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Home Publications Blogs Beat the Press Robert Reich is Correct, the NYT's Incompetent Book Reviewer Is Wrong

Robert Reich is Correct, the NYT's Incompetent Book Reviewer Is Wrong

Sunday, 26 September 2010 19:54

The New York Times assigned former Washington Post reporter Sebastian Mallaby to review Robert Reich's new book, Aftershock: The Next Economy and America's Future. It is unfortunate that they couldn't find someone familiar who knew some economics for this task.

Near the beginning of the review, Mallaby tells readers:

"Reich insists instead that American consumers, and particularly the middle class, have been buying too little. For years, the United States has consumed more than it has produced; the excess demand has sucked in products from abroad, which is why the nation has run a trade deficit. The idea that the economy has suffered from a lack of demand is, shall we say, eccentric."

Actually, there are few economists who would say that the United States had excess demand throughout most of the last decade, so Robert Reich is exactly right on this point and Sebastian Mallaby is completely wrong. The trade deficit was the result of an over-valued dollar.

This is actually very basic economics. The value of the dollar determines the relative price of foreign and domestic goods. If the dollar is sufficiently over-valued then the United States could be running a trade deficit even when demand is grossly inadequate -- as is the case at present. The high dollar makes imports very cheap for people in the United States, which causes us to consume large amounts of imports. It also makes U.S. exports expensive to people living in other countries, which means that we will have weak exports. It is remarkably that Mallaby is apparently unfamiliar with this basic logic and that his mistake was apparently not caught by the editor.

Comments (11)Add Comment
written by izzatzo, September 26, 2010 9:35
The disconnect between aggregate supply and demand, between aggregate production and consumption, between aggregate employment and spending that repeatedly appears in these errors reveals a blind ideology at work.

They're so hell bent on washing out the public's mouth with a bar of Austerity Soap for the sins of exceeding its demand side privileges at the expense of the supply side, these austerity fetish clowns may as well don the garb of a sadistic high priest or nun complete with whips, electric prods and hot irons, line up the unemployed one at a time and have a go at some raptuous Christine O'Donnell sins until they go blind with ecstasy.

It doesn't have a goddamn thing to do with economics.
written by mmckinl, September 26, 2010 10:07
Mallaby was crap when he was at the WashPost ...

Unfortunately America seems to be a dumping ground for failed Brits ...

Must be their penchant for Empire worship.
This quote from his article
written by diesel, September 27, 2010 2:53
"Caught between rising aspirations and stagnant wages, Reich says, middle-class Americans have gone through a series of coping mechanisms. First, women joined the workforce, giving families a second income. Then husbands and wives put in longer shifts, creating a species of family called DINS — “double income, no sex.” Finally, families went into debt. In this sense, inequality helped to stoke the credit bubble."

Maybe he doesn't view "stagnant wages", families struggling to achieve a second income or wives putting in longer shifts as indicative of lack of demand.

And then "Finally, families went into debt", you know, just sort of happened out of the blue so to speak, so you see, it was "inequality" (i.e. wages inadequate to support a middle class lifestyle aka lack of demand), "that helped stoke the credit bubble", because these people were, like, just basically trying to live beyond their means because they hadn't learned to sacrifice like the previous, Greatest and all, being self-indulgent moral-relativistic, me-first types who, you know, can't rise to the whole put-a-man-on-the-Moon-challenge-of-a-generation type thing because they're so self absorbed, driving their kids to soccer practice and all that, and then the Baby Einstein thing too. So they kinda deserve what they're getting, laid off of the two jobs, husband and wife both. For, like, expecting too much. No one's gonna bring those jobs back to you, so you just kinda gotta entrepreneur your own pair of bootstraps and get pullin. That's what makes this country so great. Each person is free to pull on their own bootstraps.
written by RBaillie, September 27, 2010 7:16
Mr. Baker, you state: "The value of the dollar determines the relative price of foreign and domestic goods."

Doesn't the relative value of wages in the two countries have a pretty huge impact on this? If China revalued its currency, wouldn't Chinese goods still be cheaper because the wages there are lower?
written by skeptonomist, September 27, 2010 8:05
The NYT has a bizarrely headlined op-ed today by Anatole Kaletsky, "Blaming China Won't Help the Economy". The piece itself seems to be saying the contrary, that international "free markets" do not exist, which implies that the US should do something to control trade with China.
Try a simple thought experiment
written by myxzptlk, September 27, 2010 9:10
I'm no economist, but even I can imagine a simple thought experiment that would expose Mallaby's brainwashed state. Imagine that virtually no goods or services were offered in the US any longer, and that most consumption (consumer and business) involved international trade. Even if demand fell to historically low levels, we would still be running a trade deficit.

Yes, dollar valuation is a major factor in our current trade deficit, but so is the shipping of US jobs out of the country.
I should have written...
written by myxzptlk, September 27, 2010 11:25
"Imagine that virtually no goods or services were offered by US sources"
written by tfg, September 27, 2010 6:08
Are you saying we can write off our entire trade deficit to anomalies in currency valuations? Haven't we been on a credit binge for now three decades the likes of which has never been seen, with serial bubbles? Hasn't the proportion of consumption in our GDP reached unsustainable levels over the years. You don't have to be an economist, if you are over 40 just compare how thing were when our parents were our age to now. Mallaby makes an entirely reasonable point. I tire of the snarky, holier-than-thou, black and white commentary -- it makes for a provocative blog I guess, but doesn't suggest much thoughtfulness or intelligence.
written by Joe, September 27, 2010 6:45
Hasn't the proportion of consumption in our GDP reached unsustainable levels over the years.

Consumption has become an increasingly larger percentage of GDP because of health care costs. If you factor out health care, consumption is a smaller percentage of GDP than it was in 1960.

written by ralston mctodd, September 27, 2010 7:22
I adore Robert Reich, and I really hope that Mallaby is also wrong in his characterization of Reich's comments about women's careers, as he is about so much else. My career is a source of intellectual fulfillment, not a "coping mechanism." The fact that some employers have begun to demand unreasonable hours is not the fault of women who entered professions from which they had previously been excluded.
written by sherparick, September 29, 2010 9:33
If the Reminbi rises in value, and the dollar falls, then Chinese workers relative wages also rise since they are paid in Reminbi, and U.S. workers relative wages fall since they are paid in dollars. U.S. wages are falling relative to the rest of the world, one way or the other. If the dollar continues as the over valued reserve currency, then wage deflation and unemployment will lower the wages, but unfortunately not their debts which still have to be paid at the full, undepreciated value.

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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.