contribution for unemployment insurance, depending on whether the program is financed in a way that ensures that it is a self-financed system. (We can also have a Ricardian equivalence story whereby other taxes would be increased to make up a shortfall in the UI system.) That can lead to lower consumption at future times.

However, there is not a plausble story whereby workers would reduce consumption today by an amount equal to the additional spending allowed by the payment of unemployment benefits. Therefore we don't have to investigate the relative labor intensity of the items purchased by UI beneficiaries and non-beneficiaries as Mulligan suggests.

It Matters That Countries Have Their Own Central Bank Print
Wednesday, 15 February 2012 05:54

A Washington Post article on the problems of restructuring of Greece's debt discussed factors that affect country's ability to carry debt. It neglected to mention the issue of whether it borrows in currency it issues. If a country is like the United States or Japan, and borrows almost entirely in its own currency, then it would only default on its debt as a political decision (e.g. it refuses to extend a debt ceiling, authorizing the debt to be paid).

Since it issues its own currency, it can always issue the currency needed to finance its debt. There markets seem to understand this point very well. The countries that issue debt in their own currency (e.g. Sweden, Denmark, the UK) consistently enjoy lower interest rates on their debt than countries with comparable debt burdens who do not have their own currency.

Big News: Japan Targets Higher Inflation Print
Wednesday, 15 February 2012 05:26

Japan's central bank took the extraordinary move of targeting a higher rate of inflation, setting a 1.0 percent inflation target. This should have been front page news.

The idea of a central bank setting an inflation target above its current level, in the hope of raising inflationary expectations, dates back to a paper by Paul Krugman in the late 90s. (Federal Reserve Board Chairman Ben Bernanke endorsed the same policy when he was still a professor at Princeton.) The logic is that if the central bank can credibly commit itself to a higher inflation target then the commitment could create self-fulfilling expectations. Businesses would invest and consumers would spend based on the expectation of higher inflation, which would mean a lower real interest rate. The increased business activity would then lead the inflation targeted by the bank.

This decision by the Japanese central bank will provide an opportunity to test whether such targeting can work. If it proves successful, it may lead to more pressure on other central banks (like the Fed) to go this route.

The Clock on UK Austerity Policies Print
Wednesday, 15 February 2012 04:58
The NYT had an article on the response in the UK to warnings from Moody's that it may downgrade the country's debt because of the country's week economy. It is worth noting that it has been roughly 20 months since the Conservative-led UK government first began to implement its austerity program. President Obama saw a resounding electoral defeat in November of 2010, 20 months after Congress passed his stimulus program.
ABC Does Unpaid(?) Commercial Announcement for the Republicans on the Evening News Print
Tuesday, 14 February 2012 17:30

ABC News took budget reporting to new levels of irresponsibility last night telling its viewers to think of the federal budget like the family budget by knocking off 8 zeros to make spending $38,000, instead of $3.8 trillion. While this approach could be useful to put some items in context (spending on TANF, the main welfare program, would be around $190; the $1 million Woodstock museum that served as a main prop for John McCain's presidential campaign would cost 1 cent), it is fundamentally misleading in explaining the significance of the deficit and debt.

Unlike ABC's family, the government is expecting to be around in perpetuity. This means that it never has to pay off its debt. At the least, it would be more appropriate to make a comparison to a corporation, which may forever add to its debt as it grows. No shareholder would complain if General Electric borrowed a huge amount of money to expand a profitable division. Government spending fosters growth by financing education, infrastructure and other public investments which will make the country richer in the future.

However, there are even more fundamental differences between the government and a family. The U.S. government's debt is in notes printed by the government. If ABC wants to make the family analogy, its family has an obligation to pay off the $9,000 it has borrowed in 9000 sheets of paper that say "I owe you $1, payable in notes that say 'I owe you a note saying that I owe you a note'."

Most families can't borrow on such terms, but the government can and does. If ABC can't explain this distinction in its 2 minute and 30 second news segment, then it should look for a different analogy.

Finally, the government has the responsibility to support the private economy. The collapse of the $8 trillion housing bubble (which ABC News neglected to tell its viewers about as it was growing) left a gap in annual demand of close to $1.4 trillion.

When the bubble burst annual spending on residential construction fell by close to $600. Consumption, which had been fueled by housing bubble generated equity, fell by close to $500 billion. The collapse of a bubble in non-residential real estate led to a fall off in this sector of close to $150 billion. And, cutbacks in state and local spending, forced by the decline in tax revenue, reduced annual demand by another $150 billion.

It would be wonderful if private sector demand would spring up and replace this lost demand, but the world doesn't work this way. If the government were to quickly cut back its deficit it would lead to lower output and higher unemployment.

To make the family analogy, suppose that the family's spending was responsible for keeping the local butcher, barber, and doctor in business. If the family decided to stop using its credit card, one or more of these businesses would go under.

If ABC wanted to do honest reporting on the budget, it would have crafted its family analogy along these lines.

One last point, ABC said that President Obama broke a promise by not cutting the deficit in half. It would have been useful to point out that the downturn was far more severe than President Obama, and most private economists, expected at the time he made this promise. This is the main reason that the deficits have not followed the course that expected.

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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.