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We have seen a number of sharp swings in oil prices over the last two decades. Clearly the underlying fundamentals of the market are the main factor in determining the price, but the fact that Wall Street-types spend tens of billions of dollars speculating on the stuff can also play a role.
NPR assured us otherwise in a Morning Edition segment today. They gave a comment from an economist who said the impact of speculation was essentially zero, effectively mocking all the folks who complained about it.
This position is not one universally held by economists. For example, this paper from the St. Louis Federal Reserve Bank analyzed recent movements in oil prices. It found that speculation had the effect of exaggerating movements in both directions by around 15 percent. The implication is that when oil prices hit their all time high of $150 a barrel in 2008, speculation might have been responsible for more than $20 of this price. This would cost U.S. consumers more than $12 billion over the course of a year if the impact lasted that long. This is equal to 0.08 percent of GDP at the time or more than one third of the gains the International Trade Commission projects for the Trans-Pacific Partnership.
While the paper still supports the idea that the fundamentals of supply and demand are the main factors determining price, it does provide evidence that speculation can play an important role. If the analysis in this paper is correct, then people would not be wrong to be bothered by speculation in the oil market.
We have seen a number of sharp swings in oil prices over the last two decades. Clearly the underlying fundamentals of the market are the main factor in determining the price, but the fact that Wall Street-types spend tens of billions of dollars speculating on the stuff can also play a role.
NPR assured us otherwise in a Morning Edition segment today. They gave a comment from an economist who said the impact of speculation was essentially zero, effectively mocking all the folks who complained about it.
This position is not one universally held by economists. For example, this paper from the St. Louis Federal Reserve Bank analyzed recent movements in oil prices. It found that speculation had the effect of exaggerating movements in both directions by around 15 percent. The implication is that when oil prices hit their all time high of $150 a barrel in 2008, speculation might have been responsible for more than $20 of this price. This would cost U.S. consumers more than $12 billion over the course of a year if the impact lasted that long. This is equal to 0.08 percent of GDP at the time or more than one third of the gains the International Trade Commission projects for the Trans-Pacific Partnership.
While the paper still supports the idea that the fundamentals of supply and demand are the main factors determining price, it does provide evidence that speculation can play an important role. If the analysis in this paper is correct, then people would not be wrong to be bothered by speculation in the oil market.
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The establishment types are pulling out all the stops in trying to resuscitate the Trans-Pacific Partnership. Hence we get a report from the OECD on the declining growth rate of world trade and a front page article highlighting the report in the Washington Post.
I haven’t read the report carefully, but it is worth making two quick points. First, trade has grown rapidly as share of world GDP from 1970 to the 2008 crash. (Interestingly, the world economy was growing more rapidly in the 1960s when there was little increase in the ratio of trade to GDP.) It was virtually inevitable that the rate of growth of trade would slow. Once the volume of trade is very large relative to the economy, it is hard for it to grow too much further.
In other words, once we have removed all the barriers in trade between the U.S. and Canada, we will have seen most of the expected growth in trade and in subsequent years we would expect trade to grow pretty much at the same pace as the economy. If we want to see more trade, then make the economies grow faster, say with larger budget deficits providing stimulus.
The other point is that many economists have argued that GDP growth is being substantially understated due to measurement error. The basic story is that we are getting lots of items free over the Internet that we used to pay for. These free items are not counted in GDP even though the costly ones they replace would have been.
I am a skeptic on this one. Clearly there is some truth to the story, but I doubt it amounts to more than 0.1 percentage point of GDP growth and almost certainly not more than 0.2 percentage points. Nonetheless, the argument is taken seriously by many. Jan Hatzius, the chief economist at Goldman Sachs, argues that the understatement could be as much as 0.75 percentage points.
Whatever the true story, the measurement error occurs overwhelmingly in items likely to be subject to international trade (e.g. music and videos transferred over the web.) This means that however much we are understating GDP growth due to measurement error of this sort, we are likely understating trade growth by close to twice this amount. That could help to explain a substantial portion of the reported slowing of trade growth.
It is also worth noting that stronger and longer patent and copyright protection (as required in trade deals like the TPP), which can be equivalent to tariffs of several thousand percent on the protected items, would be expected to slow both overall economic growth and the volume of international trade.
The establishment types are pulling out all the stops in trying to resuscitate the Trans-Pacific Partnership. Hence we get a report from the OECD on the declining growth rate of world trade and a front page article highlighting the report in the Washington Post.
I haven’t read the report carefully, but it is worth making two quick points. First, trade has grown rapidly as share of world GDP from 1970 to the 2008 crash. (Interestingly, the world economy was growing more rapidly in the 1960s when there was little increase in the ratio of trade to GDP.) It was virtually inevitable that the rate of growth of trade would slow. Once the volume of trade is very large relative to the economy, it is hard for it to grow too much further.
In other words, once we have removed all the barriers in trade between the U.S. and Canada, we will have seen most of the expected growth in trade and in subsequent years we would expect trade to grow pretty much at the same pace as the economy. If we want to see more trade, then make the economies grow faster, say with larger budget deficits providing stimulus.
The other point is that many economists have argued that GDP growth is being substantially understated due to measurement error. The basic story is that we are getting lots of items free over the Internet that we used to pay for. These free items are not counted in GDP even though the costly ones they replace would have been.
I am a skeptic on this one. Clearly there is some truth to the story, but I doubt it amounts to more than 0.1 percentage point of GDP growth and almost certainly not more than 0.2 percentage points. Nonetheless, the argument is taken seriously by many. Jan Hatzius, the chief economist at Goldman Sachs, argues that the understatement could be as much as 0.75 percentage points.
Whatever the true story, the measurement error occurs overwhelmingly in items likely to be subject to international trade (e.g. music and videos transferred over the web.) This means that however much we are understating GDP growth due to measurement error of this sort, we are likely understating trade growth by close to twice this amount. That could help to explain a substantial portion of the reported slowing of trade growth.
It is also worth noting that stronger and longer patent and copyright protection (as required in trade deals like the TPP), which can be equivalent to tariffs of several thousand percent on the protected items, would be expected to slow both overall economic growth and the volume of international trade.
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The NYT ran a short AP piece on Social Security and “why it matters.” The piece wrongly told readers that Social Security is “a main driver of the government’s long-term budget problems.” This is not true. Under the law, Social Security can only spend money that is in its trust fund. If the trust fund is depleted then full benefits cannot be paid. The law would have to be changed to allow Social Security to spend money other than the funds designated for the program and in that way contribute to the deficit.
The piece also plays the “really big number” game, telling readers:
“the program faces huge shortfalls that get bigger and bigger each year.In 2034, the program faces a $500 billion shortfall, according to the Social Security Administration. In just five years, the shortfalls add up to more than $3 trillion.
“Over the next 75 years, the shortfalls add up to a staggering $139 trillion. But why worry? When that number is adjusted for inflation, it comes to only $40 trillion in 2016 dollars — a little more than twice the national debt.”
Since this is talking about shortfalls projected to be incurred over a long period of time, it would be helpful to express the shortfall relative to the economy over this period of time, not debt at a point in time. This is not hard to do, since there is a table right in the Social Security trustees report that reports the projected shortfall as being equal to 0.95 percent of GDP over the 75-year forecasting horizon. By comparison, the costs of the war in Iraq and Afghanistan came to around 1.6 percent of GDP at their peaks in the last decade.
The piece also gets the reason for the projected shortfall wrong. It tells readers:
“In short, because Americans aren’t having as many babies as they used to. That leaves relatively fewer workers to pay into the system. Immigration has helped Social Security’s finances, but not enough to fix the long-term problems.
“In 1960, there were 5.1 workers for each person getting benefits. Today, there are about 2.8 workers for each beneficiary. That ratio will drop to 2.1 workers by 2040.”
Actually, the drop in the birth rate and the declining ratio of workers to beneficiaries had long been predicted. The reason that the program’s finances look worse than when the Greenspan commission put in place the last major changes in 1983 is the slowdown in wage growth and the upward redistribution of wage income so that a larger share of wage income now goes untaxed.
In 1983, only 10 percent of wage income was above the payroll tax cap. Today it is close to 18 percent. This upward redistribution explains more than 40 percent of projected shortfall over the next 75 years.
It is also worth noting that the loss in wage income for most workers to upward redistribution swamps the size of any tax increases that could be needed to maintain full funding for the program. While AP wants to get people very worried over possible tax increases in future years, it would rather they ignore the policies (e.g. trade, Fed policy, Wall Street policy, patent policy) that have taken money out of the pockets of ordinary workers and put it in the hands of the rich.
The NYT ran a short AP piece on Social Security and “why it matters.” The piece wrongly told readers that Social Security is “a main driver of the government’s long-term budget problems.” This is not true. Under the law, Social Security can only spend money that is in its trust fund. If the trust fund is depleted then full benefits cannot be paid. The law would have to be changed to allow Social Security to spend money other than the funds designated for the program and in that way contribute to the deficit.
The piece also plays the “really big number” game, telling readers:
“the program faces huge shortfalls that get bigger and bigger each year.In 2034, the program faces a $500 billion shortfall, according to the Social Security Administration. In just five years, the shortfalls add up to more than $3 trillion.
“Over the next 75 years, the shortfalls add up to a staggering $139 trillion. But why worry? When that number is adjusted for inflation, it comes to only $40 trillion in 2016 dollars — a little more than twice the national debt.”
Since this is talking about shortfalls projected to be incurred over a long period of time, it would be helpful to express the shortfall relative to the economy over this period of time, not debt at a point in time. This is not hard to do, since there is a table right in the Social Security trustees report that reports the projected shortfall as being equal to 0.95 percent of GDP over the 75-year forecasting horizon. By comparison, the costs of the war in Iraq and Afghanistan came to around 1.6 percent of GDP at their peaks in the last decade.
The piece also gets the reason for the projected shortfall wrong. It tells readers:
“In short, because Americans aren’t having as many babies as they used to. That leaves relatively fewer workers to pay into the system. Immigration has helped Social Security’s finances, but not enough to fix the long-term problems.
“In 1960, there were 5.1 workers for each person getting benefits. Today, there are about 2.8 workers for each beneficiary. That ratio will drop to 2.1 workers by 2040.”
Actually, the drop in the birth rate and the declining ratio of workers to beneficiaries had long been predicted. The reason that the program’s finances look worse than when the Greenspan commission put in place the last major changes in 1983 is the slowdown in wage growth and the upward redistribution of wage income so that a larger share of wage income now goes untaxed.
In 1983, only 10 percent of wage income was above the payroll tax cap. Today it is close to 18 percent. This upward redistribution explains more than 40 percent of projected shortfall over the next 75 years.
It is also worth noting that the loss in wage income for most workers to upward redistribution swamps the size of any tax increases that could be needed to maintain full funding for the program. While AP wants to get people very worried over possible tax increases in future years, it would rather they ignore the policies (e.g. trade, Fed policy, Wall Street policy, patent policy) that have taken money out of the pockets of ordinary workers and put it in the hands of the rich.
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You don’t remember casting that vote? Well, you didn’t actually cast it, but if you have a 401(k) someone like Blackrock CEO Larry Fink cast the vote for you.
Most middle-income people have 401(k)s for their retirement and most of this money is in mutual funds. These mutual funds have control over the proxy votes for the shares they hold. This means that funds like Blackrock, which has more than $5 trillion in assets, have enormous say over the distribution of income in this country. And, as Gretchen Morgenson points out in her NYT column this morning, these folks almost always endorse outlandish pay packages for CEOs. As they say in Wall Street circles, what’s a few million dollars between friends?
So, if you’re upset about an economy where the rich keep getting richer, just remember, you voted for it, sort of.
You don’t remember casting that vote? Well, you didn’t actually cast it, but if you have a 401(k) someone like Blackrock CEO Larry Fink cast the vote for you.
Most middle-income people have 401(k)s for their retirement and most of this money is in mutual funds. These mutual funds have control over the proxy votes for the shares they hold. This means that funds like Blackrock, which has more than $5 trillion in assets, have enormous say over the distribution of income in this country. And, as Gretchen Morgenson points out in her NYT column this morning, these folks almost always endorse outlandish pay packages for CEOs. As they say in Wall Street circles, what’s a few million dollars between friends?
So, if you’re upset about an economy where the rich keep getting richer, just remember, you voted for it, sort of.
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As is widely known the Washington Post never misses an opportunity to blame the victims of policy for bad outcomes, rather than rich and powerful folks who design policy. We are treated to yet another example of this charade with the Post running a major article that claims that video games are a major reason that fewer young men are working today than 15 years ago.
The basic story is that many young men, particularly those with less education, have dropped out of the labor force in the last 15 years. According to survey data, they appear to be spending much of their time playing video games. They also report to be relatively happy. See, all you people who thought it was a bad economy are mistaken, the problem is the video games are just too much fun.
Okay, that’s a great Trumpian level of analysis, but let’s get back to the real world. Less-educated young men are not the only group with declines in employment rates. In fact, the drop in employment rates among less educated women over the last 15 years has been even sharper. Furthermore there has been a decline in employment rates among all groups of prime-age workers (25–54), even those with college degrees.
This general drop in employment rates might suggest that the real problem is a lack of demand. In other words, young men are not working for the same reason young women are not working, the Washington Post and other advocates of austerity have been successful in reducing demand in the economy by reducing the government budget deficit. So the problem has little to do with video games, the problem is the policy, but hey, if the Post can use video games to distract attention from what its favored policies are doing to people — why not?
As is widely known the Washington Post never misses an opportunity to blame the victims of policy for bad outcomes, rather than rich and powerful folks who design policy. We are treated to yet another example of this charade with the Post running a major article that claims that video games are a major reason that fewer young men are working today than 15 years ago.
The basic story is that many young men, particularly those with less education, have dropped out of the labor force in the last 15 years. According to survey data, they appear to be spending much of their time playing video games. They also report to be relatively happy. See, all you people who thought it was a bad economy are mistaken, the problem is the video games are just too much fun.
Okay, that’s a great Trumpian level of analysis, but let’s get back to the real world. Less-educated young men are not the only group with declines in employment rates. In fact, the drop in employment rates among less educated women over the last 15 years has been even sharper. Furthermore there has been a decline in employment rates among all groups of prime-age workers (25–54), even those with college degrees.
This general drop in employment rates might suggest that the real problem is a lack of demand. In other words, young men are not working for the same reason young women are not working, the Washington Post and other advocates of austerity have been successful in reducing demand in the economy by reducing the government budget deficit. So the problem has little to do with video games, the problem is the policy, but hey, if the Post can use video games to distract attention from what its favored policies are doing to people — why not?
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Nashville’s public radio station complained that the construction companies simply can’t find workers. This is in spite of the fact that they pay $12 an hour to start and that the pay could go as high as $22 an hour for the most experienced workers.
It is interesting that the radio station has decided that this is the pay construction workers should get even though the market seems to be saying that the pay should be higher. This raises the question of whether the station would complain about a doctors shortage if no doctors answered the call at a $30 an hour pay rate. (Their actual pay averages more than $250,000 a year, although most put in far more than 40 hours a week.)
Just as a point of reference, if the minimum wage had kept pace with productivity growth over the last fifty years it would be over $18 an hour now. So Nashville’s public radio station apparently believes that as a matter of principle (it’s not the market) construction workers should be earning less than a productivity adjusted minimum wage. It is also worth noting that these are jobs that typically carried some wage premium — as opposed to working at a fast food restaurant — both because they often require considerable skills and then tend to be physically demanding and dangerous.
Nashville’s public radio station complained that the construction companies simply can’t find workers. This is in spite of the fact that they pay $12 an hour to start and that the pay could go as high as $22 an hour for the most experienced workers.
It is interesting that the radio station has decided that this is the pay construction workers should get even though the market seems to be saying that the pay should be higher. This raises the question of whether the station would complain about a doctors shortage if no doctors answered the call at a $30 an hour pay rate. (Their actual pay averages more than $250,000 a year, although most put in far more than 40 hours a week.)
Just as a point of reference, if the minimum wage had kept pace with productivity growth over the last fifty years it would be over $18 an hour now. So Nashville’s public radio station apparently believes that as a matter of principle (it’s not the market) construction workers should be earning less than a productivity adjusted minimum wage. It is also worth noting that these are jobs that typically carried some wage premium — as opposed to working at a fast food restaurant — both because they often require considerable skills and then tend to be physically demanding and dangerous.
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Paul Krugman used his column to berate reporters for not highlighting when candidates are lying. The basic point is that reporters are in a position to know that a candidate is saying something that is outright false, whereas the typical reader/viewer likely doesn’t have the time to check the truth of a particular claim. Not doing this basic service encourages lying, since candidates will freely change positions and make claims that are not true if they know they will not pay a price for lying.
The immediate context is the presidential debate next Monday. Krugman notes in passing that reporters tend to pass on fact checking and instead engage in theater criticism:
“One all-too-common response to such attacks involves abdicating responsibility for fact-checking entirely, and replacing it with theater criticism: Never mind whether what the candidate said is true or false, how did it play? How did he or she ‘come across’? What were the ‘optics’?
“But theater criticism is the job of theater critics; news reporting should tell the public what really happened, not be devoted to speculation about how other people might react to what happened.”
This is a point I have often made in the past. I would carry the complaint even a step further than Krugman. Not only is theater criticism the job of theater critics, the amateur criticism in which highly paid reporters engage is the sort of thing we all do all the time. All of us engage in conversations with people over the course of our lives. In doing so, we are constantly assessing their confidence, whether they are acting defensive, whether they are forceful, and whether they appear sincere. Reporters have no comparative advantage in this area.
We will have roughly 100 million people watching the debate on Monday night. There is no reason to believe that the judgement of the reporters covering the debate on the relative confidence and outward sincerity of Donald Trump and Hillary Clinton will be any more accurate and insightful than the judgement of the typical viewer among the 100 million.
By contrast, most of the 100 million will not know if Trump has yet again changed his tax proposal, has made up new stories about the origins of birtherism, or is saying nothing coherent on trade policy. This is where reporters can add value. They should save the theater criticism for their family and friends.
Paul Krugman used his column to berate reporters for not highlighting when candidates are lying. The basic point is that reporters are in a position to know that a candidate is saying something that is outright false, whereas the typical reader/viewer likely doesn’t have the time to check the truth of a particular claim. Not doing this basic service encourages lying, since candidates will freely change positions and make claims that are not true if they know they will not pay a price for lying.
The immediate context is the presidential debate next Monday. Krugman notes in passing that reporters tend to pass on fact checking and instead engage in theater criticism:
“One all-too-common response to such attacks involves abdicating responsibility for fact-checking entirely, and replacing it with theater criticism: Never mind whether what the candidate said is true or false, how did it play? How did he or she ‘come across’? What were the ‘optics’?
“But theater criticism is the job of theater critics; news reporting should tell the public what really happened, not be devoted to speculation about how other people might react to what happened.”
This is a point I have often made in the past. I would carry the complaint even a step further than Krugman. Not only is theater criticism the job of theater critics, the amateur criticism in which highly paid reporters engage is the sort of thing we all do all the time. All of us engage in conversations with people over the course of our lives. In doing so, we are constantly assessing their confidence, whether they are acting defensive, whether they are forceful, and whether they appear sincere. Reporters have no comparative advantage in this area.
We will have roughly 100 million people watching the debate on Monday night. There is no reason to believe that the judgement of the reporters covering the debate on the relative confidence and outward sincerity of Donald Trump and Hillary Clinton will be any more accurate and insightful than the judgement of the typical viewer among the 100 million.
By contrast, most of the 100 million will not know if Trump has yet again changed his tax proposal, has made up new stories about the origins of birtherism, or is saying nothing coherent on trade policy. This is where reporters can add value. They should save the theater criticism for their family and friends.
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Fareed Zakaria used his Washington Post column to tell readers that there are no simple solutions, it’s just too complicated. The point is that the gods have condemned us to suffer slow growth and rising inequality. In addition to making the absurd point that we should be worried because people are having fewer kids (just imagine, the robots will take all the jobs and we won’t have any workers) Zakaria tells us that nothing seems to work.
“Facing these forces [globalization, an aging workforce, and technology], leaders have no easy path to restore growth and revive their countries. Deep, radical reforms are unpopular and in this climate do not seem to lead to roaring growth. Ireland, Portugal and Mexico have all enacted broad market reforms, and yet, growth has not come booming back. Japan has spent hundreds of billions on stimulus plans and yet it is just muddling along. Thus, even the leaders who come to office with strong public approval and much promise find themselves trapped by the same forces. Very quickly their approval ratings begin to drop and new populist anger grows. Italy’s reformist prime minister, Matteo Renzi, has seen his numbers fall below 30 percent. The populist Greek leader, Alexis Tsipras, is down to 19 percent.”
Well, that seems to cover the bases, right? Except that there is a lot to show for the stimulus in Japan (which could be far more aggressive, since the country has negative long-term interest rates and is still facing near zero inflation). Since Abe took over at the end of 2012 the employment-to-population ratio in Japan has risen by 2.5 percentage points. This would be the equivalent of adding 6.2 million jobs in excess of the endogenous growth in the population in the United States. By contrast, the employment-to-population ratio has risen by just 1.1 percentage point in the United States over this period, in spite of the strong job growth of the last three years.
This might help to explain why Mr. Abe’s approval rating is at 60 percent, a marked contrast with the rating of other leaders on Zakaria’s list. One can debate whether or not Keynesian-style stimulus is simple, but the world looks much less complicated if we talk about the real world honestly and not ignore facts that contradict our message.
I will have much more to say countering the Zakaria/mainstream establishment line in my forthcoming book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, coming soon to a website near you.
Fareed Zakaria used his Washington Post column to tell readers that there are no simple solutions, it’s just too complicated. The point is that the gods have condemned us to suffer slow growth and rising inequality. In addition to making the absurd point that we should be worried because people are having fewer kids (just imagine, the robots will take all the jobs and we won’t have any workers) Zakaria tells us that nothing seems to work.
“Facing these forces [globalization, an aging workforce, and technology], leaders have no easy path to restore growth and revive their countries. Deep, radical reforms are unpopular and in this climate do not seem to lead to roaring growth. Ireland, Portugal and Mexico have all enacted broad market reforms, and yet, growth has not come booming back. Japan has spent hundreds of billions on stimulus plans and yet it is just muddling along. Thus, even the leaders who come to office with strong public approval and much promise find themselves trapped by the same forces. Very quickly their approval ratings begin to drop and new populist anger grows. Italy’s reformist prime minister, Matteo Renzi, has seen his numbers fall below 30 percent. The populist Greek leader, Alexis Tsipras, is down to 19 percent.”
Well, that seems to cover the bases, right? Except that there is a lot to show for the stimulus in Japan (which could be far more aggressive, since the country has negative long-term interest rates and is still facing near zero inflation). Since Abe took over at the end of 2012 the employment-to-population ratio in Japan has risen by 2.5 percentage points. This would be the equivalent of adding 6.2 million jobs in excess of the endogenous growth in the population in the United States. By contrast, the employment-to-population ratio has risen by just 1.1 percentage point in the United States over this period, in spite of the strong job growth of the last three years.
This might help to explain why Mr. Abe’s approval rating is at 60 percent, a marked contrast with the rating of other leaders on Zakaria’s list. One can debate whether or not Keynesian-style stimulus is simple, but the world looks much less complicated if we talk about the real world honestly and not ignore facts that contradict our message.
I will have much more to say countering the Zakaria/mainstream establishment line in my forthcoming book, Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer, coming soon to a website near you.
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