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Robert Samuelson: "Bye Bye Darwin?" Print
Monday, 19 December 2011 05:21

Okay, Samuelson actually wants to say goodbye to Keynes, but he would have had a better case if he was talking about Darwin and the theory of evolution. After all, when we have seen nothing but confirming evidence for years, why should we still accept the theory?

Samuelson tells readers:

"The eclipse of Keynesian economics proceeds. When Keynes wrote “The General Theory of Employment, Interest and Money” in the mid-1930s, governments in most wealthy nations were relatively small and their debts modest. Deficit spending and pump priming were plausible responses to economic slumps. Now, huge governments are often saddled with massive debts. Standard Keynesian remedies for downturns — spend more and tax less — presume the willingness of bond markets to finance the resulting deficits at reasonable interest rates. If markets refuse, Keynesian policies won’t work."

It seems the problem here is that Robert Samuelson has not heard about the euro. The countries he has identified as reaching a situation where they "lose control over their economy" are all on the euro. These are countries that do not issue their own currency. In this sense they are like Ohio and Texas. These states cannot freely run deficits because the Federal Reserve Board has no explicit or implicit commitment to back up their debt. Greece, Italy and Spain are in the same situation, as the European Central Bank (ECB) has repeatedly insisted that it will not back up the government debt they issue.

Samuelson says it is "unclear" why, given our own debt and deficit, interest rates are still just 2 percent and investors are willing to lend us trillions of dollars. Actually it is very clear. The Federal Reserve Board stands behind the debt of the United States government and there are few good investment opportunities in the current economy. 

Comparing the interest rate on government debt of countries with similar debt/deficit situations, it is very clear that being able to issue currency makes an enormous difference. For example, the interest rate on Spain's and Austria's debt is much higher than the interest rate on UK debt, even though both countries have much lower debt to GDP ratios. In short, Samuelson finds mystery and confusion where in fact there is none.

He does the same in warning us off stimulus. First he cites Christine Romer, President Obama's former chief economic adviser, as saying that determining the exact number of jobs created by the last stimulus is "incredibly hard." As Barbie would say, so is math.

We can't know the exact number of jobs generated by the stimulus because a hell of a lot things were going on in the economy at the time and it is very difficult to construct a proper counterfactual. This does not amount to an argument against stimulus.

It is incredibly hard to determine the counterfactual if the United States did not enter World War II. In Samuelson's world that would be a compelling argument against having fought Hitler. The research that has attempted to measure the number of jobs created found that the impact was pretty much along the lines predicted by the Obama administration, but yes, there is a large degree of uncertainty around these numbers.

Finally, he comes up with a harsh warning against trying the more stimulus route. Quoting Berkely economist Barry Eichengreen, he tells readers:

"At some point, however, investors will recognize this behavior for the Ponzi scheme it is. ... If history is any guide, this scenario will develop not gradually but abruptly. Previously gullible investors will wake up one morning and conclude that the situation is beyond salvation. They will scramble to get out. Interest rates in the United States will shoot up. The dollar will fall. The United States will suffer the kind of crisis that Europe experienced in 2010, but magnified."

So Eichengreen, through Samuelson, is telling us that if we go the route of more stimulus we will get a really bad situation. There are two issues here. First is Eichengreen's story credible? And second, what is the alternative?

Eichengreen presumably has not made the same mistake as Samuelson, but again we issue our own currency, so the United States can never literally be in the same situation as Europe in 2010. We can always pay our debt, it is denominated in dollars and we issue dollars.

But Eichengreen tells us the "dollar will fall." Actually, the official policy of both the Bush and Obama administrations were that we want the dollar to fall (mostly against the yuan). This is the only plausible way to address our trade deficit. A lower valued dollar will make imports more expensive, leading us to buy less of them, and make our exports cheaper, causing foreigners to buy more.

If we could get the dollar to fall enough to balance our trade it would create over 5 million jobs in manufacturing. This is more than 250 times the number of jobs that the oil industry claims will be created by the Keystone pipeline. Why would we be concerned about this prospect?

If Eichengreen means that the dollar would go into a free fall -- reaching 3 or 4 dollars to a euro, 2 cents to a yen, 40 cents to a yuan -- this is more than a bit hard to imagine. Under such circumstances U.S. exports would be hyper-competitive and our import market for other countries would vanish. Maybe Eichengreen wants to bet that this is a plausible future, but I doubt that many others would.

If for some reason investors really did send the dollar into a free fall, our trading partners would have no choice but to intervene in order to avoid the enormous damage that such a collapse would imply for their own economies. (Of course it is worth remembering that the long-term deficit horror stories are entirely driven by health care costs, a fact that Samuelson used to know.)

In short, the horror story is nice for little kids, but not terribly plausible in the real world. (Japan's debt to GDP ratio is over 200 percent, we have a very long way to go before we get there. It can borrow long-term in financial markets at interest rates a bit over 1.0 percent.)

Finally, what is the alternative? Tens of millions of people are supposed to go unemployed or underemployed. These are people unable to care for their children properly, unable to prepare for their own retirement, and in many cases, unable to keep their homes. Absent major stimulus, things are not going to get better for these people anytime soon. And given the consistently overly optimistic track record of forecasters, it may be close to a decade until we have fully recovered from the downturn.

It is important to remember that the unemployed/underemployed are not in financial trouble because they messed up. They are in financial trouble because people like Alan Greenspan, Ben Bernanke, and Robert Rubin messed up. They are in financial trouble because news outlets like the Washington Post only had room in their news and opinion pages for people whining about budget deficits. (This is back in 2004-2007, when deficits were small.) They had no room for the people warning that the housing bubble would inevitably burst and sink the economy.

But Samuelson says that we have no choice but to make these people suffer because if we don't then something really bad will happen. It is difficult not to ask whether Samuelson's assessment of this risk of the bad unknown may be somewhat different if it was his family that was facing unemployment and eviction.



Samuelson ended his column by saying:

"Were Keynes alive now, he would almost certainly acknowledge the limits of Keynesian policies. High debt complicates the analysis and subverts the solutions. What might have worked in the 1930s offers no panacea today."

As Gary Burltess reminds me, the debt to GDP ratio in the UK in the mid-30s when Keynes was writing The General Theory was close to 200 percent.

Misleading Claims on the Keystone Pipeline: Brought to You By Our Friends at Washington Post Print
Sunday, 18 December 2011 09:57

News outlets reserve the option to factcheck ads and will generally refuse to run an ad that is clearly false. This is apparently not the practice at the Washington Post (a.k.a "Fox on 15th Street).

The paper had a full page ad in the Sunday edition pushing the Keystone Pipeline. One of the claims in the add is that the unemployment rate among construction workers is 20 percent. If the Post had made the long trip over to the Bureau of Labor Statistics (BLS) website it would have discovered that the November employment report showed the unemployment rate among construction workers to be 13.1 percent. That is considerably higher than the national average of 8.6 percent, but still quite a bit short of 20 percent.

It is also worth noting some of the other misleading statements in the ad. It refers to 20,000 jobs that will be "directly" created by construction of the pipeline. Most of these jobs are not in the construction industry, but rather jobs along the supply line, for example in pipeline manufacturers or for truck drivers. While the economy can use these jobs as well, if we're looking at employing construction workers, the 20,000 figure is the wrong number. Direct employment in construction of the pipeline will be less than half of this number.

Finally, it is worth putting this figure in some context. BLS tells us that there were 1.1 million unemployed construction workers in November. If we assume (generously) that half of the 20,000 jobs mentioned in the ad are in construction, then the pipeline would reduce unemployment among construction workers by less than 1 percent. Note that this is 1 percent, not 1 percentage point. Assuming that the industry's numbers are accurate, construction of the pipeline would create enough jobs to reduce unemployment in the construction industry by approximately 0.1 percentage points. 

You Don't Have to Save When Your House Does it For You Print
Sunday, 18 December 2011 09:39

Adam Davidson had an amusing piece on the consumption of various items (e.g. lipstick, nail polish and men's underwear) that can be taken as reflecting consumers' sentiment. At one point he comments on the high levels of consumption of the last two decades and implied low levels of savings:

"During the fast growth of the late 1990s and mid-2000s, and the dark times that followed, people have been choosing to spend more and save less than ever before. Paradoxically, this happened just as pensions have been disappearing and life spans have been increasing. It suggests that Americans are so caught up in every short-term enthusiasm or agony that they haven’t thought enough about long-term fiscal health."

While this is true in the sense that most workers are ill-prepared for retirement due to their lack of saving, it is important to recognize that their consumption was driven in large part by the wealth created by first the stock bubble in the 90s and then the housing bubble in the last decade. People saw stock prices soar at double digit rates in the second half of the 90s. They were led to believe by experts (i.e. the people quoted in places like the NYT and Washington Post) that stock prices would continue to remain high. If the wealth created by this bubble had been real, then many of the people who were not saving during this period would have been just fine.

The same applied, albeit even more so, to the run-up in house prices in the last decade. Housing is much more widely held than stock. When people saw their house prices rise by 10-20 percent a year, they saw little point in putting a few thousand dollars into a retirement account. The increase in house prices gave many homeowners far more additional wealth during the bubble years than they could have hoped to accrue by putting aside a portion of their income.

While it was predictable that this bubble would also burst, most homeowners were far more likely to hear the voice of someone like Federal Reserve Board Chairman Alan Greenspan, insisting that there was no bubble, then one of the few economists who were raising the alarm. Given the information that they had at the time, it was perfectly reasonable for people to think that they did not need to save for their retirement.

Romer on Financial Crises: Getting Argentina Wrong Print
Sunday, 18 December 2011 09:27

It is amazing how frequently people seem to ignore the data when they discuss the financial crisis in Argentina. In a generally solid column on financial crises and their aftermath in today's paper, Christina Romer tells readers that it took Argentina 8 years to recover its pre-crisis level of per capita GDP following its 2001 financial crisis.

This is clearly not true, if the reference is to the 2001 crisis. According to the IMF's data, real per capital GDP in Argentina exceeded its 2001 level in 2004. Argentina actually first sank into recession in 1998. Its per capita GDP did not exceed the 1998 level until 2006. This would be 8 years, however the reference then should not to the 2001 financial crisis, but the longer period of decline that preceded the financial crisis.

How Did Fannie and Freddie Get to be the Symbols of the Housing Bubble? Print
Saturday, 17 December 2011 08:40

In an article on addressing global warming would a serious newspaper throw in a comment to the effect that "many Americans consider it a hoax," without pointing out that it is not? It did the equivalent in an article on the Security and Exchange Commission's charges against the top executives at Fannie Mae and Freddie Mac for inaccurately representing their exposure to subprime debt.

The Post article at one point commented that:

"Fannie Mae and Freddie Mac, which came to symbolize the housing bubble and its painful aftermath."

In fact, the charges described in the article describe a situation in which the top executives at these institutions bought up stakes in non-prime loans and subprime backed securities just as the market was collapsing. The purchases began in late 2006 and accelerated in 2007 and 2008.

The housing bubble had peaked in the middle of 2006 and subprime issuance plummeted in the second half of the year. It had virtually ceased altogether by 2007. In other words, Fannie and Freddie purchases at this point could have played no role in the splurge of subprime junk loans because the splurge had already stopped.

The purchases of securities backed by subprime and Alt-A loans was simply reducing the explosure of the private investment banks that had issued these securities (e.g. Goldman Sachs and Lehman) or issuers that still had some loans on their books (e.g. Countrywide or Ameriquest). This would have transferred bad debt from the private sector to the government sponsored enterprises, but the economic damage caused by the issuance of these loans had already been done. 

[Addendum: This comment should not at all be taken as a defense of Fannie and Freddie. Unlike the right-wing buffoons who now criticize them for causing the housing bubble, I was critical at the time. I was trying to call attention to the bubble since 2002. Fannie and Freddie financed close to half of the housing in the country at the time. They could have taken steps to stop the bubble (e.g. require appraisals of rental values and refuse to make loans at purchase prices that exceeded a ratio of 18 to 1). Housing is all they do. They should have seen the bubble. Nonetheless, the worst loans were securitized by Citigroup, Merrill Lynch and other private lenders. That is really not a debatable point. Angelo Mozilo and Robert Rubin should be the symbols of the housing bubble, not Fannie and Freddie.]

The Naked Truth on Short-Selling Print
Friday, 16 December 2011 06:36

For some reason short-selling has a bad reputation in many circles. It is often blamed for bad things happening to good companies and/or good countries. The story among short-sellings critics is that it involves market manipulation, where big actors are attempting to profit by sending stocks or bonds plummeting.

Floyd Norris has a good column on short-selling in today's NYT. It sums up research on the issue which indicates that most of the time when companies are complaining about short-sellers, the shorters are actually identifying over-valued stocks and in some cases uncovering fraud.This certainly seems to have been true of the short-sellers who were attacked Fannie Mae and Freddie Mac before they were put into conservatorship or Lehman, Citigroup and other badly troubled banks in the heyday of the financial crisis.

Certainly there are instances where shorting is in fact market manipulation, but there are also instances where traders take long positions to manipulate the market. (The notion of market manipulation here is using your trading to deliberately drive stock prices in the hope of being able to profit from the movement you have created. In the case of shorting, you hope to send the stock price plummeting and then buy back shares at a big discount. On the long side, the hope is to create a euphoria around the stock and then dump it before people realize that the price has no basis in the fundamentals.) There is no intrinsic reason that short trades will be more susceptible to manipulation than long trades, except that most small investors (who lack the ability to move markets) can't do shorts.

Short-trading, when it is based on fundamentals, can be seen as equivalent to exposing counterfeit money. It is showing the public that a company is not as profitable as widely believed. It would have been hugely beneficial to the economy if we had many people shorrting Lehman, Citigroup and the other companies pushing and securitizing subprime mortgages back in 2004. 

Quick, How Big a Deal Is $200 Billion Over the Next Quarter Century? Print
Friday, 16 December 2011 05:20
That's what NYT readers are asking themselves after the NYT told them that the oil and gas industry may spend up to $200 billion (in 2010 dollars) by 2035 on pipeline construction. While NYT readers are quite educated as a group, most probably do not have a clear idea of how much this spending would mean to the economy. It's a bit less than 0.05 percent of projected GDP over this period. That is not trivial, but it's not going to replace the auto industry (@ 4.0 percent of GDP).
Time Magazine Decides to Throw Numbers to the Wind to Promote Representative Ryan Print
Thursday, 15 December 2011 14:05

Every budget expert knows that the stories of exploding budget deficits in the tens or hundreds of trillions of dollars (depends how many centuries in the future we wants to count), are driven by our broken health care system. If the United States paid the same amount per person for its health care as other wealthy countries, we would be looking at long-term budget surpluses not deficits. However, people who don't do budget calculations for a living do not generally know that the real story is a broken health care system.

This allows charlatans like Representative Paul Ryan to push nonsense budget plans that mean huge tax cuts for the wealthy, while slashing the programs that low and middle income people depend upon, like Social Security and Medicare. They also know that they can count on innumerate reporters to tout their programs to the sky, since the media is largely controlled by people who also want to see government programs for low and middle and income people slashed.

This is why Time Magazine made Representative Ryan the runner-up for person of the year. He proposed a plan that, according to the Congressional Budget Office's (CBO) projections would increase the cost of buying Medicare equivalent policies by $34 trillion over the program's 75-year planning period. Under Representative Ryan's plan, the CBO projections imply by 2050 the cost of buying a Medicare equivalent policy at age 65 will be two-thirds of the median retiree's income. For a person who is 85 the cost will be twice the median retiree's income.

Meanwhile, Representative Ryan proposed massive tax cuts for the country's richest people. Under his proposal, the tax cuts are paid for by the cuts in Medicare, Medicaid and other government programs. The projected deficits are little affected, since the revenue lost to tax cuts is roughly equal to the cuts in government programs.

Representative Ryan's program would imply a massive upward redistribution to the one percent. While Time Magazine holds out the prospect:

"the $15 trillion U.S. economy grows by 3% rather than 2% per year, after a decade that extra percentage point will mean almost $2 trillion extra in the national wallet each year,"

serious people do not listen to such nonsense. There is a vast vast pool of evidence on the impact of tax rates on growth. There is no way that a serious person can use this evidence to conclude that tax reform can have more than a modest impact on growth, and certainly not an increase of one percentage point, unless of course you work for the One Percent.

How Does the Post Know that the Ryan-Wyden Plan Will "Preserve" Medicare? Print
Thursday, 15 December 2011 06:08

Whether or not the premium support plan put forward by Representative Paul Ryan and Senator Ron Wyden would preserve what people understand as "Medicare" is a topic open to debate. Nonetheless the Post asserts that in both the headline and the first sentence of its article that the plan will preserve Medicare.

Of course the Post supports such premium support plans as it has repeatedly said on its editorial pages. However serious newspapers maintain a distinction between their editorial position and news stories.

SOPA Will Cost Jobs! The NYT Should Talk to an Economist, not the Chamber of Commerce Print
Thursday, 15 December 2011 05:42

Standard economic models show that tariffs cost jobs. The reason is that they make consumers pay more money for the protected product. This pulls money away that could be spent in other areas. If the spending took place elsewhere, it would create more jobs than the additional money earned by the protected industry.

The same logic applies to increasingly stringent protections for copyright, except the economic waste and resulting job loss is likely to be much larger. Tariffs rarely raise the price of products by more than 15-20 percent. Copyright can make items very costly that could otherwise be available for free or nearly free. This implies a tariff of several thousand percent or higher.

In addition, there are enormous costs associated with copyright enforcement, with both the public and private sector required to make substantial expenditures to prevent unauthorized copies of copyrighted material from being circulated. This amounts to a waste of resources that could instead go to productive activity.

Copyright and its enforcement can be thought of as being analogous to toll booths, which can be used as a way to finance road construction. If the only way we have to finance road construction is toll booths, then we absolutely need toll booths to pay the road-builders.

However, once we have roads that are financed through other mechanisms (e.g. government funding), then it becomes increasingly difficult to collect money at the tollbooths since people will opt to use the free roads. We could go the route that many in Congress want to take with the Stop Online Piracy Act (SOPA), which effectively amounts to building toll booths that are harder to get around and imposing tough penalties on those who try to take free roads.

This gets more money for the people who build and operate toll booths, but may not do very much to help the people who build roads. Alternatively, we could try to find ways to get more money directly to the road-builders without spending vast sums erecting bigger more expensive toll booths and being more punitive to those who use free roads.

If the NYT had relied on an economist rather than the Chamber of Commerce, it would know that the SOPA is likely to cost large numbers of jobs rather than create jobs because of the costs it imposes on the economy and the money it will drain out of consumers' pockets.  

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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.