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Fareed Zakaria's Pinata of Errors

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Monday, 24 January 2011 05:29

Those of us who follow economic reporting closely have long recognized the Washington Post's opinion pages as the mother lode of confused economic thinking. Fareed Zakaria lives up to the standard in today's column, which offers policy tokens for both the left and right.

He starts by noting that the tax/spending package agreed to by President Obama and the Republicans last year added $900 billion to the deficit over 10 years and then wrongly tells readers:

"We can't keep playing this game."

Of course we can. The important point, apparently lost on Zakaria, is that the deal increased the deficit by $900 billion over the next two years. This is a period in which virtually every economic forecast projects the U.S. economy to be well below full employment levels of output. This means that deficit spending will crowd out little or no private investment. So what exactly is the problem with playing this game; that we might put more people to work?

Even the interest burden on this debt need not pose a problem. The Fed could simply buy and hold the bonds used to finance the debt. This would mean that the interest is paid to the Fed, which then refunds it to the Treasury at the end of the year. Last year the Fed paid almost $80 billion back to the Treasury. When the economy eventually moves back toward full employment it can raise reserve requirements in the banking system to ensure that the additional reserves don't lead to inflation.

Zakaria then gives us the right's caricature of U.S. politics, telling us with reference to policies to promote growth:

"The left and right disagree here as well, with the right focusing more on measures to spur the private sector and the left on government spending."

Let see, the right tends to be in favor of having the government impose strong patent and copyright monopolies on the market. Is this government involvement spurring the private sector? Does it spur the private sector more than having the government contract with private firms to develop new drugs or new software? If so, it is not obvious how.

How about if the Fed targets a higher rate of inflation (e.g. 3-4 percent) in order to reduce real interest rates and reduce private sector debt burdens. Is this a focus on government spending as opposed to the private sector?

He then tells us that the private sector has been investing furiously around the world but "meagerly" in the United States. If Zakaria had access to the Commerce Department's data he would know that investment in equipment and software has been rising at almost a 20 percent annual rate over the last year. Actually, investment has been relatively healthy in this downturn.

Zakaria then gives as an example of over-regulation driving business overseas Goldman Sachs' decision to only offer Facebook shares to its foreign customers. It's hard to see exactly what the problem is here. Facebook is trying to skirt U.S. laws on disclosure requirements for publicly traded companies. They are apparently able to do this by just selling shares to foreign investors. Perhaps this means that foreign investors will get a good deal or alternatively will get scammed by Facebook, but it is hard to see any important implications for the U.S. economy. This doesn't affect how many jobs Facebook will create in the United States.

Zakaria then turns to drug development where the Obama administration announced plans for a $1 billion program to help spur progress. He then complains that regulations are the problem, commenting that:

"The Food and Drug Administration takes twice as long to approve a drug as its European counterparts. As a result, health-care research has been moving offshore, particularly as China and India innovate in every product and process."

Actually this makes no sense whatsoever. Under the TRIPs agreement, countries are prohibiting from providing favorable access rules based on the location of research. This means that the rate at which the FDA approves drugs would have nothing to do with a company's decision on where to locate its research. We should expect company's to base their research where it can be done at the lowest cost. They would then look to have drugs approved wherever it is profitable to have them approved. There is no logical connection between the two, even though pharmaceutical industry lobbyists may try to convince members of Congress and gullible columnists that there is.

Comments (6)Add Comment
With No Games There is No Game Theory to Justify Capitalism
written by izzatzo, January 24, 2011 9:55
"We can't keep playing this game."


Zakaria is correct. If we keep playing this game then there can be no game theory to model and act out and without that, free markets will dissolve into socialism as the debt explodes.

For example, consider the game played currently with 'competiveness' by Obama and Immelt along with Zakaria. Suddenly 'competition' is the new buzzword talking point for economic recovery - like they discovered Adam Smith, the invisible hand, comparative advantage and capitalism yesterday.

Uh huh. Like Obama is going to take Dean Baker's advice and introduce serious 'competition' into the health care sector in the State of the Union Speech, to erase long term, unsustainable crippling debt that can actually balance the budget.

What's that? That's not the kind of 'competition' they have in mind? The kind that can actually bring down cost when markets are allowed to work. The kind that increases productivity, growth and living standards.

Then what kind of 'competition' are they talking about? Yes, of course, it's the kind explained in game theory - if everyone competes then everyone is better off, but if 90% compete for the benefit of the 10% who don't compete at all, the result is a Great Recession with 10 million unemployed and class warfare in an economy and government run by the Ultra-Rich.

It's true. We can't keep playing this game. The 'winners' keep taking all, because they're not 'competing' at all in the 'free' markets and 'competition' they prescribe for everyone else.

Now STFU and go watch some professional sports to celebrate 'competition'.
ooops...bonds=dollars
written by pete, January 24, 2011 10:45
There are several papers out there which Dean should know of which indicate that dollars are treated in the macro-economy just really really short term debt. Bottom line: buying debt with dollars does not make the debt disappear like magic. It is just movement along the yield curve. Sorry, but it was valiant effort.
...
written by ComradeAnon, January 24, 2011 12:29
Must be a bitch to have some wanna be hijack your comments all the time.
re bonds=dollars
written by jm, January 24, 2011 3:06
Dean didn't claim that buying debt with dollars makes the debt disappear. He pointed out that with so many resources idle, government borrowing to but them to work does not crowd out private investment.
FDA vs. European Drug Approval Time
written by jethan, January 24, 2011 3:15
I have one word for you -- "Thalidomide". Wikipedia reports it has been called "one of the biggest medical tragedies of modern times". Approved in Europe, but not in the US as the FDA demanded further testing.
...
written by Chris, January 25, 2011 5:55
You're mostly right. But you fumbled by saying Goldman was trying to skirt disclosure laws.

From the WSJ:

Under an SEC rule known as Regulation D, private placements like the Facebook deal "cannot be the subject of advertising, general promotional seminars or public meetings in connection with the offering."

So the unwanted media attention created a situation where Goldman wouldn't be able to do a private placement. So this would be a case of US regulations diverting investment.

Reminds me that everyone's not perfect.

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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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