CEPR - Center for Economic and Policy Research

Multimedia

En Español

Em Português

Other Languages

Home Publications Blogs Beat the Press

Beat the Press

 facebook_logo  Subscribe by E-mail  


Misplaced Optimism and Fears on Greece Print
Friday, 28 November 2014 18:15

Nicholas Gage uses a NYT column to tell us that Greece is on the path to recovery and that the main risk to its prosperity is the rise of the left-wing political party Syriza. Both claims are dubious.

In terms of the recovery, Gage points to the country's strong third quarter growth, increased tourism, an improved budget situation and a decline in the unemployment rate. While the lower deficits would be good news, if the European Union was prepared to allow Greece to have a substantial stimulus, this does not seem likely anywhere in the foreseeable future. Therefore it is simply a bookkeeping entry from the standpoint of the economy. The third quarter growth, spurred in part by tourism, is a positive, but quarterly data are erratic so it will be necessary to see several more quarters before the trend is clear.

Gage touts the drop in the unemployment rate to 25.9 percent from 28.0 percent last year. However, most of this drop is due to people leaving the labor force. The employment rate, the percentage of people employed, is up by just 0.6 percentage points from its low. It is still down by 12.2 percentage points from its peak in 2008. This would be equivalent to 30 million people losing employment in the United States.

According to the most recent projections from the I.M.F, even in 2019 (the last year in the projection period) Greece's GDP will still be almost 10 percent less than its 2007 level. This is far worse than the Great Depression in the United States. And, the I.M.F.'s projections for Greece have consistently proven to be overly optimistic.

By contrast, Gage warns of the bad scenario for Greece's future:

"While the €23 billion shortfall in that year was covered by the E.C.B., today a much weaker eurozone would hardly be in a position to transfer over €100 billion to Greece if another huge run were to occur.

"In this scenario, the vacuum of currency would bring Greece to technical bankruptcy. The hard-won gains of the past two years would vanish. Access to loans would disappear. The faltering economy would come to a standstill, and the only recourse for Greece would be to return to the drachma, a disastrous move for a country that imports much of the goods it consumes."

Almost every part of this is wrong. First, the European Central Bank (ECB) has no shortage of euros. It can make as many of them it wants. (Is Gage worried about inflation?) If a flight of capital means that Greece needs 100 billion euros, the ECB would have no problem providing them.

Gage is also wrong with the bad story about Greece leaving the euro. The drop in the value of its currency would instantly make its goods and services more competitive in the euro zone and elsewhere. The country already has a current account surplus. If Greece renegotiated its debts and increased its exports with a lower valued currency, it should have no problem at all paying for its imports.

The basic facts of the situation show that any plausible stay the course route for Greece implies a level of pain that exceeds that experienced by the U.S. in the Great Depression long into the future. The alternative path of leaving the euro holds out the possibility of a much quicker return to normal growth and potential GDP.

 
Keynes and the Slow Boat Print
Thursday, 27 November 2014 09:03

Paul Krugman tells us that "Keynes is Slowly Winning." The immediate cause for celebration is Catherine Mann, the new chief economist at the OECD, calls for stimulus. By contrast, her predecessors in 2011 were calling for rapid increases in interest rates to normalize the economic situation.

This is indeed good news, but as a practical matter the flat-earth crowd is still calling the shots outside of Japan. There is little hope for real stimulus any time soon. The Austerians in power in the EU and to a lesser extent the U.S. are inflicting the sort of damage that our enemies could only dream about. Keynes might be winning slowly, but it is "very slowly."

 
Obamacare: Confusion in High Places Print
Thursday, 27 November 2014 08:13

Much of the public remains badly confused about the Affordable Care Act (ACA). This shouldn't be a surprise. It is a complicated bill. Also, there has been much effort to deliberately create confusion. For example, Republicans invented stories of ACA death panels and massive job loss. Major media outlets, in their commitment to neutral reporting, treated such claims seriously, along with the assertion that the earth is flat.

While the public's confusion is understandable, if regrettable, the confusion among elite types is far more disturbing. Earlier in the week, New York Senator Charles Schumer, the third ranking Democrat in the Senate, admonished his party for pursuing Obamacare rather than promoting stronger measures for the economy. Schumer didn't explain why he thinks not pursuing health care reform would have increased support for bigger budget deficits or a lower valued dollar to reduce the trade deficit, the necessary steps for fixing the economy.

But the really striking part of Schumer's comments was his confusion about the status of the uninsured. He asserted that they were a small part of the electorate and most don't even vote. Washington Post columnist Charles Lane chimes in today, largely agreeing with Schumer on this point.

Contrary to what Senator Schumer and Mr. Lane seem to believe, being uninsured is not a permanent state. People move in and out of jobs and marriages, and their insurance moves with them. (More than 4.5 million people lose or leave their jobs every month.) The number of people who are uninsured at some point in a year is more than 50 percent larger than the number who are uninsured at a point in time.

This means that if 50 million people are uninsured on any given day, it is likely that more than 75 million people will be uninsured at some point over a year. This would likely increase to 100 million over the course of two years. If we add in the close friends and immediate family of these uninsured individuals, it would almost certainly be a substantial majority of the voting age population.

It is reasonable to believe that these people who face and fear periods without insurance would value the security provided by the ACA, since it means that they can still get insurance during these periods. However this security will not affect the popularity of the bill if people are not aware of it. Since Senator Schumer and Charles Lane apparently do not understand this essential aspect of the ACA, it is likely that the tens of millions of people who have day jobs (unlike Schumer and Lane) also don't understand the security provided to them under the law.

The ignorance of this and other aspects of the law likely helps explain much of the law's unpopularity. Opinion polls consistently show overwhelming public support for most of the key features of the bill when asked separately.

It is also worth calling attention to a bizarre assertion in Lane's piece. Schumer notes that the economy has been very weak leading to stagnant incomes for most of the population. He then comments:

"In theory, at least, this should be a time of electoral triumph for the party of government."

This is bizarre because both parties are the party of government, the question is what the government is used for. The Democrats have not distinguished themselves in a big way from Republicans in this area. The top leaders of the party all supported the bailout measures that largely kept Wall Street intact by shoveling the big banks trillions of dollars of below market interest rate loans and guarantees at a time when liquidity carried an enormous premium. The Obama administration has also gone to bat for them by blocking a European tax on the financial transactions of their European subsidiaries.

The Democrats have also used the power of government to make the patent monopolies of the drug companies stronger and longer and spreading them around the globe in trade agreements. In the latter case the profits for the drug companies come at the expense of other exports. The same story applies with stronger and longer copyright protection for the entertainment industry.

They have also constructed trade agreements that are explicitly designed to put U.S. manufacturing workers in direct competition with low paid workers in the developing world. At the same time the Democrats use the power of government to protect the most highly paid professionals (e.g. doctors, lawyers, and dentists) from the same competition.

In short, most of the public sees the Democrats as one of the parties of government that uses the power of the government against most of the public, because it happens to be true.

 
NYT Claims That Ending France 35-Hour Work Week Would Hugely Increase French GDP Print
Wednesday, 26 November 2014 23:08

Of course it had no evidence, but hey, if you don't like the 35-hour work week, who needs evidence. The comment came in an article discussing the debate over changing the 35-hour work week, which requires that employers pay an overtime premium for additional hours.

The piece told readers:

"The law has not improved an unemployment rate that, at 10.2 percent, hovers near a high."

It would be fascinating to know how the NYT reached this conclusion. If people worked more hours, and the unemployment rate remained the same, the implication is that considerably more goods and services would be produced. (If the average workweek increased by just one hour, and there was no decline in productivity, it would imply a 2.9 percent increase in output.)

Incredibly, this piece only presents assertions from experts who claim that France is suffering from the short workweek, although it did make a passengers' assistant at Orly airport, into an expert, telling readers:

"For wage earners like Ms. Ahlem, political resistance to change seems out of touch with economic reality." It then quotes her as saying that the laws should be encouraging people to work, which of course ignores the fact that France is suffering from a lack of demand, not a lack of people who want to work. (See, unemployment means people want to work but can't find jobs.) It's not clear that Ms. Ahlem is typical of most wage earners in thinking that people don't want to work -- even if the NYT assures us that she is.

The piece also includes the bizarre complaint that the short work week has made France too productive:

"But in reality, France’s 35-hour week has become largely symbolic, as employees across the country pull longer hours and work more intensely, with productivity per hour about 13 percent higher than the eurozone average."

Economists attach enormous importance to productivity. If the short workweek has helped to make the productivity of French workers 13 percent higher than the euro zone average this would be a strong argument in its favor.

In short, this is a very confused article. The NYT obviously doesn't like to see workers putting in short workweeks. But if it wants to maintain its status as a serious newspaper it should get its argument straight and move it to the opinion page.

 
Wall Street Journal and Charles Schumer on Obamacare Print
Wednesday, 26 November 2014 06:50

The Wall Street Journal applauded Senator Charles Schumer for saying that the Democrats made a mistake by pursuing health care reform rather than promoting economic recovery. This of course raises the obvious question, what policies exactly would Senator Schumer have put forward to promote economic recovery had the Democrats not pursued health care reform? Would there have been a much bigger stimulus with much larger deficits? Would we have had a more serious financial reform that broke up the large banks and thrown many of Schumer's biggest campaign contributors in jail? Obviously the Democrats should have done more to promote a recovery, but it is difficult to see how anything connected with the Affordable Care Act (ACA) prevented it.

Perhaps the more serious problem with Schumer's logic, as presented by the WSJ, is the claim that the politics on the ACA were inherently bad.

"Mr. Schumer put the problem to Democrats in terms crass enough for them to understand—'only a third of the uninsured are even registered to vote,' he said, and only 'about 5% of the electorate' benefits from the entitlement. 'To aim a huge change in mandate at such a small percentage of the electorate made no political sense.'"

While the uninsured at any point in time are a relatively small share of the electorate, tens of millions of people experience stretches of being uninsured over the course of a year and tens of millions more worry about this possibility. Of course many of them may not realize how they can benefit from the ACA and even many of those who do benefit (e.g. by getting insurance on the exchanges) may not know it is due to the ACA. In this respect, it is important to note that more than 4 million people leave or lose their job every month.

In a situation where one of the leading Democrats in the Senate apparently does not understand how the ACA affects a very large share of the currently insured population, it would not be surprising that the average voter does not understand either.

 

 
Profit Share Drops: No One Notices Print
Wednesday, 26 November 2014 05:43

The gods of national income accounting gave us some good news for Thanksgiving but it seems no one noticed. The data on corporate profits released in yesterday's GDP report showed that the slight downward trend in shares in recent quarters is continuing. The profit share of net corporate income was 20.5 percent in the third quarter, down from a peak of 21.2 percent in the second quarter of 2013. Quarterly data are erratic but if we take a four quarter moving average we get the share was 20.2 percent in the four quarters ending with the third quarter, down from 21.0 percent in the four quarter average ending in the fourth quarter of 2013. That still up considerably from the 16.7 percent average since 1950, but clearly a step in the right direction. (Most of the drop is on the financial side, the profit share in the non-financial sector is still close to its peak.)

The shift away from profits could mean that workers will finally start to see some of the benefits of growth. However, there are two important cautions. First, most of the upward redistribution from 1980 to the present was not from wages to profits but rather from wages to high end workers. CEOs and hedge fund managers are getting labor income, or at least it is classified that way in the national income accounts.

The other point is that the economy is still not growing especially fast, in spite of what you read in the newspaper. GDP is up just 2.4 percent from the third quarter of last year. That is better than nothing, but with the labor force growing by close to 2.0 percent over this period, that doesn't leave much room for wage growth even without upward redistribution.

 
Robert Samuelson Doesn't Like Social Security, Again Print
Tuesday, 25 November 2014 15:01

As much as some folks might hate this fact, the government is sometimes more efficient than the private sector. This is true in the case of providing a retirement income to workers. It is also true when it comes to providing health care insurance. This is one of the main reasons that we have a government-run Social Security and Medicare program.

This means that because we have a large population of retirees we will have a relatively large government, since it costs a fair bit for tens of millions of retirees to live and get health care. Furthermore, as we get more retirees, we will get a larger government.

This troubles Robert Samuelson greatly, but not in a way that makes a great deal of sense. Social Security is modestly redistributive. Adjusting for differences in life expectancies, those at the bottom of the wage ladder get a somewhat higher return on what they pay in, while those at the top get a lower return. If we consider this redistribution valuable, we can do it through a separate tax and transfer system and then have the whole Social Security program run through the private sector with the government mandating savings.

In Robert Samuelson's world, this would be great news because we now have a much smaller government. (The private savings system doesn't count as government.) It also is far more inefficient, since privatized systems cost 20-30 times as much to run as our centralized Social Security system. Also, the expenses of a privatized system are revenue for the financial industry, but no reason to discuss that one. So, in the world of mandated private savings people have no more control over their money than our current system, but somehow we are supposed to be happy because we have a smaller government.

The other part of the Samuelson story that is worth noting is the idea that we can somehow play with the money paid into Social Security and Medicare and use it for other purposes. That is implicit in his discussion of the idea that we should decide where our money is best spent. Samuelson makes it quite clear that he doesn't want to see retirees get the Social Security and Medicare they paid for. (An Urban Institute study shows that workers on average will pay slightly more into Social Security than they get back in benefits. Medicare benefits exceed taxes by a substantial amount, but this is primarily due to the fact that we pay our doctors, drug companies, and other providers twice as much as any other country.)

As a practical matter, people are willing to pay these taxes because they value the benefits. They are not paying Social Security taxes so folks in Washington can stage wars around the world. We could view the money paid out in interest and principle on government bonds as being available for other purposes also, but most people would recognize the legal and moral obstacles to not repaying bondholders. Similarly, most people would probably see a serious issue with not giving seniors the benefits that they had paid for, even if Samuelson apparently does not.

 

 
Strange Reuters Commentary on Economic Populism Print
Tuesday, 25 November 2014 08:08

Most news outlets try to make sure that their commentators at least have some idea of the topics on which they comment. Apparently this is not the case with Reuters, which gave Hugo Dixon the opportunity to condemn the economic populism that is gaining support across Europe. (The NYT reprinted the piece on its website.) Dixon tells readers:

"The cures proposed by the populists, however, are worse than the disease. UKIP wants to pull Britain out of the European Union. The National Front wants to destroy the Union. The Five-Star Movement wants to yank Italy out of the euro. Podemos wants to audit part of the national debt before writing it off. Syriza wants to write off half of Greece’s debts."

All of these plans would involve considerable uncertainty. However, the disease -- the economic prescriptions coming from the European Union-- imply mass unemployment for the rest of this decade and much of the next, according to the projections of their proponents. It would be hard to do much worse and Dixon certainly does not argue the case, he just indicates that he doesn't like the populists' platform. 

Certainly there are more and less effective ways to design a populist agenda. For example, one that focused on attacking the rents earned by the wealthy would be a great way to both hurt the people most responsible for Europe's plight and to bring about "supply side" reforms being pushed by the European Union. But the blanket dismissal of a populist agenda when the alternative is an extended period of double-digit unemployment seems unwarranted.

Dixon shows the nature of his misunderstanding of the problem most clearly when he tells readers:

"But even if the economy is fixed, that won’t be the end of populism. Look at Britain, where growth is strong but so is UKIP."

Actually, in Britain wages have been falling throughout the recovery so that the bulk of the population has seen none of the gains from economic growth. It's not clear why Dixon thinks people should care about growth when they get none of the benefits.

 
It Would Take a Lot of Mismanagement to Raise the Cost of Treasury Debt by "Just" 20 Basis Points Print
Tuesday, 25 November 2014 05:50

Andrew Sorkin criticized Senator Elizabeth Warren for her opposition to Antonio Weiss, President Obama's nominee to be the under secretary of Treasury for domestic finance. Sorkin argues that Warren is mistaken about his role in corporate inversions done to evade U.S. taxes. He also argues that his background makes him uniquely well-suited for this position because it involves the sale of government debt and:

"If the interest on the securities the Treasury sells was just 20 basis points higher for a year because of uncertainty or mismanagement, it would cost taxpayers $32 billion — more than it would cost to fund the Consumer Financial Protection Bureau for 50 years. The bureau was, of course, inspired by Ms. Warren."

Actually, it would take some very serious mismanagement to raise the interest rate on government debt by an average of 20 basis points over the course of a year. While the timing of any given auction might raise the cost for that auction by a few basis points, it would take extraordinary skill to consistently mistime auctions. Furthermore, since half of the debt is short-term, with interest rates near zero, it would be almost inconceivable that the timing would change its price by any significant amount.

The comparison of the cost of running the Consumer Financial Protection Bureau is an interesting one. It is worth noting that the extra interest cost here is a transfer of income from the government to people who own government bonds. Some of these people will be wealthy investors, but more than half will be held by pension funds and middle income families.

By contrast the failure of economic appointees with names like Greenspan, Paulson, Bernanke, and Geithner to see an $8 trillion housing bubble (equivalent to @$10 trillion in the current economy) is likely to cost the economy around $10 trillion in lost output. Unlike the transfer in the case of higher interest rates, this is money that is effectively thrown in the garbage. This would be enough to run the Consumer Financial Protection Bureau for 15,000 years.

So clearly it is important to get people with expertise in key policy positions. Unfortunately our leaders have largely failed to do so.

 

Note: The number of years the Consumer Financial Protection Bureau could be funded by the lost output due to the collapse of the bubble was corrected from 1,500, thanks John.

 
Because Stock Prices Have Soared, Returns in the Future Will Be Lower Print
Tuesday, 25 November 2014 05:38

The Washington Post had a piece on the wealth gap between whites and African Americans. It attributes much of the gap to the fact that African Americans with some amount of wealth are less likely to invest it in stocks and mutual funds and instead tend to hold lower yielding assets. It notes that this made a large difference as the stock market soared in recent years.

While this is true, because the stock market soared, and price to earnings ratios are above historic averages, it is likely to provide lower returns in the future. The real return on stocks in the decades ahead is likely to average closer to 5.0 percent, compared to the 7.0 percent long-term average and the double-digit returns of the last five years. While it may be the case that many African Americans can still benefit from holding more stock, the difference in returns is likely to be less in the future than in the past.

 
<< Start < Prev 1 2 3 4 5 6 7 8 9 10 Next > End >>

Page 5 of 408

CEPR.net
Support this blog, donate
Combined Federal Campaign #79613

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.

Archives