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Home Publications Blogs Beat the Press Greg Ip Gets the Basics Wrong in Analysis of Downturn (with response)

Greg Ip Gets the Basics Wrong in Analysis of Downturn (with response)

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Sunday, 07 October 2012 07:05

Greg Ip is usually a solid analyst of economic trends. However he apparently agreed to adopt house standards in his column for the Washington Post that told readers that "Obama is saving the economy, but maybe not in time to save the economy."

The main assertions in the piece are just flat out wrong. For example, the column tells readers:

"Paradoxically, the same forces that made for such a weak recovery during Obama’s first term suggest that the next four years will be better, regardless of who holds the White House. Right now, businesses, households and governments are all trying to wrestle down their debts. That “deleveraging” saps spending and blunts the power of low interest rates."

This statement would lead readers to believe that the problem is low consumer spending and low business investment because of high debt burdens. However the Commerce Department's data strongly disagrees with this assessment. Here is the ratio of consumption to disposable income over the last four decades. (Adjusted disposable income has to do with the statistical discrepancy in GDP accounts.)

consump-disp-09-2012

Source: Bureau of Economic Analysis.

The Commerce Department strongly disagrees with Ip, telling us that consumption remains far above its long-term share of disposable income even if it is somewhat below the peaks driven by the wealth from the stock and housing bubbles. It also disputes the business side of Ip's argument. In the second quarter of 2012 (the most recent quarter for which data are available), businesses spent an amount equal to 7.4 percent of GDP on equipment and software investment. In 2007, the last pre-recession year they spent 7.9 percent. See the collapse? In fact, given the large amounts of excess capacity in major sectors of the economy, business investment is surprisingly high.

The real story of the current shortfall in demand is very simple. The wealth generated by the housing bubble led to unusually high consumption. It also led to a building boom in both residential and non-residential construction. Consumption fell back to more normal levels after the wealth that was driving it disappeared. Construction went from boom to bust, as we had enormous overbuilding of both homes and most types of non-residential structures.

There is no simple way to replace this demand from the private sector. And contrary to what Ip asserts, our best and really only hope is to reverse current patterns of trade. While Ip notes that we have had a surge of exports, what matters for demand is net exports, which is the difference between exports and imports.

There has been very little progress in reducing the country's trade deficit over the last four years. Most of the gains have been from reduced imports as a result of the recession. The only plausible mechanism for getting the trade deficit down is by reducing the value of the dollar which will make U.S. goods more competitive internationally. President Obama has made little progress on this front, leaving most of the work to the person occupying the White House for the next four years. 

Unless trade is closer to balance, the only way to maintain anything close to full employment (absent another bubble) will be to run large budget deficits. That is accounting -- there is no possible way around this fact.

Ip also comments that, "home prices, which hit bottom in January, are rising steadily." That should scare us. Inflation adjusted house prices are already back to their long-term trend level. The last thing that any sane person should want to see is a re-inflation of the bubble. Anyone feel good about another plunge in house prices of 20-30 percent? It won't be any more fun the next time it happens.

Finally, Ip tells us the:

"financial crisis that bears the fingerprints of every president going back to Lyndon Johnson, who turned mortgage giant Fannie Mae over to private shareholders, as well as Carter, who ushered in the era of deregulated finance by loosening interest-rate controls."

Actually, we could go further back to the mortgage interest deduction and the creation of Fannie Mae, but the key point is that if anyone had been awake at the White House or the Fed in the years 2002-2006 they would have been able to notice the huge housing bubble that was driving the economy. Bubbles are not built on fundamentals, which mean that they will burst. And it was 100 percent predictable that when this bubble burst that it would take down the economy with it. While prior presidents had certainly made serious mistakes in regulation (give Clinton a gold medal in this category), none of these mistakes put us on an inevitable path to the disaster that we are now facing.

The people in power at the time should not be allowed to pass the buck and evade responsibility. Many of those convicted of crimes grew up in poverty, but we still send them to jail. The case for punishment of the Greenspan-Bush gang would be more solid than for almost any prisoner sitting behind bars today.

 

Addendum: Note on Deleveraging

There has been considerable discussion by economists and in the media of "deleveraging." There is some fundamental confusion on this issue. It is important to remember that debt for one person is an asset for another. While it is likely that the debt of underwater homeowners does more to depress their spending than the wealth of the mortgage holders does to increase theirs, it is not really possible to explain much of the downturn by the amount of underwater mortgage debt in the economy, which is estimated at $700 billion to $1.1 trillion.

Furthermore, as this gets paid down (the deleveraging), this is simply a form of saving. Suppose that we snapped our fingers and underwater homeowners suddenly were set right-side up in their mortgages. This would not be hugely different than if they suddenly accumulated $1.1 trillion in housing equity. While it is likely that being underwater does more to depress consumption than being above water by the same amount does to raise it, we are likely talking about relatively small sums. (To believe otherwise, we would have to think that underwater homeowners would increase annual spending by something like $30,000 a year if they were no longer underwater. That would be pretty impressive for a group of homeowners with average income that is probably around $70,000.)

 

Greg Ip's Reponse

Greg Ip was good enough to write a substantive response and allowed me to post it:

I agree with your point that the level of consumption relative to income is not indicative of consumers suddenly turning thrifty; but the process of deleveraging results not from consumers consuming an unusually low share of income, but simply moving to a lower share than before, which is more or less what we've witnessed. In my own analysis I prefer to examine both consumption and residential investment together, and these show a decline in their share of GDP from the bubble peak of about 76% to around 73% currently. More important is look at contributions to GDP. As the chart accompanying this article http://www.economist.com/node/21558591 shows, consumption has made a much lower contribution to growth in this recovery than either of its two predecessors, and housing has to date made a net contribution of about zero, compared to 0.5 to 1 percentage point in prior recoveries. And of course, this understates the trend because deleveraging holds back overall GDP and thus depresses the denominator - either GDP or, in your calculation, disposable income. In other words, consumption shares would have fallen even faster but for the negative feedback of deleveraging on income and GDP (the paradox of thrift). Of course, other factors have held back the recovery, but the overall pattern fits the deleveraging story reasonably well.
 
Your point about business investment is a good one: in absolute levels it's done relatively well. But as a share of corporate cash flow it remains puzzlingly low. Last year, for example, non financial corporate cash flow exceeded gross investment by about $200bn. The reasons why are unclear but we've seen this phenomenon on and off for some years now and in many countries. The financial sector has of course gone through a much more serious policy-imposed deleveraging, which has rippled throughout the entire economy.
 
Your point about the need to rebuild trade is also a good one. However, this actually strengthens my point. One reason that countries that endured domestic deleveraging in the past, like Sweden and Canada, were able to recover so well was by expanding net exports. This has not been possible for the United States because of the relatively small share of the export sector, the weakness of the rest of the world, and the fact the dollar hasn't fallen even further. Even so, trade has made a bigger-than-normal contribution to this recovery than predecessors.
 
I absolutely agree that durable growth requires the US economy to rebalance towards net exports and away from consumption, but that is not a necessary condition for a full recovery. In general, I am not fond of economic explanations based on national accounting, e.g. since  C+I+G+X-M = Y, then if C+I is weak we need more X-M. The fact of the matter is that if we were able to generate more demand, such as through more deeply negative interest rates or higher G, we could boost C, I, and thus Y and the apparent need for higher X-M would be less evident. It wouldn't be as preferable a route to recovery, but it would suffice. The reason deleveraging episodes are so slow is that  weakness  in the deleveraging sectors cannot, or for some reason is not, made up by other sectors, because of policy obstacles (e.g. zero nominal bound or financing constraints) or global conditions.
 
Finally, in citing the culprits I did for the financial crisis, I was citing a few acts of commission rather than acts of omission. I did not mean to absolve others of responsibility, but a more comprehensive accounting was beyond the scope of this particular article.
 
 
My Response
 

Greg is absolutely right that consumption and housing have not made the contribution to this recovery as they did in prior recoveries. The question is whether there is any reason that we should have expected them to. 
 
I have argued that the pre-recession levels of both were extraordinary and driven by the $8 trillion housing bubble. There was therefore no reason for us to get back to these levels unless the housing bubble re-inflated, which is probably not possible and certainly not desirable. In the case of the pre-recession level of consumption, we were spending at a pace that pushed the saving rate to zero. This is certainly not a good story if we think that people should have anything to live on in retirement other than their Social Security. Absent the run-up in housing wealth, they would not have chosen to spend at this pace.
 
In the case of housing, we were building way ahead of demand, which was evident by a record vacancy rate as early as 2002. It was inevitable that this overbuilding would lead to a sharp falloff in construction after the bubble's collapse. We are now finally seeing some growth in this sector, but this is only likely to bring us back to post-war averages of 3-4 percent of GDP in residential construction, not the 6.1 percent bubble peak.
 
Finally, Greg is correct that we don't absolutely need an increase in net exports to get back to full employment on a sustainable growth path, the question is whether there is a plausible alternative. The government could certainly start spending enough money tomorrow to get the economy back to full employment, but I don't think anyone believes that it is politically feasible, regardless of the outcome of the November elections. 
 
We have extensive research that shows that neither consumption nor investment are especially sensitive to interest rates (the former probably more so than the latter). This means that the likelihood that the Fed could somehow prompt enough of either or both to get the economy back to full employment seems remote, especially when it is already up against the zero bound for short-term interest rates.
 
This leaves X-M as the only plausible path for maintaining sustainable full employment. It is not a logical necessity, it's just the only route left after the others can be dismissed as implausible.

 

Comments (47)Add Comment
Crime, Punishment and Avoidance
written by Last Mover, October 07, 2012 8:24
The case for punishment of the Greenspan-Bush gang would be more solid than for almost any prisonercurrently sitting behind bars today.


Not to mention the potential for future economic crimes. Rather than running for President, Romney should be in a rehabilitation program for sociopaths whose stated goal is to continue creating the economic carnage of Greenspan and Bush.
confused
written by Peter K., October 07, 2012 8:59
Is deleveraging not occurring? I don't get it. Does the housing sector have more debt and underwater mortgages than a healthy one would normally have?

What do you think of Steve Pearlstein's column? Maybe you could take a look at it tomorrow?
...
written by skeptonomist, October 07, 2012 9:41
Dean's claim that the Fed chairman and the President are responsible for detecting and safely deflating asset bubbles would make some sense if there were any evidence that such a thing had ever been done before. If would be nice if these people - or somebody - had the inclination, the ability and the power to control asset bubbles by discretionary action, but in real life it doesn't work that way. The stock market goes up and down and local real-estate bubbles come and go and authorities do little about them, nor is it really their jobs to control them directly - they usually have plenty to do otherwise.

What made the late housing bubble so bad was certain specific flaws in finance - allowing credit default swaps to proliferate unregulated, increased bundling of mortgages so that responsibility was diffused, etc. The rating agencies certainly failed to do their job, but actually nobody, Dean Baker included, foresaw exactly how CDS's increased rather than decreased systemic risk. More generally, most of these changes were a result of a deregulatory climate that was fostered by Greenspan and almost everybody else mentioned in the post and by Ip. This climate, and the specific things in finance and banking that have increased the risk of more bubbles and crashes, are what has to be changed, not the job descriptions of the Fed Chairman and the President, or finding people with superpowers to fill these jobs.
...
written by JSeydl, October 07, 2012 9:56
IP also threw out a whole bunch of nonsense about how the yuan is coming closer to a market-determined currency, citing this article from a few weeks ago: http://www.washingtonpost.com/...tory.html. Of course, in keeping with WAPO tradition, the article relies on a study from Peterson Institute for International Economics, which is an organization that obviously has a vested interest in not seeing the value of the dollar fall versus the yuan.
CDSs
written by David, October 07, 2012 10:37
Dr. Baker already addressed how CDSs are but ainsult added to the injury caused by the housing bubble. Market-based credit is rather new, and Greenspan failed to see the danger, though the big clue was out there (the failure of Black's hedge fund).

But the principal fact, not to be lost sight of, is that the Fed, by raising rates, could easily have popped that bubble in , say, 2004, after the recovery from the 2001 recession.
CDSs
written by David, October 07, 2012 10:53
Dr. Baker already addressed how CDSs are but an insult added to the injury caused by the housing bubble. [url= http://www.cepr.net/index.php/...damn-cdos/
europe and u.s. cannot both devalue....
written by pete, October 07, 2012 11:05
This is really the issue, no? Dean and Krugmans solution to Europe is a devaluation, lowering the real (Dollar?) cost of PIIG debt. But that means the dollar would have to RISE! Bottom line, you have to pick one. Or, as the Asian countries did in the 90s, and the Latins before them, race to devalue faster than your neighbor. Not really a good strategy in the long run.
How Is the Financial Crisis Depressing Output Today?
written by Dean, October 07, 2012 11:08
Skeptonomist,

I think the CDSs made for lots of fun for Bernanke and company, but they have almost nothing to do with the story of the downturn today. We lost $8 trillion of housing bubble wealth -- that's the story, full stop. It explains everything.

In terms of the responsibilities and capabilities of the Fed, I would love to hear someone tell me that of Alan Greenspan said in 2003 that he was raising rates by 0.5 percentage points and he would keep raising them until house prices fell by 20 percent, that this would not have deflated the bubble. Given the enormous cost of letting the bubble grow, there was zero excuse not to try this in any case.

In terms of the Fed's other responsibilities -- they are a joke by comparison. I have to walk my dog and take out the garbage, that's not an excuse for not doing my job at work.
...
written by AlanInAZ, October 07, 2012 12:22
There would have been no housing bubble if tough lending standards had been in place and enforced. There was no attempt to stop the music because too much money was being made and greed ruled everyone, not just Wall Street. I saw this all to often when I moved to AZ in 2003 and bought a house in 2004. Everyone thought house flipping was the route to prosperity. I cannot remember an economy in the last twenty years that was not based on some type of bubble.

...
written by Argh, October 07, 2012 12:29
Surely the better path to full employment is to simply increase the federal budget deficit. As dean baker often reminds us, interest on the devt is at an all time low. Relying on a reduced trade deficit is beggar-thy-neighbor economics, relying on taking jobs away from everyone else.
more not less CDSss
written by pete, October 07, 2012 1:00
What CDSs do is allow folks like John Paulson to short corporate bonds. The Case Shiller futures market did not do the job, so the CDS market is the next best thing to allow shorting. Without shorting CDSs, there is little other chance to put downward pressure on real estate (or any other corporate bond). In order to short sell, one must borrow. Naked CDSs eliminate the borrowing need.

The idiocy of thinking CDSs on real estate were uncorrelated with each other has obviously been shot. No reason not to use them now. As with most bubble situations, the problem is the inability to sell short.
...
written by urban legend, October 07, 2012 1:00
Skeptonomist --

I think maybe you are giving the President (Bush) and Greenspan too much of a free pass. Consider the refusal of the Comptroller of the Currency -- part of Treasury -- to allow state attorneys general to enforce garden-variety state fraud laws uniformly, by improperly invoking Federal preemption in the case of violation of state lending laws by national banks. Not allowing the same state rules to be applied to all lenders surely played a huge role in the explosion of the bubble. Would not a few big and highly publicized cases about abusive lending practices have stopped some of the worst of the "flip-this-house" behavior? Seems to me Greenspan and Bush knew perfectly well what would happen if the bubble were deflated: their economy was completely dependent on the bubble. Even if deflated at a less drastic rate, the result would have been a recession -- and discredit to the top-heavy tax cuts of 2001 and 2003 and other Republican policies.

CDSs, more or less
written by David, October 07, 2012 5:28
First, I agree with Dean that the bubble was the full story, which is a simple story of overvaluation. The rest is collateral (or better yet, lack of collateral) damage Like pete says, CDSs have a valid place in the marketplace, useful insurance, as long as the insurers can pay up. The Fed can't pretend there's only money anymore, there are derivative equivalents that have now proven their complete power to topple the financial system. But that's not the cause of the current problems, it just revealed that bankers overestimate their ability to assess and assuage risks.
...
written by A Populist, October 07, 2012 6:53

Re: "As with most bubble situations, the problem is the inability to sell short."

You mean like the Tech and Internet bubbles?

The way I remember it, there was bubble peak after bubble peak, as the short sellers got squeezed repeatedly.  The "suckers" (most of the public, and, apparently all the mainstream CNBC cheerleaders) - were apparently oblivious to the massive short squeezes, and saw these spikes in prices as a signal to buy, buy, buy.

So, short selling can definitely increase instability and mispricing.

And, to some extent, one could look at short sellers as "counterfeiting" stocks, thus depriving companies of some of the investment cash contributed by genuine investors - making it harder for a stock to fulfill it's primary function - to allow companies to gain funding from willing investors.

The primary reason short selling is legal, is because it makes Wall Street money.  Whether it is good or bad for the Nation, is immaterial.  If it makes Wall Street money, our government will pass it.
...
written by liberal, October 07, 2012 8:03
Peter K. wrote,
Is deleveraging not occurring? I don't get it.


Yeah, I was thinking the same thing.
...
written by liberal, October 07, 2012 8:07
David wrote,
Like pete says, CDSs have a valid place in the marketplace, useful insurance, as long as the insurers can pay up.


No, that's precisely why pete is completely wrong about CDSs. They're not insurance, because traditional insurance must be highly regulated, with capital requirements, etc.

CDSs serve no useful function and should be euthanized.
Credit default swaps
written by John Wright, October 07, 2012 9:00
Maybe if the ability to purchase CDS were limited to those with an insurable interest (they actually owned the security that could default) we could avoid the problems.

Didn't John Paulson make his fortune by buying CDS on securities he didn't own?

But I don't see the underlying need for CDS, if a security is risky then it should have a higher than risk free risk adjusted rate of return. Buying a CDS would lower the rate of return by the insurance cost, and if it is priced by the insurer correctly, it would cost more for riskier securities as the cost of default is transferred to the insurer.

Without CDS, the default risk resides with the security owners, which is probably spread over many diversified parties. The CDS concentrates the default risk in financial companies and they (see AIG) can trigger a government rescue.

Given the financial industry and its product development, maybe they will produce a CDS ^2, in which a CDS itself is insured against default by the insurer by a different insurer.

And why stop there, as maybe someone wants insurance on the CDS^2 leading to CDS^N products?

Perhaps a reasonable metaphor for the future course for the USA economy is the new industry at the former Bethlehem Steel plant in Bethlehem, PA.

A recent article mentioned it is the site of a Indian Gam(bl)ing, casino that is doing quite well.

This seems to be similar to the financial industry's unproductive restructuring of the USA economy.



CDSs
written by David, October 07, 2012 10:11
I know what you mean, liberal, but that is the point of my saying "provided the insurer can pay up." They're not exactly for short sells, nit always. The money market has many facets, and CDSs can serve a useful role (read, for example, The Money View blogposts on MBS and CDSs), and from that perspective the Fed needs now to act not just as canker of last resort but dealer if last resort. Securities will always be traded, euthanizing could be like going back to the gold standard. And the concave folks will always find a sneak around. Regulate, enforce capital requirements by all means. Dimon's big loss shows that the risk exposures are being limited, so no bailout was asked for. Well, read that blog, it's fascinating and two experts explain without being apologists for the finance folks.
Funny typo
written by David, October 07, 2012 10:20
Shoulda been "banker of last resort", not "canker of last resort." Or both.
...
written by Fed Up, October 07, 2012 11:24
"In terms of the responsibilities and capabilities of the Fed, I would love to hear someone tell me that of Alan Greenspan said in 2003 that he was raising rates by 0.5 percentage points and he would keep raising them until house prices fell by 20 percent, that this would not have deflated the bubble. Given the enormous cost of letting the bubble grow, there was zero excuse not to try this in any case."

What if that led to price deflation and/or negative real GDP growth in the real economy?
Ring-fencing explained
written by David, October 07, 2012 11:39
http://ineteconomics.org/blog/...-explained

Perry Mehrling starts off by saying:

Everyone wants to ring-fence something, but they can’t agree on what: Vickers, Liikanen, Volcker.

In all proposals, the idea is to have bank capital separately allocated for some activity, and to prevent that capital from being exposed to any other activity. Some people want to lock the wild animals in a cage to keep them away from us; some people want to lock the tame animals in a cage to keep them safe from the dangerous world outside.


It's a good read.
The thing about deleveraging...
written by LSTB, October 08, 2012 7:13
...And underwater mortgages for that matter, is that it's not evenly spread across the country.

Things are very different if you're living in Minneapolis versus North Las Vegas, which can't even file in Chapter 9 like its California neighbors are doing.
Fed rate
written by David, October 08, 2012 7:16
What if that led to price deflation and/or negative real GDP growth in the real


Isn't that the point? If home prices are speculatively inflated beyond the fundamentals, then so is real GDP. And why be penny-wise but pound foolish? We've already spent 5 years paying off the 5 year party but the moralists insist on another 10. Where were these moralists in 2002-2004?
...
written by liberal, October 08, 2012 8:38
David wrote,
Securities will always be traded, euthanizing could be like going back to the gold standard. And the concave folks will always find a sneak around. Regulate, enforce capital requirements by all means.


That's 100% false. We've been off the gold standard for a long time, but insurers---until the advent of CDS---were required to set aside capital.

"Enforce capital requirements"---if issuers of CDS were required to set aside sufficient capital, the CDS market would no longer exist. That's precisely my point.

John Wright gets it exactly right:
But I don't see the underlying need for CDS, if a security is risky then it should have a higher than risk free risk adjusted rate of return.


If someone buys a riskier bond, he shouldn't need a CDS---all he needs to do is insist on a premium to compensate him for default risk.

CDS are evil, because they result in risk being concentrated (as in the case of AIG) and underpriced.
...
written by skeptonomist, October 08, 2012 8:55
Housing assets or liabilities probably have a secondary effect at best on demand. Once a family has bought a house they do not adjust consumption as the paper value of the house rises and falls, unless they are not only very near retirement but near cashing in the house equity. This seems to be another example of economists going overboard on hypothetical motivations, of which they have no fundamental psychological understanding. Stock market valuations probably have a more direct effect on perceived wealth, although even there there is probably a big difference between people who have nearly-forgotten retirement accounts and those who trade actively. Among psychological effects the general mood is probably more important than any rational calculation net assets. Economists may tend to deny the effects of mass psychology because they can't put numbers on it - certainly there is no other good reason to discount it. These things are complex, and economists' approach seems to be to throw out oversimplified dogma in one-size-fits-all explanations.

What does affect household consumption and demand directly is cash flow. Of course people without jobs have negative cash flow. Instead of rushing to blame total debt or debt distribution or asset valuation, total cash flow should be accounted for first.
Shiller points out everybody knew it was a bubble
written by pete, October 08, 2012 9:48
Sunday Times. In a bubble, you want to make money along with everybody else. As long as you think the price is going to rise, even if you know its wrong. These are so called rational bubbles. "I know it can't go on forever, but..."

CDSes and all similar futures contracts are wonderful ways of getting more information into prices. Do markets make mistakes, absolutely! Is there a better alternative? Not without the information, which can only be gleaned from prices...Catch 22. The whole point of CDS is to complete the market, that is the inability to sell short. During the dot com bubble it was indeed hard to borrow dotcom stocks to sell them short. Short selling was tough then. And of course, there are simply capital limits, or gamblers ruin. If you bought puts in 96 (first use of irrational exuberance), 97, 98, 99...well tough to make enough in 2000 to cover those losses.
Housing Wealth very Directly Affects Consumption
written by Dean, October 08, 2012 10:20
Skeptonomist,

you're going to have take issue issue with a great deal of economic research that shows housing wealth has a very substantial impact on consumption (go to Google Scholar and type in "housing wealth effect").
capital requirements
written by David, October 08, 2012 10:50
liberal writes:
"Enforce capital requirements"---if issuers of CDS were required to set aside sufficient capital, the CDS market would no longer exist.


They already do, most of the time, set aside sufficient capital. JP Morgan/Dimon's fail this past Spring is a case in point where things begin to go wrong. When the risk valuation model is underestimating (and liquidity risk is very tricky to measure) then there is trouble. This fail helped retain a balance. If you look at Dimon's responses, you'll see that it will be quite a battle to get rid of CDSs and it would be limiting to the economy to do so; but losses like this also get the market players to enforce a tighter discipline themselves. But just like the Bank of England is preparing to do with their next governor (I'm rooting for Vicker) http://www.bloomberg.com/news/...ms-1-.html, the Fed can take on the role of central dealer and enforce conservative risk valuations on the market. Sure there's useless crap out there, just like there's a lot of music now, most of it not that good; but some of the new stuff is excellent and serves a societal role (here, I actually agree with pete (!)).

There's no going back, the finance world already changed on us, and the Fed has to evolve with it. It is in that sense that I used the gold standard, analogically.
net export agenda is a corporate agenda
written by Brian Dell, October 08, 2012 11:09
Policy aimed at increasing net exports is policy that generates higher revenues for "producers", ie business owners, while squeezing "consumers", e.g. pensioners surviving on Social Security etc. ORDINARY people are consumers, they go to WalMart and buy stuff and that stuff will become more expensive if there is a policy move to increase net exports. Increased US exports doesn't do anything for ordinary people directly, it only helps businesses. Dean should explain further why he has such confidence that there will be extensive "trickle-down" from the exporting corporation to the social-assistance-dependent consumer.
exports and jobs
written by David, October 08, 2012 11:27
Brian, not sure if this is what you want, but according to a Commerce Dept. report from 2010: export-supported jobs rose from 7.6 million in 1993 to 10.3 million in 2008, an increase of 2.7 million jobs. This increase accounted for 40 percent of total job growth in the United States during this period.

http://www.google.com/url?sa=t...LuxfBiP5VQ

Here is real net exports (from FRED):



Looks positively correlated to me. Now, about those wages ... But right now, we just need people working.
Consumers Get their income from working
written by Dean, October 08, 2012 11:29
Brian,

the vast majority of consumers get the vast majority of their income from working. Wages have generally kept pace with inflation and in tight labor markets (caused by increased demand), they have outpaced inflation. And the largest source of income for retirees is Social Security is indexed to inflation. So, the story looks really good for "consumers" in my book.
...
written by liberal, October 08, 2012 12:41
David wrote,
They already do, most of the time, set aside sufficient capital.


Simply, utterly false. They post collateral, and when the position they're "insuring" worsens, they have to post more collateral. In bad cases, the thing explodes, like AIG.

Again, if they had to set aside collateral in the same manner that true insurance does, they'd never be issued.

One could argue that there's some cases in which one could claim a social benefit. But things should always be viewed in terms of both costs and benefits. And as we saw from the last financial crisis, the costs are enormous.

Given a situation of questionable, marginal benefits vs enormous potential costs, they clearly should not exist.
...
written by liberal, October 08, 2012 12:45
pete wrote,
The whole point of CDS is to complete the market, that is the inability to sell short.


Empirically, looking at the last crisis, this is simple, utter nonsense.
...
written by liberal, October 08, 2012 12:50
David wrote,
...you'll see that it will be quite a battle to get rid of CDSs and it would be limiting to the economy to do so...


Utter, insane bullshit.

Yes, it will be quite a battle to get rid of CDS, and because of already-existing contracts it would have to be done carefully. But just because it would be difficult doesn't mean it's not the right thing to do. Fighting evil and stupidity is never easy.

As for "limiting the economy," that's just crazy, insane garbage. The financial sector, measured as a fraction of GDP, has exploded in size since the early 1980s. The only legitimate function of the financial sector is efficient allocation of capital. If all these so-called financial innovations did anything useful, and capital were more efficiently allocated, we'd see a "signal" in the long-term trend of an increase in the output of the non-financial sector. Yet no such signal exists.

It's clear from the empirical record that the only function of all this complexity in the FIRE sector is parasitic rent collection. If you think otherwise, you'll either a paid shill, or you need to get your head examined.
...
written by liberal, October 08, 2012 1:00
John Wright wrote,
A recent article mentioned it is the site of a Indian Gam(bl)ing, casino that is doing quite well.

This seems to be similar to the financial industry's unproductive restructuring of the USA economy.


Well, at least someone here gets it.
...
written by Fed Up, October 08, 2012 4:51
"This leaves X-M as the only plausible path for maintaining sustainable full employment. It is not a logical necessity, it's just the only route left after the others can be dismissed as implausible."

Incorrect! More people could be put into retirement.
...
written by Fed Up, October 08, 2012 4:56
"the vast majority of consumers get the vast majority of their income from working. Wages have generally kept pace with inflation and in tight labor markets (caused by increased demand), they have outpaced inflation."

What if price inflation of a lower/middle class person's budget is higher than the CPI?
...
written by Fred Brack, October 08, 2012 6:22
Hope I'm not commenting too late for you to see this, Dean. But your exchange with Ip was deeply illuminating and proves how valuable honest economists having an honest, data-driven, nonpartisan conversation can be. If MSNBC were to turn over just one "Hardball" hour to the two of you and permit both of you to bring charts and graphs, it would contribute more to public-policy education than "Hardball" has and will cumulatively contribute.

Thanks, Dean.
Thanks Fred
written by Dean, October 08, 2012 8:42
Yes, it would be great if we could have more discussions that focused on the evidence.
Fed Up Is Right, we could reduce labor supply
written by Dean, October 08, 2012 8:56
my preferred route is work sharing to early retirement
hey
written by David, October 08, 2012 9:51
if you're not going to let me post, let me know why. I'd at least like a chance to defend against being called 100% wrong, which I am not.
no bull
written by David, October 08, 2012 10:14
"liberal" says CDSs are evil and uses some colorful language that says nothing, for emphasis. That's the type of losing mentality that has to be lost. Calling reality names isn't going to make it go away. CDSs were not the problem so much as the way the investment banks inflated the so-called shadow banking system so that it is now, in the US and worldwide, 150% the size of commercial banking. Euthanizing CDSs won't shrink that puppy one bit; if you think so, you need to lay off the grass, man. It's not all a gambling hall, that's just your brain trying to make something real and complicated into a cartoon character. What is needed is regulation of the shadow banking system (aka market-based credit system). And just remember, your sample of the CDS market is biased, try to remain fact-based rather than making wild generalizations no matter how good it feels to do so. It's the only way you'll beat these guys.

Remember, Romney will repeal Dodd-Frank and get rid of Bernanke, to be replaced by ... ? Another Paulson?
...
written by Fed Up, October 08, 2012 10:53
"Fed Up Is Right, we could reduce labor supply

written by Dean"

Finally! Someone sees that!

The next step is the "land of medium of exchange".

Is all that private debt AND gov't debt mostly about tricking people into working longer so that an economy won't be running out of workers so that the 1970's don't happen all over again?

What are the chances of an entity retiring if it has accumulated too much debt in the past?

Lastly, does:

current account deficit = gov't deficit plus private deficit actually have a +0 (zero) after private deficit the way the system is set up now?
...
written by urban legend, October 08, 2012 11:51
I'm very confused. The negative balance of trade was growing rapidly at least until the recession, and yet the dollar has been weakening a lot since 2002 (when,supposedly, Rubin's strong dollar jawboning started losing its effect in the face of struggling U.S. manufacturers). Some say the dollar is weaker now (on a secular basis) than it's ever been. If it's already dropped by a third or more against competitive currencies, how are we going to be able to get further weakening to improve the price competitiveness of our exports? And even if we could -- requires inaction by our trading partners, doesn't it? -- doesn't this history suggest it will not do a whole lot, if anything, to improve the balance?

Does that mean we are just screwed?
...
written by JSeydl, October 09, 2012 1:44
Good debate, but I think Dean takes the prize. That Ip keeps suggesting that housing and consumption could have come roaring back in the aftermath of the largest asset bubble and bust the world has ever seen is completely bizarre.
In a way labor supply is already being reduced ...
written by David, October 09, 2012 2:31
This really isn't the way to do it, though, by force.
.
BTW here's a short opinion in Salon that covers the CDS issue pretty well: http://www.salon.com/2010/04/2...ult_swaps/
Let’s say General Motors issues a bond and I purchase it. But I’m worried that General Motors may collapse, so I buy a credit default swap on my bond from A.I.G. In return for regular premium payments, A.I.G. promises to reimburse me in full in the event for the value of my bond in the event of a GM bankruptcy. In the parlance of Wall Street, by purchasing the credit default swap I am “hedging” against the chance that my bond will suddenly become worthless.
Those who don't own the bonds but do own the CDSs issued against it are engaging in pure speculation, and that can be dealt with. But having CDSs available, in the example, increases sales of the bonds and helps increase GMs cash flow if they have a good plan behind the bond.
...
written by Jay, October 10, 2012 6:19
Greg said, "Last year, for example, non financial corporate cash flow exceeded gross investment by about $200bn." What is non-financial corporate cash flow? What's the significance of it exceeding gross investment by about 200 billion?

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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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