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Home Publications Blogs Beat the Press Thomas Freidman Spews Nonsense with Hurricane Force

Thomas Freidman Spews Nonsense with Hurricane Force

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Sunday, 28 August 2011 12:18

Yes, it’s Sunday and Thomas Friedman has another of his whacky big picture columns:

“Now let me say that in English: the European Union is cracking up. The Arab world is cracking up. China’s growth model is under pressure and America’s credit-driven capitalist model has suffered a warning heart attack and needs a total rethink. Recasting any one of these alone would be huge. Doing all four at once — when the world has never been more interconnected — is mind-boggling. We are again ‘present at the creation’ — but of what?”

pretty profound stuff.

Okay, let’s get to specifics. We leave out the Arab world, skip China for a moment, and jump to the European Union. Friedman tells us:

“Farther north, it was a nice idea, this European Union and euro-zone: Let’s have a monetary union and a common currency but let everyone run their own fiscal policy, as long as they swear to work and save like Germans. Alas, it was too good to be true. Large government welfare programs in some European countries, without the revenue to finance them from local production, eventually led to a piling up of sovereign debt — mostly owed to European banks — and then a lender revolt. The producer-savers in northern Europe are now drawing up a new deal with the overspenders — the PIIGS: Portugal, Italy, Ireland, Greece and Spain.”

There is lots of good stuff here. First, the European Union and the euro-zone are not the same thing. There are countries with names like the United Kingdom, Denmark, and Sweden that have been longstanding members of the European Union that are not members of the euro-zone. While there have been some suggestions that heavily indebted countries consider leaving the euro, one would be hard-pressed to find anyone suggesting they leave the European Union.

This is not the only complete  invention in Friedman’s story. The story of the heavily indebted countries as serious overspenders spits in the face of reality. Spain and Ireland were actually running budget surpluses in the years preceding the recession. Italy and Portugal had relatively modest deficits. Only Greece had a clearly unsustainable budget path.

The story of the debt crisis of these countries is primarily the story of the inept monetary and financial policy run by the European Central Bank (ECB) in the years leading up to the crisis. They opted to ignore the imbalances created by housing bubbles across much of the euro zone and the rest of the world. Rather than taking steps to rein in these bubbles, they patted themselves on the back for hitting their 2.0 percent inflation targets. Remarkably, none of these central bankers lost their jobs and the 2.0 percent cult still reins at the ECB.

If there is a crisis in the euro zone it is that a dogmatic cult has seized control of the euro zone monetary and financial policy to the enormous detriment of its economy and its people. And, there is no obvious mechanism through which they can be dislodged. Friedman might have devoted his column to this problem, but it requires far more knowledge of the economy than he seems to possess.

Now let’s get to the China and U.S. problem that Freidman discusses.  Friedman tells us that:

“China’s growth model is under pressure and America’s credit-driven capitalist model has suffered a warning heart attack and needs a total rethink.” To a large extent these are actually the same issue.

The United States has been running large trade deficits ever since the Rubin-Greenspan-Summers clique used their control of the IMF to impose draconian bailout terms on the East Asian countries following the East Asian financial crisis. The result of this action was that countries throughout the developing world began accumulating dollars like crazy in order to protect themselves against ever being in the same circumstances.

Their effort to acquire dollars led to the over-valued dollar (Robert Rubin’s “strong dollar”), which in turn gave us our large trade deficits. Large trade deficits logically imply either large budget deficits or large private sector savings. This fact is well-known to people who know national income accounting, which unfortunately is a tiny minority of those who write about economic issues for major media outlets.

China is one of the countries that has been accumulating massive reserves. If it desires to slow its growth rate (no one other Friedman would call going from 10 percent growth to 7 or 8 percent a crisis), the most obvious mechanism is to raise the value of its currency against the dollar. This will reduce its exports to the U.S. and increase its imports from the United States. That will help boost growth in the United States and reduce its indebtedness. In short, Friedman’s two problems here are in fact one problem with a simple solution.

Finally, Friedman shows a stunning ignorance of arithmetic when he tells readers:

“China also has to get rich before it gets old. It has to move from two parents saving for one kid, to one kid paying for the retirement of two parents. To do that, it has to move from an assembly-copying-manufacturing economy to a knowledge-services-innovation economy. This requires more freedom and rule of law, and you can already see mounting demands for it. Something has to give there.”

Using somewhat more realistic numbers (China is not seeing its population cut in half), let’s say that it is moving from having 5 workers per retiree to 2 workers per retiree over 30 years, a far faster decline than it is actually seeing. China’s output per worker has been increasing a rate of more than 8 percent a year. This means that over a 30 year period, output per worker will increase more than 10 fold.

Suppose our 5 workers are taxed at a 12 percent rate at the start of the period to give retirees an income equal to 70 percent of the typical worker’s after tax income. If we want to maintain this 70 percent ratio, when 2 workers support each retiree, it would take a tax rate of just under 24 percent to maintain this ratio.

Okay, so output per worker has increased by 1000 percent. We have to increase the tax rate from 12 percent to 24 percent. This means that with the higher worker to retiree ratio, the average worker will have a bit less than 9 times the after-tax income (76% of 1000 percent, as opposed to 88 percent of 100 percent) of her predecessor thirty years earlier who only had to support one-fifth of a retiree. If there is a problem here, it is very hard to see it.

So there we have it, Thomas Friedman once again letting his poor grasp of economics and arithmetic invent grand problems where there are none. What would be do without him?

Comments (13)Add Comment
China Follows Lead Set by USA Towards Death of Manufacturing
written by izzatzo, August 28, 2011 3:49
To do that, it [China] has to move from an assembly-copying-manufacturing economy to a knowledge-services-innovation economy. This requires more freedom and rule of law, and you can already see mounting demands for it. Something has to give there.”


Uh huh. Comrade Friedman peddles the same globalistic free trade propaganda force fed to Americans for the last two decades that landed them where they're at now after assembling, copying and manufacturing a million copies of the Communist Capitalism for the Wealthy adorned in Friedman's columns.

Stupid liberals.
...
written by Jethro, August 28, 2011 6:13
Dean - is there a desired savings rate for the USA. Or, is there a point considered too much or too little ?
...
written by anthrosciguy, August 28, 2011 6:34
You know, once the entire world arrives at being a "knowledge-services-innovation economy" it'll be a utopia. I wonder where we'll buy our food and goods from? I'm sure Friedman knows the answer, because if he doesn't it would mean he's an idiot.
...
written by jiml, August 28, 2011 8:52
I haven't been able to stomach Friedman since his endorsement of Bush's invasion of Iraq as a bold experiment in democracy building -- with real live humans to experiment upon. Have tuned him out for years -- and would recommend doing so to others.
Thomas Freidman is still a silly twit.
written by Scott ffolliott, August 28, 2011 10:12
"Thomas Freidman Spews Nonsense with Hurricane Force"

Is this anything new?
Mr.
written by chris scruton, August 28, 2011 11:23
You said deficits imply government deficits or private savings. is that correct? i thought private and public dis-saving would have the same effect.
...
written by mel, August 29, 2011 12:01
Chinas problem isn't population changes, its population distribution between urban and rural. That plus ue. That's why going from 10 to 7% growth is an issue for Chinese govt. China has financed unprofitable businesses to keep employment stable and stability intact. Lack of employment is the start of real turmoil
...
written by JoblessInJersey, August 29, 2011 1:11
Just an interested bystander here with no economic expertise.

But since you ask re the cost of supporting China's future retirees "If there is a problem here, it is very hard to see it." I will tell you that I see at least two.

1. The assumption that since future workers will be making much, much more, they'd be willing to pay much higher taxes to support the retirees. How can you tell today what the next generation will be willing to pay?

2. The assumption that future workers will be making much, much more due to 30 years of 8% increases in productivity. What if that doesn't happen

It seems this situation somewhat parellels our own. I have said for many years that I don't know what will happen but I am certain that that young people in 20 years will not be willing to part with 1/3 of their earnings to support the over 65 crowd.

We here in the US have got to do something to get our healthcare spending down; we cannot spend so much more than the rest of the First World on healthcare and defense without ruining ourselves financially.

Now I'd think people in China, as the years go on and expectations change there, will probably see their spending on healthcare go up considerably as a percentage of GDP. Since the elderly use so much more healthczre, that will be an economic nightmare for them and other developing countries as well.
typo?
written by winstongator, August 29, 2011 11:02
Shouldn't "Large trade deficits logically imply either large budget deficits or large private sector savings [deficits]"

(X-M) = (S-I)+(T-G)

X-M -> negative because of the trade deficit. Assume gov budget balanced. S-I needs to be negative?
The China problem
written by Matt, August 29, 2011 12:31
The China "problem" Friedman cites is, of course, totally ridiculous if one assumes that wage increases roughly match productivity increases. The unstated assumption that leads him to declare it a "problem" is that such a thing *won't* happen and instead wages will stagnate while productivity rises - you know, the US model.
Corrected link for "Spain and Ireland were actually running budget surpluses "
written by Winston Smith, August 29, 2011 2:23
The hyperlink given has a typo, here is the correct one: http://www.imf.org/external/pu...P&grp=0&a=
...
written by Ed, August 29, 2011 9:24
China could be like the US where increased productivity reduces the need for workers. This pushes down wages as there are more workers competing for less jobs and the guys at the top get to skim a bit more.
Editor
written by DL, September 07, 2011 12:17
Although I agree with most of the thrust of the article, I question that "the most obvious mechanism is to raise the value of its currency against the dollar. This will reduce its exports to the U.S. and increase its imports from the United States. That will help boost growth in the United States and reduce its indebtedness."
Raising the value of the Yuan will decrease China's exports,and increase its imports but will those necessarily be to and from the U.S.?
Won't other nations, such as India, Japan,Korea, and SE Asia become more competitive? Couldn't U.S. exports remain stagnant and imports shift to coming from other nations?
I would also have preferred that Dean Baker respond to a list of general statements, as if said by many, without mentioning Friedmans's name. Responding to spurious economic dogma is warranted. Responding to a person in a deliberate manner appears more as a personal attack and detracts from the knowledgeable commentary.

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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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