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NYT Gets It Right on Debt Fixers Print
Friday, 26 October 2012 04:28

The NYT deserves credit for pointing out the personal interest of a group of corporate CEOs in the outcome of negotiations over the budget. An article on the Campaign to Fix the Debt  reminded readers that:

"several members of the group, which includes highly paid chief executives of financial and industrial corporations who will stand to pay more if President Obama succeeds in his effort to raise taxes on the wealthy..."

By contrast, the Post ran an article on the same group last week that never noted the personal interest of the individuals involved, instead treating them entirely as a civically minded group focused on the country's future.

Robert Samuelson Takes on NYT Editorial Board: Government Does Not Create Jobs! Print
Thursday, 25 October 2012 15:53

Robert Samuelson was sufficiently outraged by a NYT editorial claiming that the government creates jobs that for the first time in his 35 years as a columnist he felt the need to attack a newspaper editorial. Samuelson called the NYT view "the flat earth theory of job creation" in his column's headline. Since on its face it might be a bit hard to understand -- there are lots of people who do work for the government and get paychecks -- let's look more closely at what Samuelson has to say on the topic. 

Samuelson tells readers:

"It’s true that, legally, government does expand employment. But economically, it doesn’t — and that’s what people usually mean when they say 'government doesn’t create jobs.'

What the Times omits is the money to support all these government jobs. It must come from somewhere — generally, taxes or loans (bonds, bills). But if the people whose money is taken via taxation or borrowing had kept the money, they would have spent most or all of it on something — and that spending would have boosted employment."

Okay, so we can at least agree that all of those people working as teachers, firefighters, forest rangers etc. do legally have jobs. That seems like progress. But let's look at the second part of the story:

"the money to support all these government jobs. It must come from somewhere."

Yes, that part is true also. But the last time I looked, the money to pay workers at Apple, General Electric, and Goldman Sachs also came from somewhere. Where's the difference?

Samuelson tells us that if the government didn't tax or borrow or the money to pay its workers (he makes a recession exception later in the piece) people "would have spent most or all of it on something -- and that spending would have boosted employment."

Again, this is true, but how does it differ from the private sector? If the new iPhone wasn't released last month people would have spent most or all of that money on something -- and that spending would have boosted employment. Does this mean that workers at Apple don't have real jobs either?

The confusion gets even greater when we start to consider the range of services that can be provided by either the public or private sector. In Robert Samuelson's world we know that public school teachers don't have real jobs, but what about teachers at private schools? Presumably the jobs held by professors at major public universities, like Berkeley or the University of Michigan are not real, but the jobs held at for-profit universities, like Phoenix or the Washington Post's own Kaplan Inc., are real. 



Will Protectionist Policies Maintain Inequality Throughout the Decade? Print
Thursday, 25 October 2012 04:41

Adam Davidson's NYT magazine piece featured the views of a number of economists as to what the U.S. economy will look like at the time of the next presidential election in 2016. Two of the experts seem to be describing a world in which the United States has become increasingly protectionist:

"by 2016, Frieden and Bremmer noted  [Jeffrey Frieden, a professor at Harvard and Ian Bremmer, president of the Eurasia Group], the U.S. will be adjusting to an economy in which inequality is a structural fixture. There will be millions who are unable to get work, and tens of millions more who will have to adapt to lower income. Meanwhile, those with college and advanced degrees will experience a country that has rebounded. Their incomes will grow."

Of course the main reason that workers at the top of the income distribution have seen their wages rise is that they continue to be largely protected from international competition. Our doctors are paid roughly twice as much as their counterparts in wealthy countries like Canada and Germany and several times as much as doctors in India, China and elsewhere in the developing world. Doctors from these countries would be happy to train to U.S. standards and work for half the pay that U.S. doctors receive, but are prevented from competing with our doctors by professional barriers. If protectionists did not dominate economic policy, the country could save hundreds of billions of dollars each year in health care costs and in the cost of other highly paid professional services. Frieden and Bremmer may well be right that protectionists will continue to control policy due to their outsized political power, but it is worth noting that this is political outcome, not a result driven by economics. (It is worth noting that rising wages for college grads would be a change. They have seen stagnant or declining wages over the last decade.)

It is also worth noting that the growth story in this piece might not prove accurate. It points to foreign pharmaceutical sales as a major growth sector for the U.S. economy, noting that the domestic market is likely to diminish in importance. This is very questionable. Drugs are actually very cheap. There are few drugs that would sell for more than $10 in a free market. The reason that drugs are expensive is because of patent protection and other restrictions on competition such as data exclusivity.

The United States has been able to get other countries to accept these extremely costly forms of protection as a quid pro quo for gaining access to the U.S. domestic market. However if the U.S. domestic market is no longer seen as a big prize internationally (a main thesis of the piece), then other countries are unlikely to go along with paying U.S. drug companies patent protected prices. There would be no offsetting gain to compensate for this huge drain on foreign economies.

It is also worth noting that the main reason that we have a dispute over currency values with China is because they want to be able to sell their goods at a low cost in the U.S. market. If China no longer cares about the U.S. market as a main export destination for their goods, it will presumably have no objection to the value of the dollar dropping against the yuan. This should be a boon for the manufacturing sector in the United States since it will mean that our goods are far more competitive in the world economy.

The piece also says that China will probably not surpass the size of the U.S. economy until the 2020s. The latest projections from the I.M.F. show China's economy exceeding the size of the U.S. economy on a purchasing power parity basis by 2017.

Germany Has Outperformed the U.S. Because of Work Sharing Print
Thursday, 25 October 2012 04:04

Nicholas Kristoff uses his column to take a shot at Mitt Romney's economic policies. While the basic point, that austerity will lead to slower growth and higher unemployment, is correct, placing Germany as a basket case alongside the U.K. is not. While the U.K. has aggressively cut its budget deficit, Germany has not been as ambitious in this respect. (Its deficit had not been as large.)

Germany is primarily feeling the effects of budget cuts in the other euro zone countries, which are largely coming at its own insistence. In this case, Germany is in the same sort of situation as Ohio would be if Pennsylvania, Michigan and Ohio's economy all went into recession. The effect has been to sharply slow Germany's growth, although since the start of the recession, Germany's growth has been roughly equal to that of the United States (somewhat higher on a per capita basis). By contrast, the U.K. has seen sharply lower growth, its economy is still smaller than it was before the downturn began.

In spite of having comparable growth, the unemployment rate in Germany is more than 2 full percentage points below its pre-recession level. By contrast, the unemployment rate in the United States is 3.3 percentage points above its pre-recession level. The difference is that Germany encourages employers to reduce workers' hours rather than lay them off. The result is that many workers are putting in fewer hours, but still have jobs in Germany. The government makes up for most of the lost pay with money that would otherwise have gone to unemployment benefits.

While close to half of the states have work sharing programs as part of their unemployment insurance program, the take-up rate is very low. The Obama administration has attempted to increase take-up by having the federal government pick up the cost for the next two years. (This measure was attached to the bill that extended the payroll tax cut.) However, because most state budgets are so flush, there has been little interest in getting this money from the federal government.


[Addendum: The comment about flush state budgets is a joke. I can't imagine why cash strapped states wouldn't look to get free money from the Feds. I suspect inertia, which is by far the most important force in politics and policy.]

Yet Another Editorial on the Budget Runs in the Post News Section Print
Wednesday, 24 October 2012 21:09

The Washington Post has long given up any pretense of objectivity in its news section on issues like Social Security, Medicare and the budget deficit. It routinely hypes deficit as a problem in a way that is inconsistent with the data and make assertions about the cost trajectory of Social Security and Medicare that are at least misleading, if not actually wrong.

In keeping with this pattern, the Post began an article reporting on an interview that President Obama had with the Des Moines Register by referring to the "the nation’s in­trac­table budget problems." Of course the nation's budget problems are not "intractable." The large deficits came about entirely because of the economic plunge following the collapse of the housing bubble as fans of Congressional Budget Office projections well know.


Source: Congressional Budget Office.

As can be seen the deficits were relatively modest until the economy collapsed in 2008 and were projected to remain modest well into the future. The debt to GDP ratio had been falling, which means deficits of this size could be sustained forever. This was true even if the Bush tax cuts did not expire at the end of 2010, although the budget was actually projected to turn to surplus in fiscal 2012 if the tax cuts did expire. It is also worth noting that the interest burden as a percent of GDP, at 1.6 percent, is near a post-war low, so the deficit is not currently presenting a problem to the economy in any obvious way.

The evidence is quite clear, the problem is a collapsed economy which has led to tens of millions of people being unemployed or underemployed. This has also led to much higher deficits. Rather than being a problem, these deficits are supporting demand right now, since there is no private sector demand to replace the $1.2 trillion in annual demand that was generated by the housing bubble.

Those advocating lower deficits in the current economic environment are advocating slower growth and higher unemployment. The fact that these people enjoy considerable political power and access to the media can be viewed as an intractable problem. 

The Protectionists are Worried About Doctor Shortages Print
Wednesday, 24 October 2012 14:32

Bloomberg had a lengthy article warning of looming doctor shortages in the years ahead. Remarkably the piece never once mentioned the possibility of bringing more foreign doctors in the country.

Doctors in the United States get paid on average close to twice as much as their counterparts in Canada, Germany and other wealthy countries. The gap between the pay of doctors in the United States and in the developing world is considerably larger. As a result, if we eliminated the barriers that made it difficult for foreign doctors who train to our standards from practicing in the United States, we could count on a large number of foreign physicians entering the country. (It would be a simple matter to have a modest tax on the earnings of foreign physicians in the United States that would be repatriated to their home countries. This could be used to educate more doctors, thereby ensuring that the home country benefited from this arrangement as well.)

We could also make it easier for people in the United States to get medical care elsewhere, for example by standardizing liability rules to ensure that patients will have recourse in the event of malpractice and also establishing governmental licensing agencies to ensure the quality of care in other countries. Also, Medicare could have enormous savings if it allowed beneficiaries to buy into the lower cost health care systems of other countries. Having more people getting medical care in other countries will reduce the demand for doctors in the United States.

[Thanks to Steve Hamlin for calling this one to my attention.]

Income Inequality and Globalization: The Protectionists Rule! Print
Wednesday, 24 October 2012 12:47

David Leonhardt tells readers today that income inequality is primarily due to technology and globalization. It is possible to tell the story of technology if you are prepared to jump over a few hoops. (The big problem is that economists confidently told us in the 90s that technology favored people with college degrees. In the last decade it seems to only favor people with advanced degrees. If that sounds like a "make it up as you go along" story, welcome to the state of modern economics.)

However, the globalization story requires even more hand-waving. The simple story is that we have hundreds of millions of people in developing countries who are prepared to work for a fraction of the wages of our manufacturing workers. This has caused us to lose millions of manufacturing jobs, depressing the wages of both the remaining workers in the sector and the workers in other sectors who must compete with displaced manufacturing workers.

This is undoubtedly a true story. However the part of globalization that economists seem to have difficulty understanding is that there are also tens of millions of potentially highly educated workers in the developing world who are willing to work for much lower pay than their counterparts in the United States. For example, while the average doctor in the United States gets close to $250,000 a year, there would be no shortage of doctors in India, Mexico, China and elsewhere who would be happy to train to U.S. standards and work for half this wage. The same would be true of lawyers, dentists, economists and all the other highly paid professions.

The reason that huge numbers of foreign professionals have not come to the United States and depressed the wages of the highest earning workers in the United States is that we have a large number of professional and legal barriers that make it difficult for foreign professionals to work in the United States.

(Note the use of the word "difficult," rather than "impossible." Economists often believe that because they know an Indian economist who teaches at a major university they have proven that there are no obstacles to foreign professionals working in the United States. This is sometimes referred to as the "Mexican avocado" theory of international trade. According to this theory, if I can buy an avocado grown in Mexico at my local supermarket I have proven that there are no barriers to imports of agricultural goods in the United States. This is of course a ridiculous view, but one that nonetheless usually arises in any discussion of professional barriers.)



China and Protectionism: It Ain't Quite as Simple as They Tell Us Print
Wednesday, 24 October 2012 04:25

Eduardo Porter has an interesting column on Governor Romney's threat to declare China a "currency manipulator" on day 1 of his administration. He makes the point that the real value of China's currency has risen substantially against the dollar in the last two years. He also notes that China is not the only country that deliberately props up the dollar relative to its own currency. Most importantly, he points out (as I have frequently noted) that declaring China a currency manipulator does nothing by itself. Inevitably the outcome of the currency issue would depend on a process of negotiation with China.

This is all true. However in the process of making his case, Porter takes advantage of a study by Gary Hufbauer on the cost of U.S. tariffs on imports of tires from China, which is more than a little suspect. Hufabauer, who is famous for predicting that NAFTA would create 250,000 jobs by increasing the U.S. trade surplus with Mexico, calculated the country paid over $900,000 for each job it saved in the tire industry as a result of the tariff. Most of this money was paid to other countries, since most tires are imported. He concluded that the net effect of higher tire prices was a modest loss of jobs, since consumers had less money to spend on other items. In addition, China retaliated by imposing barriers on imports of chicken parts that Hufbauer calculates reduced exports by $1 billion.

There are several aspects to Hufbauer's analysis that are very questionable. The most important is that he ignored the timing of the tariff. It was imposed in September of 2009, just as the car industry was recovering from its recession lows. Hufbauer attributes all the rise in tire prices in the fall of 2009 to the tariff. However, car prices more generally also rose in the fall of 2009 in response to the pick-up in demand. At the time the tariff was imposed in September of 2009 car prices were actually somewhat lower than their level of two years earlier. (They have risen by about 7 percent in total since the time the tariff was imposed.) Hufabuer makes no effort to control for the uptick in car demand in assessing the impact of the tariff on tire prices, which means he has almost certainly overstated its impact.

Hufbauer also makes a point of noting the open retaliation by China -- its tariffs on imports of chicken parts -- without taking into account the possibility that the threat of tariffs affected China' behavior in other areas. It is possible that China has limited the subsidies it has applied to other export industries in response to the tariff on tires. This would have reduced their exports to the United States and increased employment in other industries. China would of course not advertise the fact that it was responding to a tariff by adjusting its behavior in other areas.

Whether it did or not would change its behavior in other areas would require a close examination of China's conduct. Hufbauer simply assumed that there was no response to the tariff other than the public retaliation on imports on chicken parts.



Two Percent GDP Growth Is Not Good News Print
Tuesday, 23 October 2012 07:16

The Washington Post had an article highlighting the Fed's commitment to continue to buy long-term bonds for the foreseeable future, even if the economy looks somewhat better. It then gives a list of what it presents as relatively positive recent economic reports and says that the Fed intends to still continue its bond buying policies.

One of the items on this list is a forecast that the economy will grow 2.0 percent in the third quarter. It is difficult to view this as positive. The Congressional Budget Office puts the economy's potential growth rate at 2.4-2.5 percent. This means that with a 2.0 percent growth rate the economy is falling further below its potential. With a gap that is already close to 6.0 percent of GDP we should be seeing growth rates that far exceed the economy's potential rate of growth in order to get us back to potential GDP and full employment.

How Much Does Charles Lane Get Paid to Complain About Being Unable to Compete With the Post Office? Print
Tuesday, 23 October 2012 04:57

I'm not kidding. Charles Lane's column in the Washington Post is quite literally complaining about the fact that the Washington Post stands to lose business to the postal service. Lane is upset that the postal service has contracted with a major distributor of ads to use the mail service to bring the material to people's houses. Previously this material was distributed largely by newspapers like the Washington Post, which means that the Post and other newspapers stand to lose from the deal.

Lane is openly upset about this. He wants the post office to go out of business because he has decided that it is technologically obsolete.

Of course any business will eventually become technologically obsolete if it doesn't adapt. Congress has largely put the post office into an impossible squeeze where it has insisted that it be run at a profit, along business lines, while at the same time it has consistently given into whiners from rival businesses, like Lane, who get upset any time they face being out-competed by this 19th century relic.

Businesses tend to get their way since they use their political connections to rein in the post office. For example, about a decade ago the postal service ran a very successful set of ads that highlighted the fact that its express mail was about a quarter of the price of the overnight delivery services of Fed Ex or UPS. The two competitors went to court to stop the ads. When the court told them to get lost, Fed Ex and UPS went to Congress and stopped the ads.

The post office used to provide banking services to much of the population. However, the wizards in the financial sector didn't like the competition, so they had it shut down.

Now we have Charles Lane and the Washington Post complaining that the technologically obsolete postal service is undercutting it in its ability to deliver junk ads to people's homes. Market economies are so tough!



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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.