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The Doom and Gloom in Denmark and the Washington Post Print
Tuesday, 20 January 2015 09:21

Denmark has long cold rainy winters where the sun only shows up briefly. It is understandable that someone can get pretty sour living in these conditions. But that is no reason for the Washington Post to run scurrilous screeds from Scandinavia that inaccurately impugn the region.

That is a reasonable description of Michael Booth's Sunday Outlook piece, which managed to get most of the important points wrong in a piece titled, "Stop the Scandimania: Nordic nations are not the utopia they are made out to be."

Going in order of importance, Booth somehow thinks that the McDonald's workers in Denmark getting paid $20 an hour pay 75 percent of their income in taxes. He better try to explain that one to the OECD. It puts the tax rate for the average worker at 26.7 percent. Booth is apparently adding in the 25 percent valued added tax, which would still leave us just over 45 percent (the 25 percent tax is applied on 73.3 percent of income left over after-tax). That's pretty far from 75 percent.

Booth then turns to mocking the employment record of the Scandinavian countries:

"last month the Times assured us that 'A Big Safety Net and Strong Job Market Can Coexist. Just Ask Scandinavia.' (*Cough* unemployment is 5.6 percent in the United States, vs. 8.1 percent in Sweden, 8.9 percent in Finland and 6.4 percent in Denmark.)"

According to the European Commission, the employment rate for people between the ages 20 and 64 is 73.3 percent in Finland, 79.8 percent in Sweden, and 75.6 percent in Denmark. All of which are above the 71.1 percent rate in the United States.

He then goes to Sweden, which he rightly attacks for its strong anti-immigrant movement, but then adds:

"This has distracted from the slowing economy, increasing state and household debt levels, and one of the highest youth unemployment rates in Europe."

Again, he'll have to explain his calculations to the folks who do this stuff for a living. The European Commission has a category for young people who are not working or in school or a training program. The share of young people in Sweden in this category about 7.5 percent, near the bottom of the European Union. As far as state indebtedness, the I.M.F. tells us the government has a deficit of about 2.0 of GDP and total debt equal to 42 percent of GDP, that less than 70 percent of the level in the United States.

Read more...

 

 
Denmark "Defends" the Krone by Lowering Interest Rate: More Which Way Is Up Problems Print
Tuesday, 20 January 2015 07:48

Usually when a country takes steps to "defend" its currency, the problem is that the value of its currency is falling in world currency markets. This is most often due to higher inflation in the country in question, although the situation can be worsened by speculative attacks. Raising interest rates is a standard form of defense, since it makes it more desirable to hold assets denominated in that currency.

Against this normal pattern, the NYT told readers that Denmark was "defending" its currency by cutting interest rates. Apparently the problem is that the krone, Denmark's currency, was rising against the euro. The krone has been pegged against the euro since its inception. The recent upswing in its value threatened to push the krone above its designated range.

So in this case, the "defense" is intended to reduce the value of the currency, not to raise it.

 
The Big Economic Slowdown in China Print
Tuesday, 20 January 2015 06:09

The NYT ran an article headlined, "China's Economy Expands at Slowest Rate in Quarter Century." People who read the piece discovered that China's growth rate for 2014 was estimated at 7.4 percent, which is more than three times the growth rate projected for the United States. More strikingly, this is not much of a slowdown from the last two years.

The I.M.F. reports growth in both of these years was 7.7 percent. Measured as a share of growth, a drop from 7.7 percent to 7.4 percent in China would be equivalent to a drop from 2.0 percent to 1.92 percent in the United States. It's not clear that this sort of slowdown would draw headlines. 

There are questions about the accuracy of China's growth data, but this article refers only to the reported numbers. These do not provide much a basis for talk of a major slowing of China's economy.

 
More on Paul Krugman and the Swiss Movement Print
Monday, 19 January 2015 06:40

Paul Krugman is still upset over the decision by Switzerland's central bank to end its peg to the euro and allow the value of the Swiss franc to rise. Since some of us non-hyper-inflation worriers don't share his anger, perhaps it worth explaining the difference in views.

Krugman sees the peg as a sort of quantitative easing. He argues it was working (Switzerland's economy has largely recovered), so there was no reason to abandon it. He sees the basis for abandonment as a needless fear over inflation and possibly a concern about central bank losses. (The Swiss central bank is partly private. Sound familiar?)

Krugman may well be right about the reasons that Switzerland's central bank abandoned its peg, but that doesn't mean that it was wrong to do so.

Switzerland's peg was designed to promote its growth at the expense of its neighbors. The under-valued currency boosts the economy by making Swiss exports cheaper relative to the goods and services of its trading partners and making imports into Switzerland more expensive. In this story, Switzerland's growth is a direct subtraction from the growth of its trading partners.

This is not a big deal with a relatively small country like Switzerland, but imagine that Germany left the euro (hold the applause) and adopted the same policy of deliberately under-valuing the new mark against the euro. Germany would then run large trade surpluses and the other euro zone countries would run large deficits, draining away demand. Should we applaud this policy as a form of quantitative easing that needs to be supported?

Krugman's argument rests largely on the idea that we need to promote central bank credibility. I'm a bit more skeptical on this one. Central bank credibility is a two-edged sword. One of the main reasons that we are not supposed to pursue QE-type policies is the risk of inflation, which could undermine central bank credibility.

I would agree with Krugman that the risk of any serious outburst of inflation in the current economic situation is near zero, but of course it is not zero. And the risk of inflation in an economy with less demand and higher unemployment is lower than the risk in an economy with more demand and lower unemployment. This means that we do face more of a risk of inflation and damaging central bank credibility on keeping inflation low with QE than without.

For me, this is a no-brainer. How many parents of children should be unemployed so that everyone knows the Fed won't let the inflation rate get above 2.0? The answer would be very few, but if central bank credibility is some great good of enormous value, then the QE-foes may have a point.

I would keep credibility on the back burner here. Switzerland has a budget surplus and extremely low government debt. It should be running budget deficits to boost its economy and those of its neighbors. There is no reason we should be applauding its efforts to sustain demand in its economy at the expense of its neighbors.

 
What Part of Japan's 3.5 Percent Unemployment Rate is Anemic? Print
Saturday, 17 January 2015 20:00

A Washington Post article on President Obama's new willingness to push an economic agenda contrasted U.S. economic performance with "the anemic economies of Europe and Japan." It's not clear on what basis Japan's economy is supposed to be anemic compared with the U.S.

Its unemployment rate stood at 3.5 percent in November, the most recent month for which data are available. Its employment rate has risen by two full percentage points since the end of 2012 when its new government shifted towards Keynesian expansionary policies. By comparison, the employment rate has risen by just 0.8 percentage points over the same period in the United States (it did rise by another 0.3 percentage points in the fourth quarter). The 1.2 percentage point difference for the period for which we have data from both countries would correspond to another 3 million people being employed in the United States.

It is also worth noting that the employment rate in Japan is 1.7 percentage points above its pre-recession level. In the United States it is more than 3.0 percentage points below its pre-recession level.

 
Paul Krugman and the Swiss Movement Print
Friday, 16 January 2015 06:01

It isn't often that I think Paul Krugman gets one wrong, but I think he wrongly attacks those chocolate loving cuckoo clock making Swiss in his column today. His complaint is that the Swiss central bank abandoned its commitment to keep down the value of the Swiss franc against the euro. Krugman sees this a failure of will, with the central bank giving up a commitment to pursue an inflationary policy. This is part of a larger saga of feckless central banks that continue to obsess about inflation when the real problem facing world economies is an inflation rate that is too low.

While the general point is right, it is hard to see how this story applies to Switzerland. Switzerland did not see the same sort of downturn as the rest of the OECD in 2008. Furthermore, it has fully recovered from its downturn with a GDP that is 8 percent above its pre-recession level and an unemployment rate of 3.5 percent.

In this context, it is actually doing what we should want Switzerland to do as a good world citizen. By allowing its currency to rise, it will make its goods and services less competitive internationally. This means it will import more from its trading partners and export less, effectively providing them with an economic boost. This is what we should want to see. The countries that are at or near full employment should be running larger trade deficits or smaller surpluses.

So give the Swiss a gold star. They called this one right. (Now if we can get them to talk to China ....)

 
Can We Talk About Patent Monopolies? Print
Thursday, 15 January 2015 10:41

It's more than a bit bizarre that patent protection doesn't get a single mention in a NYT column on "why drugs cost so much." Of course without government granted patent monopolies the vast majority of drugs would sell for $5-$10 per prescription. And, drug companies would not have incentive to mislead the public about the safety and effectiveness of their drugs.

 
Does the 0.25 Interest Rate on Government Debt Demonstrate Japan's "Need" for Budget Discipline? Print
Thursday, 15 January 2015 09:51

The NYT has somehow decided that Japan needs budget discipline. It's not clear what the basis for this determination is, but the fourth paragraph of an article on Japan's latest budget proposal told readers:

"With the budget proposal, Japan is trying to balance its need for growth and discipline."

The markets apparently do not see the same need as the NYT. The current interest rate on 10-year government bonds is 0.25 percent.

 
Do More Job Openings Mean Higher Wages? Print
Wednesday, 14 January 2015 16:53

Neil Irwin has an Upshot piece making the case for why we should expect to see wages rising soon. He noted a survey of employers showing more are planning to raise wages than in prior years. He also noted the promise by Aetna to place a floor of $16 an hour on its workers' pay.

However the main piece of evidence is a rise in the number of job opening to a high for the recovery. While this is indeed encouraging, there are three important qualifications that deserve mention.

First, the biggest rise in openings compared with pre-recession levels are in low-paying sectors like retail and restaurant employment. This may mean some shift from these low-paying sectors to higher paying sectors, but the high-paying sectors do not appear to be having trouble getting workers. One exception is the government sector, which has also returned to pre-recession levels of openings. This could reflect the deterioration in the pay and work conditions of government employees.

A second fact worth noting is that real wages were rising very modestly even before the recession. The last time we saw strong real wage growth was at the very beginning of the decade. This series began in December of 2000, just before the 2001 recession kicked in. But the job opening rate was higher in the three months preceeding the recession than the number released by the Labor Department this week, 3.6 percent in 2001 compared to 3.4 percent in November.

Finally, the quit rate at 1.9 percent is below the 2.1-2.2 percent pre-recession level and well below the 2.5 percent rate of 2000-2001. This means that workers still do not feel comfortable leaving their jobs.

Clearly the labor market is improving, but we likely still have a long way to go before most workers see real wage gains. The one wild card is that the Affordable Care Act, by allowing workers to get insurance outside of employment, may make workers more comfortable leaving jobs they don't like. This could lead the labor market to tighten up more quickly than otherwise would have been the case.

 

 
Serious Confusion About Economics in Europe Print
Wednesday, 14 January 2015 05:57

The folks setting economic policy in Europe have already inflicted massive damage on the continent, putting foreign enemies and natural disasters to shame. But the pain goes on.

The NYT reported on a preliminary ruling on the European Central Bank's (ECB) plans to buy government bonds by one of the advocates general at the Court of Justice of the European Union. According to the piece, the ruling authorized the ECB to buy government debt, but said:

"the central bank should not buy government bonds immediately after they are issued, to allow markets to determine a price."

The point of a bond buying program is to raise the price of bonds and push down interest rates below the market level. Also, it really doesn't matter whether the ECB buys the bonds directly from a government or from third parties after they are issued. In both cases it would be taking possession of the same share of the stock of outstanding debt, which is the relevant factor for determining bond prices and interest rates.

Can someone buy these folks an intro econ text?

 
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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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