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Ruchir Sharma's Entry in the "Most Things Wrong in a Short Column" Contest Print
Wednesday, 25 April 2012 23:36

I'm shorting Morgan Stanley after reading the NYT column on China by Ruchir Sharma, the head of emerging market equities at Morgan Stanley Investment Management. The piece begins by telling readers:

"more than half of Americans think China is already the world’s leading economy — an astonishing misperception, given that China’s gross domestic product is still less than half of America’s."

That is not what our friends at the IMF say. On a purchasing power parity basis, which assigns the same set of prices to goods and services produced in both countries, China is already almost 80 percent of the size of the U.S. economy. There is also some serious research suggesting that because of mis-measurement of prices in rural areas, China's economy is already larger than the U.S. economy.

The piece then goes on to tell us:

"It is well known that developing nations hit a “middle-income trap,” and stop catching up to rich nations, when per-capita income reaches about $5,000 to $15,000 (in current dollars). The examples (Brazil, Mexico, Malaysia) are numerous."

Huh? This is well-known to whom? This is a huge range (imagine per capita GDP in the U.S. tripled to $150,000 per person) that includes almost 70 countries. It makes a huge difference whether a country's growth slows near the bottom of this range, where they are still relatively poor, as opposed to the top, where they are decidedly middle class.

Furthermore, countries enter this range with radically different growth paths. The speedy growers like China are the exception. More typically countries edge up into this range with modest growth rates. In the more typical case, there is not much room for a slowdown. Of course in some of the fast growers, like Malaysia, one of Sharma's examples of a slowdown country, there is little evidence of a slowdown as they maintain rapid growth right through this range.

Then Sharma tells us that China passed his $5,000 mark last year. Actually the IMF says it was 2007, and if the understatement view is right, China hit this mark as early as 2005.

Next we get my favorite:

"In recent years China has accounted for nearly half of global growth in oil demand, and every 1 percent of G.D.P. growth in China added 10 to 30 percent to the price of oil."

I'm still trying to figure this one out. China consumes a bit more than half as much oil as the U.S., but somehow if its GDP increases by 1 percent, the price of oil rises by 10-30 percent. How exactly does that work? If U.S. GDP rises by 1 percent, does the price of oil rise 20-60 percent.

Finally, we are told that:

"China’s slowdown is also opening the door to a revival in American manufacturing. China is suffering many symptoms typical of a maturing miracle economy, from a strengthening currency to rising wages, land prices and transport costs, while the United States has a weak currency, stagnant wages and a moribund property market. The dollar is near record lows (in inflation-adjusted terms) against many of its trading partners, including China."

I understand the point about relative prices, but don't we have a better export market if China is growing rapidly? What did I learn in my econ 101 class that was wrong, don't fast-growing countries have more rapid import growth than slow-growing countries?

Perhaps there is something that made sense in this piece, but it's not easy to find. It's hard to understand how a piece so chock full of errors finds its way into the NYT oped page.

Federal Reserve Board Credibility, Plus 50 Cents, Will Get You a Cup of Coffee Print
Wednesday, 25 April 2012 23:13

Since folks have asked my thoughts (you had to ask?) on the Krugman-Bernanke debate, I will throw in my two cents. The question at hand is whether the Fed can plausible generate more inflation, and thereby lower real interest rates and reduce the unemployment rate by announcing a commitment to higher inflation rate over the near future. This could mean, for example, committing itself to 4 percent inflation over the next 5 years.

If this policy was successful, it would lead to lower real interest rates, which would in turn lead to more consumption and investment. Ideally we would also see a decline in th real value of the dollar, leading to more net exports, the essential long-term path to full employment.

My view is that this path would likely be successful, if the Fed were really committed to it. That means continually buying up vast amounts of assets if the inflation rate did not appear to be rising. This should ultimately freak enough investor types into thinking that Bernanke was sufficiently nuts that he could cause inflation. They would then hedge themselves against this risk by buying up all sorts of commodities to protect against inflation, which would then lead to inflation.

That looks like a pretty compelling story to me, but perhaps at least as important, I don't see the downside. Bernanke's obsession with the Fed's inflation fighting credibility (like the ECB's) is really pathetic. How much is this worth when you just wrecked an economy with your incompetence in protecting against asset bubbles?

Other things equal, it is better to have central banks that have some credibility in fighting inflation, but how does this compare against tens of millions of people in the U.S. and euro zone being unemployed? If the latter is such a small matter, would the inflation fighters volunteer to surrender their jobs so that some of the unemployed can work?

Finally, if buying up tons of assets will not cause inflation, then there is definitely no excuse not to do it. The Fed can hold $10 trillion in assets and pay the interest to the Treasury each year. Currently it is refunding about $80 billion a year to the Treasury from its interest in assets.

Suppose this was instead $400 billion a year or $4 trillion over a decade? That should make even the most ardent deficit hawk happy. There would be no deficit problem in that story, which would mean that we can freely spend on all sorts of things that can boost growth and help people. Tell me again that story about Fed credibility? 

The Social Security Trust Fund and the "Money Has Been Spent" Line Print
Wednesday, 25 April 2012 00:42

With the release of the latest Social Security trustees report the scare stories have been coming fast and furious. In this vein, Marketplace radio had an interview with Olivia Mitchell, the head of the Pension Research Council. In this interview, Mitchell commented on the bonds held by the Social Security trust fund:

"If you take a narrow view, what you understand is that there's a trust fund, which is supposed to be the piggy bank whereby if the funds run short, the Social Security Administration can go and claim these bonds. But if you take the broad view -- which I do take -- you have to understand that the money actually has been spent. And so what it means is we'll either have to raise taxes, or cut expenditures, or issue more debt to be able to pay the scheduled benefits."

Of course Professor Mitchell's "broad view" would apply to any bonds issued by the federal government. For example, if Peter Peterson were to decide to cash in $1 billion in U.S. government bonds on their due date, the government would have to "raise taxes, or cut expenditures, or issue more debt" to be able to pay off Mr. Peterson's bonds.

Ordinarily we would not say that this fact means that Peter Peterson does not actually have the $1 billion in wealth implied by his bonds. In fact, the government's financial situation would probably never enter a discussion of Peter Peterson's wealth. In the same vein, since Social Security has a separate account under the law, it is hard to see what relevance Professor Mitchell's broad view has to the system's finances.

Government Spending Bad: What Some Economists Say Print
Tuesday, 24 April 2012 22:13

In reporting on the victory of François Hollande in the first round of the French presidential elections the NYT noted Mr. Hollande's opposition to further austerity measures. It then told readers:

"But while Mr. Sarkozy puts his emphasis more on spending cuts, reducing the tax burden on companies and liberalizing the labor market, Mr. Hollande has charted a traditional socialist path of public spending and job creation. That, some economists say, is likely to make matters worse, possibly sending financial markets into a tailspin that invites further chaos.

'The real problem is the preference for public spending,' said Nicolas Baverez, an economist and author. 'The main candidates continue to believe that it is the state that creates jobs and that will innovate, and this is wrong. Public spending is 56.6 percent of gross domestic product, which is huge. And the increase in public spending and taxes is downsizing the private sector and private jobs.'"

While "some economists" do say things like this, other economists, including folks like Nobel Prize winner Paul Krugman, say that austerity as a way to control budget deficits is self defeating in the current economic situation. It reduces GDP, which in turn lowers tax collections and raises expenditures on items like unemployment benefits.

Rather than just telling readers what "some" economists say on the virtues of austerity, it would have been helpful to include the views of what some other economists say.

(Thanks to Josh Greenstein for calling this one to my attention.) 

CNN Forget to Look at Its Chart When Warning of the "Burgeoning Cost" of Social Security Print
Tuesday, 24 April 2012 15:24

It's always a good idea to look at the data that you present to readers when you write about it. It appears that CNNMoney forgot to do this in an article whose first sentence warned of the, "the burgeoning costs of Medicare and Social Security."

The chart shows a modest uptick in the cost of Social Security, measured as a share of GDP, over the next two decades, then a line that is essentially flat over the remaining 55 years of the projection period. Medicare does have costs that could be called "burgeoning," but that is the story of our broken private health care system.

The Primary Cause of Social Security's Bleak Outlook Is Upward Redistribution Print
Tuesday, 24 April 2012 05:27

In an article on the release of the 2012 Social Security trustees report the Washington Post told readers that:

"Social Security’s bleak outlook is primarily driven by the ever-larger numbers of people in the baby boom generation entering retirement."

Actually the fact that baby boomers would enter retirement is not news. Back in 1983, the Greenspan Commission knew that the baby boomers would retire, yet they still projected that the program would be able to pay all promised benefits into the 2050s.

The main reason that the program's finances have deteriorated relative to the projected path is that wage growth has not kept pace with the path projected. This is in part due to the fact that productivity growth slowed in the 80s, before accelerating again in the mid-90s and in part due to the fact that much more wage income now goes to people earning above the taxable cap.

In 1983 only 10 percent of wage income fell above the cap and escaped taxation. Now more than 18 percent of wage income is above the cap.

Remember When Mexico Presented a Contrast to Argentina? Print
Tuesday, 24 April 2012 00:45
It seems like just yesterday when Mexico was being held up as a paragon of free enterprise, in contrast to Argentina, which was nationalizing its oil company. (Okay, it was two days ago.) Anyhow, it seems that Mexico's government is preparing to impose new restrictions on its state-owned oil company.
The Right's Inventive Approach to Income Inequality Print
Sunday, 22 April 2012 23:58

Just as it refuses to accept global warming or evolution, much of the right is busy trying to deny the evidence on income inequality. As Thomas Edsall notes in his column today, they don't have much of a case.

The big point that they are hitting on these days is that most middle income and poor people get health insurance, either from their employer or the government, which costs lots of money. If we add in this expense to their cash income, then the rise in inequality does not seem as large.

There are two important points to consider on this issue. The cost of health insurance is money being paid to highly paid medical specialists, insurers, and drug companies. It seems a bit perverse to argue that the poor are actually doing better than we thought because we are paying lots of money to cardiologists.

The other point is to keep in mind is that if we look at health outcomes like life expectancy, then it adds to the view that inequality is increasing. While all income groups shared more or less equally in the gains in life expectancy in the three decades immediately following World War II, a hugely disproportionate share of the gains have gone to the top in last three decades.

This suggests that if we measure what low and middle income people get by way of health care, instead of what the government and employers pay, the growth of inequality might be even worse than the commonly used data indicate.

Robert Samuelson Has Never Heard of Paul Krugman (or Me) Print
Sunday, 22 April 2012 23:33

Regular readers of the Washington Post know that they have a hard time getting information at the newspaper, buried as it is in the center of the national's capital. Robert Samuelson gave more evidence of this problem in his column today on the renewed difficulties facing Spain.

Samuelson told readers:

"in truth, no one has a neat solution to end Europe’s financial nightmare."

Actually, many of us have proposed what would seem like a pretty neat solution, have the European Central Bank guarantee Spain's debt. That would immediately push the interest rates paid by the Spanish government down to the levels paid by the German government. That would make Spain's debt burden easily sustainable.

Spain does need to re-establish its competitiveness which can best be done within the euro zone by having a somewhat higher rate of inflation in Germany and other core countries. If Spain can sustain a lower rate of inflation than the core countries then it will be able to get its current account deficit with other euro zone nations back to a reasonably level.

Samuelson should know that many prominent economists have advocated this sort of solution. He may think it is a bad option for some reason, but then he should present the reason. As it stands, his column makes it sound as though he has no clue on the nature of the debate over euro zone policy.

Postal Service's Business Failures Might Have Something to Do With Political Connections of Competitors Print
Sunday, 22 April 2012 20:07

A NYT article on the financial difficulties of the Postal Service concluded with a comment from Art Sackler,  the chairman of the Coalition for a 21st Century Postal Service:

"They haven’t had a good track record when it comes to developing new lines of business."

This organization is identified as "a mailing industry group that includes companies like FedEx."

It might have been worth reminding readers that FedEx and UPS have in the past used their political power to limit the ability of the Postal Service to compete with them. A few years back the Postal Service had a successful ad campaign that highlighted the fact that its express service was much cheaper than FedEx or UPS.

These companies then went to court to try to stop the campaign. After they lost their court case, they then went to Congress, which helped to persuade the Postal Service to end this particular ad campaign. At least in this particular case the Postal Service's main problem was a lack of political clout, not a bad business model.

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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.