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The Money Should Come from the ECB, Not Germany Print
Tuesday, 19 June 2012 04:51

The NYT had two pieces today discussing the euro zone crisis, both of which implied that additional funds to support the peripheral countries will have to come from Germany and other core countries. Actually, this route would be problematic because at some point even Germany's credit would be called into question.

The key to restoring the euro zone to stable growth would be to have the European Central Bank (ECB) back up the debts of the euro zone countries. This would immediately restore the market's confidence in their debt and sharply reduce interest rates. The only risk from going this route is higher inflation.

Of course higher inflation is a necessary part of the solution to the crisis. The peripheral countries must regain their competitiveness relative to Germany. This can only be done by having prices rise less rapidly in the peripheral countries than in Germany. Since it is not plausible to envision prices declining in the peripheral countries (there is no precedence for such price declines) then prices must rise more rapidly in Germany.

For this reason, the guarantee of peripheral country debts by the ECB would accomplish both major tasks needed to end the crisis. It would immediately end the risk of a default by these countries and also set in motion a process that could restore their competitiveness. And, it would be largely painless for numerate people in Germany and other core euro zone countries.

Someone Has to Tell Mitt Romney That He Supports a Lower Valued Dollar Print
Monday, 18 June 2012 21:08

In an article on the likelihood that the Fed would take steps to boost the economy at its meeting this week the NYT gave readers Governor Romney's assessment of Fed actions to boost the economy. The article tells readers:

"As for the consequences [of measures to boost the economy], Mr. Romney said the program was 'not extraordinarily harmful, but it does put in question the future value of the dollar and it will obviously encourage some inflation down the road.'"

Romney has repeatedly said that he would take strong measures against China to pressure it to raise the value of its currency against the dollar. This is the same thing as reducing the value of the dollar since it means that the dollar will fall against the Chinese yuan and almost certainly against the currencies of many other countries who will follow China's lead.

If Romney really wants to see the value of the dollar fall against China's currency, as he claims, then it is hard to see why he would be worried that dollar would fall in response to the Fed's actions. This seems to be exactly the policy he is advocating.

It is also worth noting that a lower valued dollar is the standard mechanism for correcting the trade deficit. Those who want to see the United States borrowing less from foreigners should favor a lower valued dollar.

Robert Samuelson Doesn't Like the Affordable Care Act Print
Monday, 18 June 2012 04:45

That's what he told us in a column that purported to show why Obamacare is bad for the economy. While he gave a list of reasons as to why the bill is bad policy, since his list doesn't hold much water, we are primarily left with the conclusion that Samuelson simply doesn't like the bill.

Reason #1 is that the Affordable Care Act (ACA) "increases uncertainty and decreases confidence when recovery from the Great Recession requires certainty and confidence."

I know this is a Republican talking point, but I really don't have a clue what it means. Employers who currently offer insurance are in a situation where insurers can raise costs by almost any amount for the following year or drop plans altogether. (I have seen both -- extraordinary price increases and the elimination of a health care plan in my years as co-director of CEPR.)

The ACA will lead to considerable more government oversight of insurers which presumably means they will be less able to have erratic increases in prices or drop plans arbitrarily. Employers also have the option of dropping insurance and paying the penalty (2.5 percent of wages for employers with more than 50 employees). In this case they would know exactly what their costs would be.

If the uncertainty created by the ACA is really slowing recovery we should expect to see weaker job growth concentrated in the firms that would be most affected, those with 45 or more employees (they could cross the 50 employee cutoff in the not distant future) who do not currently offer their workers' insurance. The data do not indicate that employment growth among these firms has been notably slower than for other firms in the recovery.

Reason #2 is that the ACA raises the cost of labor and therefore will reduce hiring. Samuelson tells us:



The Race Between Brazil and Mexico: Is It Close? Print
Monday, 18 June 2012 04:33

The NYT told readers that Mexico looks set to surge past Brazil in its growth rate in the years ahead. It notes the fact that it grew more rapidly last year and looks set to grow more rapidly again in 2012. It is worth noting that Brazil grew considerably more rapidly since 2000, so Mexico would have a long way to go to make up lost ground, although its initial GDP was considerably higher than Brazil's.


                                 Source: IMF.

It's also worth noting that Mexico's 3.9 percent growth rate for 2011, which is 2.9 percent per capita, is not especially rapid for a developing country.

Start-ups and Job Creation Print
Sunday, 17 June 2012 07:57

There was a lengthy and pointless debate that began in the early 90s over what sized businesses created the most jobs. The original story was that small businesses created the most jobs. This turned out not to be true on more careful investigation, since small businesses also lost the most jobs. There were various twists and turns in the academic literature before most economists came to the conclusion that businesses of all sizes on net create jobs at roughly the same rate.

While this debate kept many economists employed and no doubt helped to boost wages in the profession, it did little to advance our knowledge of the economy. Unfortunately economists learn little from such experiences.

We now have the sequel to this silliness with the claim that it is new businesses that create jobs. This claim emanates most prominently from the entrepreneurially oriented Kauffman Foundation. It was picked up in an Ezra Klein column yesterday. The argument coming from this direction is that all the job growth in the last three decades came from new businesses. Employment in firms that existed in 1980 has just stayed roughly even.

The reason this claim is silly is that the decision of a corporation to expand and open a new division depends to a large extent on the ease with which new businesses can form. If it is easy for start-ups to form, then existing businesses will be less likely to expand their operations by setting up a new division. If they want to get into a new area, then they will just buy a start-up that looks promising.

The logic here is simple. The vast majority of start-ups will fail. However if there are a large number, then certainly some will succeed. The ones that do can then be purchased by existing companies that want to expand. The new jobs can then be attributed to start-ups and not existing businesses, but this is entirely due to the fact that we make it easy for start-ups to form.

An example of this story is Google's acquisition of Youtube. The fact that there was a successful start-up that Google could buy made it easier to enter this market. But does anyone think that Google would not have moved itself in a similar direction had Youtube not existed?

The point is that even if we accept that all net new jobs came from start-ups it does not follow that we necessarily want to do more to encourage start-ups nor adopt any policies that have a negative impact on existing businesses to favor start-ups. The reason why the former is not true is that the vast majority of new businesses fail within a decade. It is reasonable to assume that the marginal start-up (the ones we encourage with our new more start-up friendly policies) will be less successful on average than the current group that did not need this extra boost from the government.

This means that we will possibly be encouraging millions more people to take their life's savings, work ridiculously long hours, usually dragging in other family members, in pursuing a venture that will fail. We will then see the person without a business, without savings and without a job and just a few years left to retirement. That doesn't sound like good policy, nor is it a good use of the economy's resources.

On other side, suppose we tilt the playing a field a bit to favor new businesses at the expense of existing businesses. Well, if we accept the Kauffman analysis, imagine that instead of holding their own existing businesses had lost 5 percent of their jobs over the last three decades. That would give us a really big hole. Would the additional tilt to new businesses fill this gap? We don't know -- at least the Kauffman data don't answer this question.

The long and short is that new businesses are wonderful, but policies that go overboard to push people to start new businesses are likely to ruin many lives and lead their promoters with lots of egg on their face.

Obamacare Without the Mandate, WAPO Misrepresents Washington State Example Print
Sunday, 17 June 2012 07:42

The Washington Post had a piece that looked at the experience of Washington State to see what might happen with President Obama's health care plan if the mandate is struck down. Washington State provides an interesting model because it had established a similar model of health care reform in the early 90s.

While the initial plan did have mandates, these were never put into law. As a result, people could opt to not buy insurance until they actually had serious medical problems. Many people went this route, which soon made insurance unaffordable since only sick people were buying insurance.

The state responded by allowing insurers to not cover pre-existing conditions, however they still had to take all applicants and charge the same amount. The piece implies that the net effect has been a failure for the people of Washington State, telling readers:

"Washington state’s insurance market now has nine companies selling individual policies, compared with the 19 that participated in 1993. Thirteen percent of Washington state residents currently lack health coverage, the same proportion as when the health reform experiment started."

These comments ignore the larger national trends. There has been enormous concentration in the insurance market everywhere over the last two decades, with 2-3 insurance companies accounting for the vast majority of the market in nearly every state. It is not clear that Washington has fared any worse than other states in this area.

If Washington has been able to keep the percentage of the population without insurance at 13 percent it has done better than the rest of the country. Nationally, the percentage of uninsured rose from 15.0 percent in 1993 to 16.3 percent in 2010, the most recent year for which data is available. While its health insurance law may not be the reason, Washington States has fared somewhat better than the country as a whole by this measure.

The Cure for Budget Deficits: Train More Deficit Hawks Print
Saturday, 16 June 2012 22:07

The United States has more than 25 million people unemployed, underemployed, or out of the labor force altogether because of the weak economy. Investors are willing to make long-term loans to the country at 1.5 percent interest. The idea that the budget deficit should be the country's major concern is close to loony, but nonetheless in policy circles that seems to be the case.

This is best demonstrated by Niall Ferguson's nutball column in the Financial Times, which we are warned is only the first of four. I would tear this thing to shreds but I want to get some sleep tonight.

I'll just pick one choice nugget. Ferguson tells us:

"The most recent estimate for the difference between the net present value of federal government liabilities and the net present value of future federal revenues is $200 trillion, nearly thirteen times the debt as stated by the U.S. Treasury.

Notice that these figures, too, are incomplete, since they omit the unfunded liabilities of state and local governments, which are estimated to be around $38 trillion."

Hmmmm, $200 trillion at the federal level and $38 trillion at the state and local level? Can we get a source for this? Is there a date there for when the Martians will attack Planet Earth?

In fairness, there are nutty projections that assume that per capita health care costs in the United States will be four or five times as high as in all other wealthy countries. If this proves true, over an infinite horizon we will have a very bad deficit problem. Of course, these health care costs would wreck our economy regardless of what we do with public sector health care programs. These projections would cause serious people to talk about the need to fix the health care system. But this is national economic policy that we are talking about.

But this piece suggests an easy route for dealing with the deficit. Clearly there is a big market for deficit hawks. (I assume that Mr. Ferguson was well-paid for this piece.) It certainly is not difficult to train someone to write this stuff. Suppose that we set up educational programs that will train millions of deficit hawks to write stuff for the Peter Peterson--BBC--Financial Times crew. We split the payments between our former students and the government.

This would be a great win-win-win story. Otherwise unemployed college grads could get good-paying jobs being deficit hawks. Taxpayers would get a cut of their payments, helping to bring down the deficit. And, even Peter Peterson, the BBC, and the Financial Times would gain because they would be able to find deficit hawks who would be every bit as knowledgeable as Niall Ferguson and would work for much less. (We could assure the deficit hawks that our students would not be more knowledgeable because then they probably would not write such dreck.)

There you have it: a plan for compromise and bipartisanship. Do we have a deal? 

Andrew Kohut Doesn't Know How to Read His Own Data Print
Saturday, 16 June 2012 07:45

That arguably should have been the headline of a Post segment discussing the release of new polling data from the Pew Research Center, which Kohut heads. The Center's poll asked people a series of questions about the budget, taxes, and various programs. Most people answered that they viewed the deficit as a major concern. They were also strongly supportive of all major areas of federal spending with the exception of the military. In the case of military spending, there were almost equal numbers of people favoring cuts as increases. In the case of Medicare and Social Security, those favoring increases outnumbered those supporting cuts by more than 3 to 1.

In the case of Social Security, an overwhelming majority of respondents said that they supported raising the cap on taxable wages (currently $110,000). In addition, an overwhelming majority also said that they would rather see the tax rate increased than face a cut in benefits.

The conclusion of the Post piece tells readers:

"But ultimately, despite listing the deficit as a priority, most Americans — about 60 percent in a 2011 poll — would prefer to maintain benefits than take steps to reduce federal spending. As Kohut explains, this puts legislators in a real bind: 'They are dealing with a public that is demanding solution to a problem which it has declared to be a major priority, but at the same time Americans are resistant, or divided at best, on the sacrifices that would be required to achieve a solution.'"

Contrary to what Kohut asserted, legislators are not in a bind if they want to follow public opinion. They can easily deal with the problems facing Social Security by raising the cap on taxable wages and phasing in an increase in tax rates over many decades in the future. If ordinary workers again share in the economy's productivity growth, as the Social Security trustees projections assume, these tax increases would be a small fraction of future wage gains.

Dana Milbank: Jamie Dimon Is an Expert on the Impact of the Debt on the Economy Print
Friday, 15 June 2012 15:50

Those of you who thought that Jamie Dimon, JP Morgan's CEO, was only good at blowing billions of dollars in risky bets, will be surprised to discover that he is also an expert on the impact of the government debt on the economy. That at least is what Dana Milbank would have us believe.

Milbank commented that President Obama is:

"hoping to limp to a second term without addressing the looming debt crisis — which, as JPMorgan Chase’s Jamie Dimon told Congress this week, has contributed to today’s economic malaise."

Hey, if Jamie Dimon says it, it's got to be true.

This diatribe stood out even by Washington Post standards. The headline, "skip the falsehoods, Mr. President, and give us a plan," essentially calls President Obama a liar because he won't cut Social Security and Medicare as Milbanks wants.

David Brooks Says That Mitt Romney and the Republicans Are Not Very Good at Arithmetic Print
Friday, 15 June 2012 02:12

That probably was not his intention, but that is the only conclusion that numerate readers can take away from his column. He tells readers that:

"But many Republicans have now come to the conclusion that the welfare-state model is in its death throes."

He points to the crises in Greece, Spain, and Italy and then adds:

"In the decades after World War II, the U.S. economy grew by well over 3 percent a year, on average. But, since then, it has failed to keep pace with changing realities. The average growth was a paltry 1.7 percent annually between 2000 and 2009. It averaged 0.6 percent growth between 2009 and 2011. Wages have failed to keep up with productivity. Family net worth is back at the same level it was at 20 years ago."

There are a number of problems with this story. First Greece, Spain, and Italy have among the least developed welfare states in Europe. If someone wants to make an argument that there is some inherent problem with the welfare state model then we should look for crises in Sweden, Denmark and Germany, all states with far more generous welfare states than these Mediterranean countries. In fact, the welfare states of northern Europe are doing relatively well through the crisis, it is difficult to understand how anyone can look at the pattern of the crisis across Europe and conclude that it implies that the welfare state model has reached its end.

Brooks account of U.S. growth is just bizarre. Did he somehow miss the collapse of the housing bubble? If he excluded the period since the crisis then there is not much of a case for a weakening economy. The economy definitely did better in the three decades immediately following World War II, when the top marginal tax rate was between 70-90 percent than it did in the post-Reagan years, but there was a substantial uptick in productivity growth in the mid-90s. The second half of that decade saw the strongest sustained growth since the early 70s, with workers up and down the income latter sharing in the gains of productivity growth.

The economy did turn down with the collapse of the stock bubble in 2000-2002, but it is hard to see how Republicans tie the collapse of this bubble to the death throes of the welfare state, just as it is difficult to see how the more recent collapse of the housing bubble implies the death throes of the welfare state. In principle the Los Angeles Kings victory in the Stanley Cup could also signal the death throes of the welfare state, but it is not easy to see the connection. The more obvious take away from this story is that a corrupt financial sector can wreck the economy.

In terms of the link between wages and productivity growth, Brooks Republican friends seem to be in an inverted world. If this is the concern, then the welfare states in Europe would seem to be the answer, not the problem. Workers have certainly seen more of the benefits of productivity growth over the last three decades in northern Europe than in the United States. If Brooks has a point here, it is very difficult to see what it is.

He then comments:

"Money that could go to schools and innovation must now go to pensions and health care. This model, which once offered insurance from the disasters inherent in capitalism, has now become a giant machine for redistributing money from the future to the elderly. "

Brooks is presumably referring primarily to health care (assuming that he has an idea of the numbers involved), since that has been the sector showing rapid increases in costs. Of course here also the story is 180 degrees at odds with what Brooks has in his piece. All the welfare states in Europe have much lower per person health care costs than the United States. In fact, the average is less than half as much. If the U.S. paid the same amount per person for health care as Denmark, Germany, or Sweden we would be looking at massive budget surpluses.

The idea that Mitt Romney expects "an efficiency explosion" from relying more on the market in the health care sector defies both common sense and a massive amount of evidence. It is more likely that he expects a big jump in profits for private insurers and other powerful interests in the health care sector. 

In short, if Brooks hoped to show why Republicans rationally concluded that the United States should further cut back its welfare state he fell way short of the mark.

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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.