That’s only a small exaggeration. He touted a study by Steve Rose showing substantial income gains for upper middle class households over the last four decades. The study did not take account of the extent to which incomes rose because households had two earners, as opposed to a situation where people in the household got more pay for each hour worked.
Most people probably expect that a household would have more income if two people are working than one. Economic progress is when people get more money for each hour of work — but hey, if you have a case to sell, you make it up as you go along.
That’s only a small exaggeration. He touted a study by Steve Rose showing substantial income gains for upper middle class households over the last four decades. The study did not take account of the extent to which incomes rose because households had two earners, as opposed to a situation where people in the household got more pay for each hour worked.
Most people probably expect that a household would have more income if two people are working than one. Economic progress is when people get more money for each hour of work — but hey, if you have a case to sell, you make it up as you go along.
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Phillippe Legrain began his NYT column denouncing the supporters of Brexit by noting their contempt for economic expertise. He then went on to give good reasons for such contempt.
Legrain tells readers:
“Experts are, of course, known to make mistakes. But in this case, the people who voted for Brexit will pay a big price for ignoring economic expertise. The harmful effects of this vote are both immediate and lasting.
“Britons are already worse off. The pound has — so far — plunged by nearly 9 percent against the dollar, slashing the value of British assets, with higher import prices likely to follow. The stock market has also taken a hit. The prices of property, most British people’s main asset, are almost certain to fall, too.”
Actually the pound’s fall was a necessary and good development in the long-run, even if it would have been better had it occurred over a longer period of time. The UK was running a trade deficit in the neighborhood of 5.0 percent of GDP (@ $900 billion in the U.S.), this was unsustainable. And, contrary to what Legrain claims in this piece, the best way to get the trade deficit down is to lower the value of the pound.
Legrain incorrectly asserts that the drop in the pound in 2008 did not lead to a reduction in the trade deficit. In fact it led to a substantial reduction, although with a 1–2 year lag as would be expected. (The pound fell from a peak of more than 1.5 euros in 2007 to just over 1.0 euro at its trough in 2008. It remained low until it began to rise sharply in 2013, reaching values of more than 1.4 euros last year, hence the large rise in the trade deficit.)
The inflow of money from abroad was fueling a housing bubble in the UK. This has priced many people out of the real estate market. Bubbles do burst, often with very bad outcomes.
The problem with bubbles is not the factor that causes them to burst, the problem is allowing them to grow in the first place. Apparently the “experts” in the UK had no idea that real estate markets could develop bubbles or that their bursting could lead to harm. The problem Legrain describes here is entirely on the shoulders of the experts, not the Brexiters.
It is also worth noting that a high stock market is not an economic good. It is a distributional measure. It means that the owners of stock have more claim on society’s income. There is very little direct relationship between the stock market’s value and investment. (In the U.S. the investment share of GDP peaked in the late 1970s when the stock market was in the doldrums.)
The piece also implies that the UK will face punitive tariffs from the EU after it leaves. This is possible, but the fault will then be with the EU leadership. They will be deliberately making the EU poorer so that they can extract revenge on the UK for leaving.
Phillippe Legrain began his NYT column denouncing the supporters of Brexit by noting their contempt for economic expertise. He then went on to give good reasons for such contempt.
Legrain tells readers:
“Experts are, of course, known to make mistakes. But in this case, the people who voted for Brexit will pay a big price for ignoring economic expertise. The harmful effects of this vote are both immediate and lasting.
“Britons are already worse off. The pound has — so far — plunged by nearly 9 percent against the dollar, slashing the value of British assets, with higher import prices likely to follow. The stock market has also taken a hit. The prices of property, most British people’s main asset, are almost certain to fall, too.”
Actually the pound’s fall was a necessary and good development in the long-run, even if it would have been better had it occurred over a longer period of time. The UK was running a trade deficit in the neighborhood of 5.0 percent of GDP (@ $900 billion in the U.S.), this was unsustainable. And, contrary to what Legrain claims in this piece, the best way to get the trade deficit down is to lower the value of the pound.
Legrain incorrectly asserts that the drop in the pound in 2008 did not lead to a reduction in the trade deficit. In fact it led to a substantial reduction, although with a 1–2 year lag as would be expected. (The pound fell from a peak of more than 1.5 euros in 2007 to just over 1.0 euro at its trough in 2008. It remained low until it began to rise sharply in 2013, reaching values of more than 1.4 euros last year, hence the large rise in the trade deficit.)
The inflow of money from abroad was fueling a housing bubble in the UK. This has priced many people out of the real estate market. Bubbles do burst, often with very bad outcomes.
The problem with bubbles is not the factor that causes them to burst, the problem is allowing them to grow in the first place. Apparently the “experts” in the UK had no idea that real estate markets could develop bubbles or that their bursting could lead to harm. The problem Legrain describes here is entirely on the shoulders of the experts, not the Brexiters.
It is also worth noting that a high stock market is not an economic good. It is a distributional measure. It means that the owners of stock have more claim on society’s income. There is very little direct relationship between the stock market’s value and investment. (In the U.S. the investment share of GDP peaked in the late 1970s when the stock market was in the doldrums.)
The piece also implies that the UK will face punitive tariffs from the EU after it leaves. This is possible, but the fault will then be with the EU leadership. They will be deliberately making the EU poorer so that they can extract revenge on the UK for leaving.
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Jim Tankersley had an interesting piece arguing that the Brexit vote ended “globalization as we know it.” I am less optimistic on that front. The folks who profit from the current path of globalization are incredibly powerful and very effective at working around democracy and things like that. But that aside, the article had an interesting graph that caught my attention.
The graph shows the ratio of international trade in goods and services to GDP over the last two decades. After rising sharply from 1995 to 2007, it has been largely flat and still has not recovered to its 2007 peak. This change in trends is of course striking.
However, there is another aspect to this story worth considering. In the debate over the productivity slowdown, there is a camp which argues that it is largely illusory. The story goes that we are undercounting GDP, and therefore productivity, because we are missing the value of things like video downloads on the web, undercounting the value of the camera in our iPhones, and other such things.
While there is obviously some non-zero amount here (we are missing some things in our GDP accounting), I have never been convinced that it could be enough to change the basic story. (Remember it has to be cumulative. If we are undercounting by 0.5 percentage points annually, after 20 years we are undercounting GDP by 10 percent.)
But this connects to the trade story in an interesting way. The items that are likely to be missed in GDP accounts are also items that are heavily involved in trade. For example, people everywhere get information, music, and videos off the web. This means that if we are even undercounting GDP by a small amount, like 0.2 percentage points, we may be undercounting trade by a large amount.
In the 0.2 percentage point case, suppose that half of this is in items that cross national borders. This means that we are understating the growth of trade by 0.1 percentage points annually. Over the stretch of time covered by the graph, this would translate into 2.0 additional percentage points of world GDP involved in trade. In this story, it is very plausible that much of the drop in the trade to GDP ratio is a result of mis-measurement, even if the measurement problem is not a big deal from the standpoint of the world as a whole.
There is one other thing worth noting in this story. Suppose the protectionists get defeated and we find a way to finance innovation and creative work other than patent and copyright protection. In that case, drugs are all cheap and books, recorded music and video material all cross borders at zero cost. This explosion in globalization would be associated with a plunge in the trade to GDP ratios. This indicates that it may not be a very good measure of what we are interested in.
Jim Tankersley had an interesting piece arguing that the Brexit vote ended “globalization as we know it.” I am less optimistic on that front. The folks who profit from the current path of globalization are incredibly powerful and very effective at working around democracy and things like that. But that aside, the article had an interesting graph that caught my attention.
The graph shows the ratio of international trade in goods and services to GDP over the last two decades. After rising sharply from 1995 to 2007, it has been largely flat and still has not recovered to its 2007 peak. This change in trends is of course striking.
However, there is another aspect to this story worth considering. In the debate over the productivity slowdown, there is a camp which argues that it is largely illusory. The story goes that we are undercounting GDP, and therefore productivity, because we are missing the value of things like video downloads on the web, undercounting the value of the camera in our iPhones, and other such things.
While there is obviously some non-zero amount here (we are missing some things in our GDP accounting), I have never been convinced that it could be enough to change the basic story. (Remember it has to be cumulative. If we are undercounting by 0.5 percentage points annually, after 20 years we are undercounting GDP by 10 percent.)
But this connects to the trade story in an interesting way. The items that are likely to be missed in GDP accounts are also items that are heavily involved in trade. For example, people everywhere get information, music, and videos off the web. This means that if we are even undercounting GDP by a small amount, like 0.2 percentage points, we may be undercounting trade by a large amount.
In the 0.2 percentage point case, suppose that half of this is in items that cross national borders. This means that we are understating the growth of trade by 0.1 percentage points annually. Over the stretch of time covered by the graph, this would translate into 2.0 additional percentage points of world GDP involved in trade. In this story, it is very plausible that much of the drop in the trade to GDP ratio is a result of mis-measurement, even if the measurement problem is not a big deal from the standpoint of the world as a whole.
There is one other thing worth noting in this story. Suppose the protectionists get defeated and we find a way to finance innovation and creative work other than patent and copyright protection. In that case, drugs are all cheap and books, recorded music and video material all cross borders at zero cost. This explosion in globalization would be associated with a plunge in the trade to GDP ratios. This indicates that it may not be a very good measure of what we are interested in.
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An NYT article on the upcoming elections in Iceland told readers that, “gross national income per capita is down by a quarter since 2007.” The I.M.F. doesn’t agree. According to the I.M.F. data, per capital GDP in Iceland is around 2.0 percent higher now than its pre-recession peak. That is a very different story.
In fairness, the NYT piece refers to gross national income (GNI), not gross domestic product. Generally these are very close, but in a small country like Iceland they may differ by large amounts. GDP is usually the preferred measure, but it can be inflated by things like foreign companies claiming profits in the country for tax purposes, as happens in Ireland.
If the NYT’s GNI numbers are correct, it is most likely due to foreign profits of Iceland’s major banks in the bubble years before the crisis. It’s not clear that the loss of these profits, which were based on speculation and fraud, is a negative for Iceland’s economy.
An NYT article on the upcoming elections in Iceland told readers that, “gross national income per capita is down by a quarter since 2007.” The I.M.F. doesn’t agree. According to the I.M.F. data, per capital GDP in Iceland is around 2.0 percent higher now than its pre-recession peak. That is a very different story.
In fairness, the NYT piece refers to gross national income (GNI), not gross domestic product. Generally these are very close, but in a small country like Iceland they may differ by large amounts. GDP is usually the preferred measure, but it can be inflated by things like foreign companies claiming profits in the country for tax purposes, as happens in Ireland.
If the NYT’s GNI numbers are correct, it is most likely due to foreign profits of Iceland’s major banks in the bubble years before the crisis. It’s not clear that the loss of these profits, which were based on speculation and fraud, is a negative for Iceland’s economy.
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Just kidding, AP wouldn’t waste readers time on anything so frivolous as the future of the planet. No, it’s calling politicians irresponsible because they won’t run out and cut Social Security and Medicare.
The piece is headlined, “Medicare, Social Security finance woes.” The first sentence tells readers:
“The nation’s framework for economic security and health care in retirement is financially unsustainable, but you wouldn’t know it from listening to the presidential candidates.“
Yep, the programs are unsustainable in the same way that driving west in New Jersey is unsustainable. If you keep going west, you’ll end up in the Pacific Ocean. Yes, the programs face a projected shortfall, but if we waited a decade to do anything, and then put in place fixes comparable to what we did in the 1980s, the program would be fine for the rest of the century.
But hey, AP wants us to cut benefits now! You hear that, now! The piece only includes comments from advocates of cuts to emphasize that point.
Also, somehow AP failed to notice the enormous progress that has been made in reducing the projected shortfall for these two programs under President Obama. The combined shortfall has fallen by more than one-third over the eight years of the Obama administration. This is primarily due to slower growth in health care costs.
On this issue, the piece wrongly asserts that further savings in this area are unlikely. This is not true, our doctors get paid more than twice as much in doctors in other wealthy countries. There are enormous potential savings from bringing their pay in line with their counterparts in the rest of the world. There is also enormous room for savings on prescription drugs, medical equipment, and other areas.
Finally, it is striking how much ink AP and other news outlets devote to warning of the prospect of higher taxes for these programs when workers face far greater risks from the continuing upward redistribution of income. If most workers get their share of projected wage growth over the next three decades, any tax increases associated with sustaining Social Security and Medicare will be a drop in the bucket.
Just kidding, AP wouldn’t waste readers time on anything so frivolous as the future of the planet. No, it’s calling politicians irresponsible because they won’t run out and cut Social Security and Medicare.
The piece is headlined, “Medicare, Social Security finance woes.” The first sentence tells readers:
“The nation’s framework for economic security and health care in retirement is financially unsustainable, but you wouldn’t know it from listening to the presidential candidates.“
Yep, the programs are unsustainable in the same way that driving west in New Jersey is unsustainable. If you keep going west, you’ll end up in the Pacific Ocean. Yes, the programs face a projected shortfall, but if we waited a decade to do anything, and then put in place fixes comparable to what we did in the 1980s, the program would be fine for the rest of the century.
But hey, AP wants us to cut benefits now! You hear that, now! The piece only includes comments from advocates of cuts to emphasize that point.
Also, somehow AP failed to notice the enormous progress that has been made in reducing the projected shortfall for these two programs under President Obama. The combined shortfall has fallen by more than one-third over the eight years of the Obama administration. This is primarily due to slower growth in health care costs.
On this issue, the piece wrongly asserts that further savings in this area are unlikely. This is not true, our doctors get paid more than twice as much in doctors in other wealthy countries. There are enormous potential savings from bringing their pay in line with their counterparts in the rest of the world. There is also enormous room for savings on prescription drugs, medical equipment, and other areas.
Finally, it is striking how much ink AP and other news outlets devote to warning of the prospect of higher taxes for these programs when workers face far greater risks from the continuing upward redistribution of income. If most workers get their share of projected wage growth over the next three decades, any tax increases associated with sustaining Social Security and Medicare will be a drop in the bucket.
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“Britain’s exit from E.U. sends global economy into a tailspin.” That was the headline of a Washington Post article on the vote in the U.K.. If you missed the tailspinning economies that’s because this is just Washington Post hysteria. Obviously the Washington Post is referring to financial markets. They apparently don’t realize the difference between financial markets and the real economy.
And if you don’t realize they are very different then you must believe in the horrible recession of 1987. Of course there was no recession in 1987 (or 1988 or 1989), but that was when the stock market plunged more than 20 percent in a single day. This drop, which happened in every major world market, did not correspond to any identifiable event in the economy. Nor did it have any massive fallout on the world economy. But in Washington Post land it was undoubtedly a serious recession.
Unfortunately the headline did not misrepresent the nature of the piece. The first sentence tells readers:
“The global economy faces months — if not years — of slower growth as Britain’s stunning decision to abandon the European Union threw financial markets into a tailspin and darkened the outlook for corporate and consumer spending.”
While the UK’s departure from the EU will almost certainly have a negative impact on world growth, most of the impact will be on the UK, with a lesser effect on the EU (both will be worse if the EU imposes harsh protectionist measures as punishment — which should be the big story in the media), the impact on the U.S. economy and the rest of the world will likely be minimal.
In terms of hits to the world economy, the 2011 budget agreement that turned the U.S. sharply toward austerity was almost certainly far worse than Brexit. Of course, the Washington Post basically liked that deal so it is unlikely that it would ever make this sort of comparison.
“Britain’s exit from E.U. sends global economy into a tailspin.” That was the headline of a Washington Post article on the vote in the U.K.. If you missed the tailspinning economies that’s because this is just Washington Post hysteria. Obviously the Washington Post is referring to financial markets. They apparently don’t realize the difference between financial markets and the real economy.
And if you don’t realize they are very different then you must believe in the horrible recession of 1987. Of course there was no recession in 1987 (or 1988 or 1989), but that was when the stock market plunged more than 20 percent in a single day. This drop, which happened in every major world market, did not correspond to any identifiable event in the economy. Nor did it have any massive fallout on the world economy. But in Washington Post land it was undoubtedly a serious recession.
Unfortunately the headline did not misrepresent the nature of the piece. The first sentence tells readers:
“The global economy faces months — if not years — of slower growth as Britain’s stunning decision to abandon the European Union threw financial markets into a tailspin and darkened the outlook for corporate and consumer spending.”
While the UK’s departure from the EU will almost certainly have a negative impact on world growth, most of the impact will be on the UK, with a lesser effect on the EU (both will be worse if the EU imposes harsh protectionist measures as punishment — which should be the big story in the media), the impact on the U.S. economy and the rest of the world will likely be minimal.
In terms of hits to the world economy, the 2011 budget agreement that turned the U.S. sharply toward austerity was almost certainly far worse than Brexit. Of course, the Washington Post basically liked that deal so it is unlikely that it would ever make this sort of comparison.
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The Washington Post once again got in over its head as it tried to sort out the consequences of the UK’s exit from the EU. In article on the implications for the rest of the European Union it told readers:
“A strain of fear is already running through the German government as it contemplates the loss of Britain — whose conservative prime minister, David Cameron, largely backed Chancellor Angela Merkel’s austerity crusade. Berlin now fears a “ganging up” by nations including France, Spain and Italy, which may seek to overthrow Merkel’s austerity-first policy.
“Yet, if the Germans do not lead, who will? France is too distracted, a nation mired in economic stagnation and a war on terror. The Italians and the Spanish, meanwhile, are still struggling with financial hardship, political volatility and large-scale unemployment.”
See the problem here? The article tells us that France, Italy, and Spain can’t lead because they are all suffering from serious internal problems. But almost all the problems cited, except for terrorism in France, are a direct result of their economic situation. And, that’s right folks, the bad economic situation is the result of the austerity imposed on them by Germany with the backing of David Cameron.
So, if Germany is no longer in a position to impose its absurd austerity policies on the rest of the EU, then France, Italy, and Spain can again have normal growth and lower unemployment. Stronger economies would then make these countries much better situated to play a leading role in the European Union: problem solved.
Wasn’t that easy?
The Washington Post once again got in over its head as it tried to sort out the consequences of the UK’s exit from the EU. In article on the implications for the rest of the European Union it told readers:
“A strain of fear is already running through the German government as it contemplates the loss of Britain — whose conservative prime minister, David Cameron, largely backed Chancellor Angela Merkel’s austerity crusade. Berlin now fears a “ganging up” by nations including France, Spain and Italy, which may seek to overthrow Merkel’s austerity-first policy.
“Yet, if the Germans do not lead, who will? France is too distracted, a nation mired in economic stagnation and a war on terror. The Italians and the Spanish, meanwhile, are still struggling with financial hardship, political volatility and large-scale unemployment.”
See the problem here? The article tells us that France, Italy, and Spain can’t lead because they are all suffering from serious internal problems. But almost all the problems cited, except for terrorism in France, are a direct result of their economic situation. And, that’s right folks, the bad economic situation is the result of the austerity imposed on them by Germany with the backing of David Cameron.
So, if Germany is no longer in a position to impose its absurd austerity policies on the rest of the EU, then France, Italy, and Spain can again have normal growth and lower unemployment. Stronger economies would then make these countries much better situated to play a leading role in the European Union: problem solved.
Wasn’t that easy?
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Neil Irwin has an Upshot piece reporting on a study by Mark Zandi projecting that the Donald Trump agenda would be an economic disaster. The piece is a fair assessment (he sees Zandi’s projections as plausible, but certainly highly debatable), but it is worth making a couple of additional points.
First, much of the Zandi horror story is premised on the idea that the economy is at full employment and that any further stimulus from larger budget deficits would lead to higher interest rates and/or inflation. If folks believe this then they must also believe that stimulus from infrastructure spending would lead to higher interest rates and or/or inflation.
I am the last person to defend tax cuts for rich people, but I don’t do make-it-up-as-you-go-along economics. If you believe that the economy is actually well below full employment and that it would benefit from the boost given by an increase in the budget deficit, then this part of the Zandi horror story does not fit. (The argument that the rich won’t spend their tax cut goes the wrong way. The problem from deficits in this story is that they are creating demand in the economy. If the rich save all their tax cuts, then we don’t have this problem.)
The other point is that Zandi’s assumptions on the evil of Trump’s tariffs seem somewhat exaggerated as others, including Paul Krugman, have noted. More importantly, there is actually a serious policy that could be buried in the midst of Trump’s bluster.
It would be perfectly reasonable for the United States to try to negotiate a rise in China’s currency against the dollar. Yes, I know China is having troubles just now and has actually been trying to keep the value of its currency up by selling dollars. But its holdings of more than $3 trillion in reserves has the effect of keeping down the value of its currency against the dollar, just as the Fed’s holding of more than $4 trillion in assets has the effect of holding down interest rates. (Sorry, the logic is inescapable for those who don’t do make-it-up-as-you-go-along economics.)
Anyhow, it would make perfect sense to negotiate a path for a higher valued yuan. At the negotiating table it would be perfectly reasonable to threaten various forms of retaliation as pressure, including tariffs. It would also be necessary to put concessions on the table, since the U.S. can’t just dictate policy to China, even if Donald Trump is president. (When he makes me Treasury Secretary, my top candidates will be that China doesn’t have to pay Bill Gates for Windows or Pfizer for its drug patents, and that they need not worry about market access for Goldman Sachs.)
If China did raise the value of its currency, it would reduce the U.S. trade deficit, boosting demand and creating more jobs, especially in manufacturing. (It would also lower our budget deficits, making deficit hawks happy.) This is a perfectly reasonable policy which should not be banished from consideration because it is associated with Donald Trump. (I have no idea what Trump hopes to get from his tariffs on Mexico.)
Note: Typos corrected, thanks Robert Salzberg.
Neil Irwin has an Upshot piece reporting on a study by Mark Zandi projecting that the Donald Trump agenda would be an economic disaster. The piece is a fair assessment (he sees Zandi’s projections as plausible, but certainly highly debatable), but it is worth making a couple of additional points.
First, much of the Zandi horror story is premised on the idea that the economy is at full employment and that any further stimulus from larger budget deficits would lead to higher interest rates and/or inflation. If folks believe this then they must also believe that stimulus from infrastructure spending would lead to higher interest rates and or/or inflation.
I am the last person to defend tax cuts for rich people, but I don’t do make-it-up-as-you-go-along economics. If you believe that the economy is actually well below full employment and that it would benefit from the boost given by an increase in the budget deficit, then this part of the Zandi horror story does not fit. (The argument that the rich won’t spend their tax cut goes the wrong way. The problem from deficits in this story is that they are creating demand in the economy. If the rich save all their tax cuts, then we don’t have this problem.)
The other point is that Zandi’s assumptions on the evil of Trump’s tariffs seem somewhat exaggerated as others, including Paul Krugman, have noted. More importantly, there is actually a serious policy that could be buried in the midst of Trump’s bluster.
It would be perfectly reasonable for the United States to try to negotiate a rise in China’s currency against the dollar. Yes, I know China is having troubles just now and has actually been trying to keep the value of its currency up by selling dollars. But its holdings of more than $3 trillion in reserves has the effect of keeping down the value of its currency against the dollar, just as the Fed’s holding of more than $4 trillion in assets has the effect of holding down interest rates. (Sorry, the logic is inescapable for those who don’t do make-it-up-as-you-go-along economics.)
Anyhow, it would make perfect sense to negotiate a path for a higher valued yuan. At the negotiating table it would be perfectly reasonable to threaten various forms of retaliation as pressure, including tariffs. It would also be necessary to put concessions on the table, since the U.S. can’t just dictate policy to China, even if Donald Trump is president. (When he makes me Treasury Secretary, my top candidates will be that China doesn’t have to pay Bill Gates for Windows or Pfizer for its drug patents, and that they need not worry about market access for Goldman Sachs.)
If China did raise the value of its currency, it would reduce the U.S. trade deficit, boosting demand and creating more jobs, especially in manufacturing. (It would also lower our budget deficits, making deficit hawks happy.) This is a perfectly reasonable policy which should not be banished from consideration because it is associated with Donald Trump. (I have no idea what Trump hopes to get from his tariffs on Mexico.)
Note: Typos corrected, thanks Robert Salzberg.
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