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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?

 
A Financial Transactions Tax Is Not a Major Tax Increase on Investors Print
Tuesday, 13 January 2015 06:14

In a Wonkblog piece Max Ehrenfreund wrongly described the Democrats proposal for a financial transactions tax as a major tax increase on investors. This is not true. Research shows that trading volume will decline roughly in proportion to the increase in transactions costs that result from this tax.

This means that if the tax increases trading costs by 50 percent, we would expect trading volume to decline by roughly 50 percent. This means that investors might pay 50 percent more for each trade, but since they only trade half as much, the total amount they spend on trading costs would be little affected. The cost of the tax would be borne almost entirely by the financial industry, not investors.

 

 
As S.&P. Prepares to Settle, Worth Remembering the Killing of the Franken Amendment Print
Tuesday, 13 January 2015 05:39

The NYT reported on the likelihood of a settlement between Standard and Poors and the Justice Department over accusations that S.&P. had effectively sold investment grade ratings to banks issuing mortgage backed securities (MBS) during the housing bubble years. The claim is that S.&P. knowingly gave ratings to MBS that they did not deserve because rating these issues was a major source of revenue to the company and it did not want to risk the business by giving out honest ratings.

This is a good time to mention the Franken Amendment to the Dodd-Frank bill which would have eliminated the incentive for the rating agencies to exaggerate the quality of MBS by taking the hiring decision away from the banks. Instead of directly hiring a rating agency, an issuer of MBS would contact the SEC, which would then determine which rating agency to assign to the job. While the amendment passed with overwhelming and bi-partisan support in the Senate, it was stripped out in the conference committee, apparently at the request of the Obama administration.

The Securities and Exchange Commission (SEC) then studied the issue for three years and decided that it was not up to the task of picking rating agencies after being inundated with comments from the industry. The gist of these comments was that the SEC might send over an agency that was not competent to rate the bond issue in question. This begs the obvious question of why would any bank be marketing a bond, the quality of which a professional auditor at one of the accredited rating agencies could not accurately assess? Nonetheless the amendment was killed and the pre-crisis system was preserved intact.

And, as economic theory would predict, there is evidence that the rating agencies are again lowering their standards to gain business.

 
The Cost to Savers of the Democrats' Wall Street Sales Tax Print
Monday, 12 January 2015 07:25

The Washington Post reports that the Democrats have a new plan for middle class tax cuts that will be financed in part by a 0.1 percent tax on financial transactions like stocks, bonds, and derivatives. Since the financial industry and its employees will undoubtedly be pushing tirades telling us that this tax will kill middle class savers, BTP decided to call in Mr. Arithmetic to get his assessment of the issue.

Mr. Arithmetic points out that the amount of the tax born by savers will depend in large part on their response to the tax. Since research indicates that trading volume declines roughly in proportion to the increase in trading costs, this means that ordinary savers will bear almost none of the tax.

To see this point, imagine that our middle class saver has $100,000 in a 401(k). Suppose that 20 percent of it is traded every year and that the trading costs average 0.2 percent. This means that our saver is spending $40 a year on trading costs (0.2 percent of $20,000). 

With the Democrats' proposal, trading costs will rise to 0.3 percent assuming that 100 percent of the tax is passed on in higher trading costs. (This is almost certainly an exaggeration, since the industry will probably not be able to pass the tax on in full.) If trading volume were unchanged, then this middle class saver would now pay $60 a year in trading costs (0.3 percent of $20,000).

However research shows that the folks managing the 401(k) will likely cut back their trading by roughly 50 percent in response to this 50 percent increase in trading costs. This would mean that only 10 percent of the 401(k) or $10,000 would be traded each year. In this case, the 401(k) holder would be paying just $30 a year in trading costs (0.3 percent of $10,000).

Instead of going up, trading costs actually fell. Since 401(k) holders don't on average make money on trading (for every winner there is a loser), they end up better off after the tax. Of course these numbers are approximations and it may well be the case that the decline in trading volume does not fully offset the increase in costs, but the point remains. The vast majority of this tax will fall on the financial industry (think Lloyd Blankfein, Jamie Dimon, and Robert Rubin). The middle class 401(k) holder will be largely unaffected.

 

 
Robert Samuelson Wants to Give Reagan Credit (see addendum) Print
Monday, 12 January 2015 06:45

Robert Samuelson uses his column today to tell readers that he is very unhappy with Paul Krugman. The specific complaint is that Krugman gives Paul Volcker credit for reducing inflation in the early 1980s, rather than Reagan. (Actually, I thought Krugman was giving Volcker credit for the recovery from the recession, which Krugman said was primarily due to lower Fed interest rates rather than Reagan tax cuts.)

Anyhow, Samuelson insists that Volcker has to share credit with Reagan, since Reagan gave him the political cover to carry through policies that pushed the unemployment rate to 10.8 percent and ruined millions of lives. I'm inclined to agree with Samuelson on this one. A different president might have put pressure on the Fed chair to back away before his policies had done so much damage.

Where Samuelson is wrong is in his characterization of the need for the Volcker policies. He tells readers:

"From 1960 to 1980, inflation — the general rise of retail prices — marched relentlessly upward. It went from 1.4 percent in 1960 to 5.9 percent in 1969 to 13.3 percent in 1979. The higher it rose, the more unpopular it became. People feared that their pay and savings wouldn’t keep pace with prices.

"Worse, government seemed powerless to defeat it."

Actually, the inflation picture was not quite as bad as Samuelson describes. He apparently is referring to the measure using the official consumer price index (CPI), which had a well-known measurement error (more in a moment) that led to an exaggerated measure of inflation. In fact the inflation rate using the now popular consumer expenditure deflator peaked at just over 11 percent.

Read more...

 

 
More on Pay by the Mile Auto Insurance Print
Saturday, 10 January 2015 14:31

Earlier in the week I took the environmental movement to task for its lack of interest in pay by the mile auto insurance. I consider it a major failing because this one should be a relative freeby in the effort to reduce greenhouse gas emissions.

In contrast to a carbon tax or cap and trade mechanism, it doesn't raise the price on average, it just changes the incentive structure. And in doing so, it can have a large impact in reducing driving. If the average insurance policy costs $1,000 a year, and people drive 10,000 miles on average, then this converts to a fee of 10 cents a mile. If a car gets 20 miles per gallon, shifting to pay by the mile insurance would have the same incentive effect in reducing driving as a $2.00 a gallon gas tax.

Also, unlike a carbon tax, which is really bad news for the oil and coal industries, insurers could still make plenty of money with pay the mile insurance. The only real obstacle for them is inertia. After all, why should they change the way they sell insurance just to save the planet? 

And, pay by the mile also has the great advantage that insurance is regulated at the state level. This means that if the enviros concentrated their forces on a green-friendly state, they should be able to win support for pay by the mile policies. And, with adverse selection going the right way (low-mileage, low accident drivers go into the pay by the mile pool, driving up the cost of conventional policies), it shouldn't be too hard to quickly get most of a state's drivers into pay by the mile policies. If one state could go this route and substantially reduce miles driven, then others could follow.

Anyhow, several people wrote comments and e-mails complaining that the environmentalists have in fact been pushing for pay by the mile insurance. I can't say I'm aware of everything enviros do, but anything they do on pay by the mile certainly is not as visible as something like the effort on the Keystone pipeline. (Which is worth opposing.)

Mark Brucker, one of my correspondents, sent along a list of relevant pieces for those who might be interested:

Read more...

 

 
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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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