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More Fun with the Export-Import Bank: It's the Customers, Stupid Print
Tuesday, 15 July 2014 03:58

Wow, the pundit class is really worried about the Export-Import Bank reauthorization. Today's big shot comes from NYT columnist Joe Nocera.

Nocera is honest enough to acknowledge that big companies like Boeing and Caterpillar are the main recipients of support. The Export-Import bank supporters have been pushing the line that most loans go to small businesses. This is of course true, but most of the money goes to the Boeings and Caterpillars, and serious people care about the money, not the number of loans going out the bank's door.

Nocera's twist is that real beneficiaries are the customers of the big companies, not the companies:

"First, customers of these big companies get the bulk of the Ex-Im Bank’s assistance. ...

"Second, most of the arguments made against the Ex-Im Bank revolve around its help to the big companies, not the small ones. For instance, it is argued that big companies have their own means of helping customers finance deals. That’s true, but it’s the customers, not the companies, that are pushing for export credit guarantees. A Boeing source told me that it is hearing from customers and potential customers about the fate of the Ex-Im Bank. 'It’s a big deal,' my source said, especially in places like Africa, where conventional financing for aircraft is hard to come by."

Okay, this one should get be worth a big burst of laughter from a comedy show laugh track. Imagine that, a "Boeing source" told a New York Times columnist that the Export-Import Bank is really about helping the companies customers. Yeah, how could anyone question that. (This is like when companies oppose pollution regulations because they are worried about their workers' jobs.)

The story here is not very complicated for believers in economics. If there were no subsidies from the Bank, Boeing would have to accept somewhat lower profits on its deals. It would likely make up some, but not all, of the value of the Bank's subsidy. This means that the customers would be looking at slightly higher prices. Life's tough. (Let's get a list of the customers and see if they rank higher than veterans or inner city kids as beneficiaries of the taxpayers largesse.)

In some cases, the higher price will mean that Boeing will lose the deal to a competitor. That's known as capitalism, it happens all the time.

It speaks volumes that at the same time the establishment pundits are getting hysterical over the dire consequences of not reauthorizing the Ex-Im Bank, the WTO issued a ruling against the U.S. over tariffs against Chinese and Indian steel imports. This ruling is likely to cost more U.S. jobs than the shutting of the Ex-Im Bank, but odds are none of the pundits will speak against it. Draw your own conclusions.   

Of course the real free trade position is to lower the value of the dollar against other countries' currencies. That is how a trade deficit is supposed to be corrected in a world of floating exchange rates, like the one we are supposed to have. However the dollar does not fall to bring our deficit into balance because many countries, most notably China, buy up hundreds of billions of dollars to keep the dollar over-valued. The over-valued dollar makes our exports expensive (like taking away the subsidy from the Ex-Im Bank) and makes imports cheaper to people in the United States, crowding out domestically produced goods.

In an economy suffering from secular stagnation, we have no market mechanism to replace the $500 billion dollars in demand (3 percent of GDP) lost to the trade deficit. Adding in a multiplier effect, this deficit costs us around $750 billion in annual output or around 6 million jobs. Unlike the Ex-Im Bank, there is real money and real jobs at stake with the value of the dollar. It would be great for Joe Nocera to write about that.

 
Yet More Frat Boy Budget Reporting at the Washington Post Print
Monday, 14 July 2014 10:25

Some folks might think that a newspapers job is to convey information to its readers: not the Washington Post. At least when it comes to budget reporting the Post firmly believes in the frat boy ritual of throwing out really big numbers that will be almost meaningless to virtually all of its readers.

It gave us one such ritualistic piece on Saturday that discussed new budget projections from the Office of Management and Budget (OMB). Among other things the piece told readers:

"The White House said Friday that the federal budget deficit will fall to $583 billion this year, the smallest deficit of President Obama’s tenure and the first to dip below $600 billion since the Great Recession took hold in 2008. ...

"The White House predicts that the nation’s finances will deteriorate markedly over the next decade, with deficits rising nearly $600 billion above previous projections. ...

"When Obama took office in 2009, the economy was in free fall and the budget deficit was soaring toward $1.4 trillion, the first of four consecutive trillion-dollar deficits that drove the national debt to the highest level as a percentage of the economy since the end of World War II. ...

"Democrats hailed Friday’s White House deficit forecast, which came on the same day as a Treasury Department announcement that the government recorded a surplus of $71 billion for the month of June. ....

"Republicans, meanwhile, noted that the long-term outlook remains gloomy, with the national debt forecast to rise to more than $25 trillion by 2024 if Obama’s policies are enacted.

"On Friday, the debt stood at $17.6 trillion."

Feel well informed? The amazing part of this story is that the reporter did not even herself have to wade through the long arduous process of dividing the numbers by GDP to make them somewhat meaningful to readers. This information was actually contained in the blogpost by OMB director Brian Deese to which the piece links.

She could have told readers that the new projections show a deficit of 3.4 percent of GDP for fiscal 2014, which is projected to fall to 3.0 percent of GDP in 2015. The size of the deficit is projected to continue to fall, hitting 2.1 percent of GDP in 2024.

While the Post piece implies that the debt situation is bad news ("remains gloomy) by just giving dollar numbers without any context, in fact it is projected to edge down slightly. The ratio of total debt (including money owed to the Social Security trust fund) to GDP is currently just over 100 percent. The latest OMB numbers project the debt to GDP ratio falls to 94.1 percent of GDP in 2024. In short, for deficit hawks the reality is the opposite of what the Post article asserts.

In addition to its frat boy use of numbers, it is also worth elaborating slightly on the pieces reference to "painful but historic spending cuts." The budget cuts were painful to millions of people who were denied work since the government was reducing demand in a badly depressed economy, therefore leaving more people without jobs. They were also painful to tens of millions of workers who were unable to secure a share of the gains from economic growth in higher wages because the weak labor market left them with little bargaining power.

The cuts probably were not painful to most business owners or highly paid professionals. The former have seen profits hit a record share of GDP, likely in part due to the fact that wages are low. The latter have benefited from being able to hire cheap help, since workers have few choices in a labor market that has been kept weak by budget cuts.

Addendum:

It is worth noting that the burden of the debt is measured by the amount of debt service, not the size of the debt. The latest OMB reports a net interest burden in 2024 of 3.0 percent of GDP. This is slightly less than its early 1990s levels. Thanks to Robert Salzberg for reminding me about this point.

 

Note: Type corrected, thanks to Rodrigo.

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Central Bank Battles Against Bubbles Print
Friday, 11 July 2014 05:41

In a Wonkblog post Matt O'Brien discusses central bank efforts to deal with bubbles. His starting point is the decision by the central bank in Sweden to begin raising interest rates in 2010, ostensibly to head off the development of a bubble there.

There are two points worth noting here. First, it is difficult to imagine what the central bankers were drinking in Sweden when they decided to start shooting at bubbles. A bubble that threatens the economy is a bubble that moves the economy. If there is a bubble in Uber stock or the price of hops, there is little consequence to the economy when the bubbles burst.

The crashes of the stock bubble and the housing bubble led to recessions because these bubbles were driving the economy. This was easy to see in the data in both cases. In the first case, the investment share of GDP hit the highest level in more than two decades as people were able to raise billions in IPOs for utterly nonsense dot.coms. Consumption surged to then record shares of income as the stock wealth effect caused spending to surge. This boost to the economy disappeared when the bubble burst.

There was a similar story with the housing bubble. Residential construction hit a record share of GDP, roughly 50 percent above its average over the prior two decades. Consumption surged to an even higher share of income, driven by the housing wealth effect. And, when this bubble burst we got the Great Recession.

There were no obvious distortions in the Swedish economy when its central bank started shooting at bubbles. Its savings rate was relatively high and the country had a huge trade surplus (as opposed to deficits in bubble driven economies like the U.S. and Spain). The bubbles that really matter are not hard to see. Economists like to pretend otherwise since almost all of them missed the last one, but that reflects the competence of economists, not the inherent difficulty in recognizing bubbles.

The other point is that central banks do have many tools other than interest rates to attack bubbles. My favorite is talk.

I know it doesn't sound sophisticated and it's not terribly mathematical, but I suspect it would have a very large impact on the housing market if Janet Yellen were to say that she thought house prices were over-valued and that the Fed would be prepared to take steps to bring prices in line with fundamentals. Note that I am referring to an explicit warning backed up by Fed research, not a mumbled "irrational exuberance" subsequently qualified by incoherent gibberish. I would certainly take such a warning seriously if I was thinking of buying a house.

I know this view is dismissed by economists, but it's hard to see the downside of trying this path. The worst I've heard is that this could damage the Fed's credibility if house prices didn't fall. Given that we have lost many trillions of dollars of output and millions of people have seen their lives ruined from the collapse of the housing bubble and the ensuing recession, the risk of the Fed's credibility seems a small price to pay in such circumstances.

 
The Secret of the First Quarter Health Care Spending Slowdown Print
Friday, 11 July 2014 04:55

Floyd Norris had an interesting piece noting the incongruity between the relatively strong job growth we saw in the first half of 2014 and the near zero or possibly negative GDP growth for the period. (First quarter growth was -2.9 percent, second quarter growth will be positive, but quite possibly less than 2.9 percent.) While it is easy to explain the drop in first quarter GDP as an anomaly driven by falling inventories and bad weather, it is still difficult to reconcile with a rate of job growth of 230,000 a month.

At least part of this story is likely due to quirks in the data. One prominent quirk that has been overlooked has been the pattern of health care spending. Much has been made of the fact that spending on health care services fell in the first quarter, something we have not seen since the 1960s. While this drop is striking, it is somewhat less so when we look at the fourth quarter data.

The Bureau of Economic Analysis (BEA) reports that nominal spending on health care services rose at a 7.6 percent annual rate in the fourth quarter of 2013. This is almost twice the average pace for the prior two years. (I use nominal since I think "real" spending is of questionable meaning in health care. If we are given more of a drug that has no beneficial effect or have more unnecessary tests or procedures, real spending will increase. If better research ends this spending, it appears as a reduction in real spending even if this might be associated with better health.)

Taken on their face, the BEA numbers show a big surge in health care spending in the fourth quarter followed by an almost unprecedented reduction in spending in the first quarter. We could believe that this accurately describes what happened in the economy, or alternatively we can believe that the fourth quarter number overstated the actual increase in spending. I would lean toward the latter view. The data are never perfect and by definition, any overstatement in spending growth in one quarter leads to an understatement of growth in the next quarter.

Anyhow, that's my story on health care spending. But the GDP growth data and the jobs data are still seriously out of line.

 

 
Fellow Travelers of the Depression Lobby Print
Friday, 11 July 2014 04:10

Paul Krugman took off the gloves in his column today. He said that much of the opposition to the Fed's low interest rate policy stems from the narrow interest of very rich people who earn lots of interest on their money. While we hear arguments, often from prominent economists, that low interest rates and other expansionary policies from the Fed risk hyper-inflation and other evil things, these arguments have repeatedly been disproven by the evidence. Krugman argues that the reason the argument against low interest rates continually reappears in different forms is the money that the 0.01 percent have at stake in protecting their interest income.

On its face this is a plausible story. Certainly the very rich have been especially prominent in making and backing absurd arguments that hyperinflation is just around the corner, or even already here, but we just can't see it  because the government is hiding it.

While we are on the topic of interests determining views on monetary policy, let's take a step over to a different, but arguably more important issue: dollar policy. The key point here is that the value of the dollar is the main determinant of the trade deficit. The basic point is simple. When the dollar is highly valued in terms of foreign currency (i.e. it takes a lot of euros, yen, or yuan to buy a dollar) our goods and services become more expensive relative to the goods and services produced by other countries. This means we will import lots of items from other countries, because they are cheap to us, and they will buy few of our exports, because they are expensive to them. In other words, we will have a large trade deficit. 

That is a big deal, especially now that even respectable economic types recognize the problem of secular stagnation. If we have a trade deficit of $500 billion (@ 3 percent of GDP), which we do, this is demand that we are generating in other countries rather than here. We have no simple mechanism for replacing this demand.

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If Working Is a Lifestyle Choice in Norway, Why Do So Many More People Choose This Lifestyle There Than In the United States Print
Thursday, 10 July 2014 15:00

Most readers expect better than silly cliches from the New York Times. That is why it was striking to see an article on Svalbard, a small town in northern Norway, tell readers:

"But it [Svalbard] shuns the leftist, leveling consensus that according to conservative critics has made working almost a lifestyle choice in the rest of Norway."

Hmmm, a leveling consensus that makes working a lifestyle choice? A quick visit over to the OECD's website tells us that 75.1 percent of the people in Norway between the ages of 16 to 65 opt for the working lifestyle. That's more than 7.0 percentage points above the 68.0 percent share of this age group that works in the United States.

It's understandable that some people will say silly things about the Scandinavian welfare state, just as some people make silly statements about almost everything. However we don't expect the NYT just to repeat whatever silly assertion that a reporter happened to overhear. That is not news.

 

Thanks to David Dyssegaard Kallick for calling this one to my attention.

 
President Obama Asks Congress for 0.1 Percent of the Budget to Deal With Children at the Border Print
Wednesday, 09 July 2014 04:39

That one may be helpful if you read the NYT article on President Obama's request of $3.7 billion from Congress.

 
China Is a Rich Country? Print
Wednesday, 09 July 2014 04:11

That's what millions are asking after hearing Morning Edition's top of the hour news segment (sorry, no link). The segment referred to negotiations over emissions caps for greenhouse gases. It said that China argued that it should not be subject to the same rules that apply to other rich countries.

China was presumably making the argument that it was not a rich country and therefore should not be subject to the same rules as rich countries. While China's economy is now larger than the U.S. economy on a purchasing power parity basis, since it has four times the population, on a per capita basis it is about fourth as rich. This means both that it has fewer resources to cope with the problem and that the average Chinese person is far less responsible for global warming than the average person in the United States.

It is also worth noting that in an era of secular stagnation, like the one we are in now, spending to slow global warming would increase employment and output. It is not a drain on the economy.

 
High Asset Prices, the Savings Glut, Secular Stagnation, and Unemployment Print
Tuesday, 08 July 2014 12:38

Neil Irwin has an interesting piece in the NYT noting how high prices for a wide variety of assets have driven returns down to historical low levels. He notes that this is a predictable outcome, and in fact an intended result, of the low interest rate policy being pursued by the Fed and other central banks.

The idea is that high asset prices make it cheap for firms to borrow to finance new investment. They also make it easier to buy a home and allow many people who had higher interest rate mortgages to refinance into lower cost ones, thereby freeing up money for other types of consumption. There is also a wealth effect whereby higher stock and house prices will translate into increased consumption. Through these channels central banks hope to provide some boost to growth.

However the flip side of this policy is that investors can anticipate lower returns on their savings, unless they want to hold exceptionally risky assets. This is the idea of there being a savings glut, or as Irwin suggests today, a shortage of adequate investment opportunities.

The idea of a savings glut is not new, Ben Bernanke first mentioned it back in 2004 when he was a member of the Board of Governors. However the implications were not fully drawn out by Bernanke at the time or by Irwin in today's piece. A savings glut implies an economy that is not producing at its capacity.

To cut through the nonsense, savings in an economic sense means not spending. From the standpoint of the economy, it is just as much savings if you put $1,000 in the stock market, a checking account in your bank, stuff it under your mattress, or burn it in your fireplace. Anything that does not involve the purchase of a newly produced good or service means saving. Saying that we have a saving glut means we have an economy that does not generate enough demand to keep the economy at full employment. This is of course the story of secular stagnation that folks like Larry Summers have recently discovered and the problem that some of us pre-mature secular stagnationists have raised for years.    

The idea that the economy could be subject to an ongoing problem of inadequate demand used to be grounds for eviction from the realm of serious economists. But anyone who is willing to look at the evidence with a straight face really can't escape this conclusion.

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Putting Numbers in Context: Give Dana Milbank a Pulitzer Prize Print
Tuesday, 08 July 2014 12:12

Regular readers of Beat the Press know that I go into the stratosphere when I see a news story or column that uses numbers in the millions, billions, or trillions and doesn't provide any context, like relating it to the total budget if it's a tax or spending item. The reason for my ire is simple: everyone knows that almost no one is going to be able to assign any significance to these Really Big Numbers. Therefore such pieces are providing no information to readers.

On the other hand it is very simple to provide context to readers. Dana Milbank showed how today when he wrote about the $4.2 million dollars that President Obama announced he would spend on a new Excellent Educators for All Initiative, which is supposed to address inequities in the quality of teachers across schools. Milbank pointed out that the commitment amounted to about 0.0001 percent of federal spending. In other words, this is gesture done for show.

By writing that President Obama plans to spend 0.0001 percent of the budget on his Excellent Educators for All Initiative, Milbank is telling readers that this is not a serious plan for addressing educational disparities, it is a public relations gesture. People who just saw the $4.2 million number may be under the mistaken impression that this program could actually make a difference in the quality of education for poor children.

Of course if reporters routinely expressed numbers in context there would be less incentive for politicians to push forward with silly public relations gestures, because everyone would know they are silly gestures. That would be a direct positive effect of this sort of effort at providing readers with real information instead of treating budget reporting as a fraternity ritual in which reporters write down numbers which they know to be meaningless to almost everyone who sees them.

 
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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.

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