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The Washington Post Is Unhappy About Plans to Reduce the Value of the Dollar Print
Monday, 03 October 2011 04:08

Those who know economics recognize the trade deficit is the basic imbalance facing the economy today. If the U.S had balanced trade it would create in the neighborhood of 4 million manufacturing jobs.

Also, by getting trade closer to balance, the country would no longer be a net borrower. By definition, countries that are net borrowers must either have budget deficits or negative private savings, as the U.S. did at the peak of the housing bubble.

This is why it is so peculiar that the Washington Post is so strongly opposed to measures to reduce the value of the dollar against the yuan. The Post constantly rants about the budget deficit being too large. However, unless the trade deficit is reduced, then the Post's dream of lower budget deficits could only translate into reduce private sector savings.

This means that people would be borrowing and accumulating nothing to support themselves in retirement. That is the implication of the Post's position, there is no way around this.

The Post's argument that the value of the yuan won't affect trade much does not hold water. Even if many of the jobs that are already lost may not come back, a higher yuan would sharply reduce the rate at which we are losing new jobs.

Furthermore, other countries would likely raise the value of their currencies against the dollar, following the yuan. This is what happened when China raised the value of the yuan in 2005. This will lead to an improved trade balance with other countries as well. Relative prices are by far the most important factor in determining trade flows. These are in turn a direct function of the exchange rate.

The Post also mentions pending trade agreements as an alternative mechanism for balancing trade. (It inaccurately described these deals as "free-trade" agreements. These agreements increase many forms of protectionism, like patents and copyrights. The Post is misleading its readers to back its position by calling these pacts "free-trade" agreements.) In fact, the sorts of trade agreements now being considered have generally been associated with larger trade deficits, not smaller trade deficits. 

Morgan Stanley Director Erskine Bowles Calls for Cutting Social Security and Medicare Print
Sunday, 02 October 2011 09:05

Morgan Stanley Director Erskine Bowles, along with his sidekick former Senator Alan Simpson, once again used the Washington Post oped page to call for cuts to Social Security and Medicare. The two made the call in the context of a piece urging the congressional "supercommittee" to produce a large deficit reduction package.

They argued that it was necessary for cuts in "entitlements" to be part of any deficit package. "Entitlements" is the preferred euphemism for Social Security and Medicare for people who want to cut Social Security and Medicare.

It is once again interesting to note that in a call for shared sacrifice, Bowles and Simpson once again never mention the possibility of financial speculation tax (FST), which could raise over $1.5 trillion over the course of the next decade. Such a tax has been used in the UK for centuries and a proposal for such a tax has recently been put forward by the European Commission. It is remarkable that the elite political figures in the United States show so little interest in an FST.

The Bowles-Simpson piece also includes a bizarre criticism of President Obama's deficit reduction proposal complaining that:

"while it does (barely) stabilize the debt, it does so at a dangerously high level and with no margin for error."

Since Congress approves budgets every single year, and often makes major budget adjustments between budgets, it is not clear why Bowles and Simpson think they mean by "with no margin for error." If a budget plan approved by the current Congress fails to meet deficit targets for budgets 8-10 years in the future, Congress will have plenty of time to make whatever adjustments it views as necessary.

Of course as every budget analyst knows, the whole long-term budget problem is the result of our broken health care system. If the United States paid a comparable amount per person for its health care as people do in any other wealthy country, we would be looking at huge surpluses, not deficit. This point is rarely mentioned by Bowles and Simpson. 

Will Thomas Friedman's Column Be Better in the Future? Print
Sunday, 02 October 2011 07:04

Those who just read the headline of Friedman's column, "how did the robot end up with my job?" will be disappointed if they are expecting an improvement in the quality of columns appearing on the NYT oped page. It turns out that Friedman was just speaking metaphorically.

Friedman yet again gives us a big picture that is completely out of focus:

"In the last decade, we have gone from a connected world (thanks to the end of the cold war, globalization and the Internet) to a hyperconnected world (thanks to those same forces expanding even faster). And it matters. The connected world was a challenge to blue-collar workers in the industrialized West. They had to compete with a bigger pool of cheap labor. The hyperconnected world is now a challenge to white-collar workers. They have to compete with a bigger pool of cheap geniuses — some of whom are people and some are now robots, microchips and software-guided machines."

Of course this is in part true. We have structured our economy so that the vast pool of low cost labor in the developing world has directly or indirectly brought down the wages of autoworkers, textile workers, retail workers, and custodians. However, it has not had the same effect on the wages of doctors, lawyers, dentists or most other highly educated professionals. Nor has it prevented the nation's capital from being chock full of "six-figure buffoons," people with no discernible skill other than being able to ingratiate themselves to those with money and power and therefore earn salaries well in excess of $100,000 a year.

Nor has globalization and technology prevented clowns, like Hewlett-Packard's Leo Apotheker, from wrecking major companies and then walking away with tens or even hundreds of millions of dollars as a reward. In Mr. Apotheker's case, bringing one of the country's leading technology companies to the brink of disaster was worth $23 million (@1590 minimum wage work years). And globalization and technology have not prevented Wall Street types like Richard Fuld or Robert Rubin from pocketing hundreds of millions as they brought both their companies and the economy to ruin.

A robot columnist might try to explain such striking facts about the U.S. economy. International competition has been a major force depressing the wage and income of most of the population, yet a small group at the top has been able to game the system to largely protect themselves from such competition. But apparently we will not be reading about this fundamental feature of the U.S. economy on the NYT oped page; Thomas Friedman still has his column.

If Millennials Do Worse Than Their Parents, It Will Be Because Bill Gates' Kids Have All the Money Print
Saturday, 01 October 2011 05:43

The Washington Post had a column by a millennial columnist complaining about the lack of opportunity. It is striking that the column never once mentioned income inequality.

There is no doubt that millennials will on average be far wealthier than their parents. Output per hour has roughly doubled over the last three decades, meaning that the real wage could be almost twice as high today as it was in 1980. Insofar as the typical millennial is not seeing the benefits of this productivity growth it is due to the fact that so much income has been redistributed upwards, not the result of any generational dynamics.

In Greece, Austerity Measures Weaken the Economy, What Did the Post Expect? Print
Friday, 30 September 2011 06:17

They kept spraying water on the wood, but they just couldn't get the fireplace started. The Post wrote the equivalent in an article on the Greek crisis:

"The government has raised taxes and cut services and is announcing tougher steps every other week. So far it has been to no avail; the economic outlook keeps getting worse, not better."

When the government pulls money out of the economy by laying off workers, cutting government workers' pay, and raising taxes, the expected result is a weakened economy. This is exactly what has happened in Greece. It is difficult to understand what the Post meant in saying "to no avail."

Mortgage Debt Is NOT the Main Factor Holding Back U.S. Growth Back Print
Friday, 30 September 2011 05:15

The NYT had an article about the prospects of persistently slower growth in Europe and the U.S. as a result of the current downturn. It told readers that:

"Now, just as the United States economy is held back by households whose mortgages are still underwater and who won’t begin to spend again until they have run down their debts, Europe can’t begin to grow again until its countries learn to live within their means."

Actually, the United States economy is not being held back by a lack of consumer spending. The ratio of spending to income is still considerably higher than the pre-bubble average as reflected by the lower than normal saving rate. The problem is that the bubble had generated excessive consumption demand, which is not being replaced by any other source of demand.

Book2_20820_image001 Source: Bureau of Economic Analysis.

The piece also inaccurately asserts that:

"in Europe it was mainly governments that piled on the debt, facilitated by banks that lent them money by buying up sovereign bonds."

Actually, Ireland and Spain, two of the most troubled countries, ran budget surpluses in the years preceding the downturn. They ran into trouble because they both had large housing bubbles which burst and left their economies in crisis.

It would also have been useful if the chart showing debt to GDP ratios included Japan. The IMF shows Japan's debt to GDP ratio at the end of this year as being 229 percent. Excluding Greece, this is almost twice as large as any debt burden shown in the chart. Japan can currently pay just over 1.0 percent interest on its long-term debt. If Japan had been included, it would have suggested that the debt levels may not be as troubling as the piece implies.

George Will Is Upset Because Barney Frank Wants to End the Banks' Control Monetary Policy Print
Thursday, 29 September 2011 07:06

That's right, Representative Barney Frank, the ranking Democrat on the House Financial Services Committee, proposed legislation that would take away the votes that the banking industry has on the Federal Reserve Board's Open Market Committee (FOMC). As the FOMC is currently structured, 12 of the 19 members are essentially appointed by the banks, with 5 of the 12 voting at any one time.

George Will is outraged that Frank would take away the banks' direct control over the country's monetary policy. After all, if we followed Frank's logic, drug companies wouldn't be able to appoint commissioners to the Food and Drug Administration, phone companies wouldn't be able to appoint commissioners to the Federal Communications Commission, and airline companies would not be able to appoint commissioners to the Federal Aviation Authority.

Bloomberg Doesn't Like Financial Speculation Taxes and Is Prepared To Make Stuff Up to Make Its Case Print
Thursday, 29 September 2011 13:36

Bloomberg News Service really doesn't like financial speculation taxes (FST). In fact it dislikes them so much that it is prepared to make things up to try to get people to oppose an FST. It told readers that the very low financial speculation taxes (0.05 percent on each side of a stock trade 0.005 percent on each side of a derivative trade) being considered by the European Union would shave 0.5 percentage points off of Europe's growth rate.

Let's think about this one for a moment. In the last three decades, the cost of trading shares of stock and derivatives has almost certainly fallen by at least twice this much. If the increase in the cost of trading from this tax would slow growth by 0.5 percentage points, then we should expect that a decline in costs of more than twice this size would raise annual growth by perhaps as much a 1.0 percentage point.

Since growth has been very weak in this last decade of low trading costs, does Bloomberg really want to tell its readers that it would have been 1.0 percentage point lower if there had not been a decline in transactions costs?

What about the UK which already has a tax on stock trades that is 5 times the size of the tax being considered by the EU. (This tax somehow appears as a "small duty" in the Bloomberg piece.) Since the UK tax is 5 times as large as the one that Bloomberg tells us would slow growth by 0.5 percentage points, does Bloomberg want us to believe that the UK's growth rate might increase by 2.5 percentage points (5*0.5 percentage points), if the UK eliminated its stock transfer tax?

Of course these claims are absurd on their face as is the claim that the tax could possibly have an impact on growth of the order of magnitude claimed by Bloomberg. This is clearly a case of Bloomberg making stuff up to put down a measure it doesn't like.

And we know that people resort to making phony arguments when they know they don't have real arguments. So, we should all extend a big thank you to Bloomberg News Service.


[Non-correction: I did find the EU study to which the Bloomberg editorial referred. It does refer to a reduction in GDP growth of 0.5 percent. However, this section is awkwardly worded and it is very clear that it is actually referring to GDP levels, not growth rates. In response to the comment by editorial board member Paula Dwyer (below), I suggest that it is Bloomberg that needs to make a correction.]

The Post Does Mind Reading at the European Central Bank Print
Thursday, 29 September 2011 06:28

The Washington Post explained the reluctance of European Central Bank president Jean-Claude Trichet to support a large write down of Greek debt that would force creditors to take large losses by saying:

"Trichet and others worry that a default or even a steep devaluation of Greek bonds would wreck the euro zone’s credibility and make it harder for countries, banks and companies to raise money."

Actually, the Post doesn't know what Mr. Trichet and others are worried are actually about, it only knows what they claim to be worried about. It is possible that Mr. Trichet and the unnamed others are actually worried about the euro zone's credibility, but it also possible that their main concern is to protect European banks from large losses. The Post should just report what people say and do and not try to claim knowledge of their motives.

Germany Is a Slow Growing Rich Country, China Is a Fast Growing Developing Country Print
Thursday, 29 September 2011 02:38

In a useful anti-austerity editorial the NYT makes the mistake of equating the trade surpluses of China and Germany. There is a fundamental difference between these countries. China is a fast growing developing country. In standard economic theory we would expect that it would be a capital importer (meaning it has a trade deficit) since capital gets a much higher return in China than elsewhere. The fact that China and other developing countries are growing by running large trade surpluses and exporting capital reflects the enormous failure of the IMF in setting up a workable international financial system.

On the other hand, it would be expected that a relatively slow growing wealthy country like Germany would have a trade surplus, although not necessarily with other wealthy countries, as is now the case in the euro zone. The Germans apparently have not yet come to grips with the accounting identity that implies that if they run persistent trade surpluses with the other euro zone countries, then Germany will have to continually lend them more money. The only way to avoid this situation would be if the deficit countries within the euro zone had massive surpluses with non-euro zone countries.

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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.