Paul Krugman had a good column this morning pointing to a lack of competition as an explanation for relatively weak investment in spite of low interest rates and high corporate profits. His immediate target is Verizon, where workers are now striking, which shows little interest in expanding its Fios high-speed Internet network in spite of soaring profits. Krugman points out that with little competition, Verizon sees little need to invest more to improve the quality of its service. He then argues that this weak investment is a major cause of secular stagnation, the ongoing weakness of demand that prevents the economy from reaching full employment.
I’d agree with virtually everything in the piece (Krugman may be a bit overly optimistic about the interest in the Obama administration in pursuing a serious competition policy), but there is an aspect to the argument that bothers me. While we should perhaps expect investment to be booming in a context of high profits and very low interest rates, investment actually is not low measured as a share of GDP.
At 12.7 percent of GDP in the 4th quarter, it’s comparable to its pre-recession peaks. Given the weak growth of demand (yes, this is partly circular — stronger investment would mean stronger demand — but companies make their investment decisions individually, not collectively), investment is certainly not low by historical measures.
On the other hand, we continue to run a trade deficit that is close to 3.0 percent of GDP, or more than $500 billion a year. Suppose that our trade deficits were still in the neighborhood of 1.0 percent of GDP, which was the case before the East Asian financial crisis in 1997.
This difference of 2 percentage points of GDP would have the same impact on demand as increasing investment by 2 percentage points of GDP. That would be a huge increase in investment. If better competition policy could increase demand by even half of this amount everyone would view it as an enormous success.
So the question is, why do Krugman and others highlight the lack of competition in many areas as a cause of secular stagnation, but largely ignore the trade deficit? This question is further aggravating since the trade deficit has featured very prominently in the upward redistribution of income in the last two decades.
Note that contrary to the latest thinking in elite circles, it is not normal for rich countries to run large trade deficits with poor countries. The textbook economics say that capital is supposed to flow in the opposite direction. It is an incredible failure of the international financial system, traceable to the botched bailout from the East Asian financial crisis, that poor countries have been forced to grow by lending capital to rich countries. It certainly is not a necessary path for development and it has had horrible consequences for the working class in the United States and other rich countries.
Paul Krugman had a good column this morning pointing to a lack of competition as an explanation for relatively weak investment in spite of low interest rates and high corporate profits. His immediate target is Verizon, where workers are now striking, which shows little interest in expanding its Fios high-speed Internet network in spite of soaring profits. Krugman points out that with little competition, Verizon sees little need to invest more to improve the quality of its service. He then argues that this weak investment is a major cause of secular stagnation, the ongoing weakness of demand that prevents the economy from reaching full employment.
I’d agree with virtually everything in the piece (Krugman may be a bit overly optimistic about the interest in the Obama administration in pursuing a serious competition policy), but there is an aspect to the argument that bothers me. While we should perhaps expect investment to be booming in a context of high profits and very low interest rates, investment actually is not low measured as a share of GDP.
At 12.7 percent of GDP in the 4th quarter, it’s comparable to its pre-recession peaks. Given the weak growth of demand (yes, this is partly circular — stronger investment would mean stronger demand — but companies make their investment decisions individually, not collectively), investment is certainly not low by historical measures.
On the other hand, we continue to run a trade deficit that is close to 3.0 percent of GDP, or more than $500 billion a year. Suppose that our trade deficits were still in the neighborhood of 1.0 percent of GDP, which was the case before the East Asian financial crisis in 1997.
This difference of 2 percentage points of GDP would have the same impact on demand as increasing investment by 2 percentage points of GDP. That would be a huge increase in investment. If better competition policy could increase demand by even half of this amount everyone would view it as an enormous success.
So the question is, why do Krugman and others highlight the lack of competition in many areas as a cause of secular stagnation, but largely ignore the trade deficit? This question is further aggravating since the trade deficit has featured very prominently in the upward redistribution of income in the last two decades.
Note that contrary to the latest thinking in elite circles, it is not normal for rich countries to run large trade deficits with poor countries. The textbook economics say that capital is supposed to flow in the opposite direction. It is an incredible failure of the international financial system, traceable to the botched bailout from the East Asian financial crisis, that poor countries have been forced to grow by lending capital to rich countries. It certainly is not a necessary path for development and it has had horrible consequences for the working class in the United States and other rich countries.
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The New York Times had an article on the downsizing of Citigroup in the wake of the passage of Dodd-Frank. The piece twice refers to the “vise of regulation” in discussing the pressures created by the law to downsize. While one use of the expression appears in a quote from an industry friendly source, the other use is the paper’s own characterization of the law.
It seems unlikely that the NYT would say that a vise of regulation is preventing Pfizer from marketing unsafe drugs. This is clearly an expression of disapproval implying that the regulations are excessive and unnecessary. That is the sort of thing that belongs in an opinion piece, not a news article.
The New York Times had an article on the downsizing of Citigroup in the wake of the passage of Dodd-Frank. The piece twice refers to the “vise of regulation” in discussing the pressures created by the law to downsize. While one use of the expression appears in a quote from an industry friendly source, the other use is the paper’s own characterization of the law.
It seems unlikely that the NYT would say that a vise of regulation is preventing Pfizer from marketing unsafe drugs. This is clearly an expression of disapproval implying that the regulations are excessive and unnecessary. That is the sort of thing that belongs in an opinion piece, not a news article.
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Some readers may have been misled by a statement in a NYT article on the Verizon strike that the union members at Verizon receive an average of $130,000 a year in wages and benefits. This is what the company pays in labor costs per worker. This includes not only straight pay, but also overtime pay, employer-side Social Security and Medicare taxes, health insurance, and pension benefits. The pension payments are everything that Verizon pays into its pension, including payments to cover costs of retired employees, averaged over the size of its current unionized workforce.
While the $130,000 number would imply an average hourly wage of $65. The average non-overtime pay of Verizon’s workers is probably in the range of $35 to $40 an hourly. While this is still a relatively good wage in the U.S. economy, it is considerably lower than the $65 an hour that readers may have inferred from too quickly reading the article.
Some readers may have been misled by a statement in a NYT article on the Verizon strike that the union members at Verizon receive an average of $130,000 a year in wages and benefits. This is what the company pays in labor costs per worker. This includes not only straight pay, but also overtime pay, employer-side Social Security and Medicare taxes, health insurance, and pension benefits. The pension payments are everything that Verizon pays into its pension, including payments to cover costs of retired employees, averaged over the size of its current unionized workforce.
While the $130,000 number would imply an average hourly wage of $65. The average non-overtime pay of Verizon’s workers is probably in the range of $35 to $40 an hourly. While this is still a relatively good wage in the U.S. economy, it is considerably lower than the $65 an hour that readers may have inferred from too quickly reading the article.
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Charles Lane used his op-ed column in the Washington Post to repeat the line that is now quite popular in elite circles: the stagnating wages and worsening living standards of large segments of the U.S. working class were a necessary price for lifting hundreds of millions of people in the developing world out of poverty. Oh yeah, and also the richest one percent happened to get unbelievably rich in the process as well. So people like Bernie Sanders, who want trade policies that will help U.S. workers, are actually being selfish. It’s the one percent who are really serving the poor.
This argument is incredibly wrongheaded for many reasons, but let’s just focus on its basic structure. The story goes that in the last three and a half decades we have seen substantial growth in the incomes of the poor in the developing world. (Actually the bulk of this story is in East Asia, but we’ll leave that aside for the moment.) During this period incomes of ordinary workers in the United States, and to a lesser extent Europe and Japan, have stagnated. Therefore, stagnating wages for rich country workers was a necessary condition for hundreds of millions of people to escape poverty.
Obviously there was a link between these events, but the serious question (okay, that leaves the WaPo folks out) is whether it was a necessary link. Suppose that a natural disaster, like a flood or earthquake, devastates a major city. In response the federal government throws in tens of billions in assistance to rebuild the city. Ten years later, the city has a thriving economy.
In Charles Lane Eliteland the disaster was a good thing, because otherwise the city never would have been revitalized. But that is not the real question. The question is whether we could have had a path that allowed developing countries to prosper without impoverishing U.S. workers.
The simple answer is we certainly could have gone a different route and most of the story is textbook economics. I lay this out more fully in a piece that was solicited for the Post Outlook/Post Everything section, but never run there because they lost the ability to reply to e-mails.
The basic story is that there is no reason that we had to run large trade deficits with developing countries like China. In the economics textbooks, capital is supposed to flow from rich countries to poor countries to finance their development. That would mean we run trade surpluses with developing countries. Furthermore, the reason that our autoworkers compete with low-paid autoworkers in the developing world, but our doctors don’t compete with their much lower paid counterparts (trained to U.S. standards), is that doctors have much more power than autoworkers. And, we enriched our one percent, while making developing countries poorer, by making patent and copyright monopolies stronger and longer.
Anyhow the story that U.S. workers had to suffer to help the world’s poor is very comforting for the country’s elite, and let’s face it, they own the media outlets. This means that we can look forward to hearing it repeated endlessly, no matter how little sense it makes.
Charles Lane used his op-ed column in the Washington Post to repeat the line that is now quite popular in elite circles: the stagnating wages and worsening living standards of large segments of the U.S. working class were a necessary price for lifting hundreds of millions of people in the developing world out of poverty. Oh yeah, and also the richest one percent happened to get unbelievably rich in the process as well. So people like Bernie Sanders, who want trade policies that will help U.S. workers, are actually being selfish. It’s the one percent who are really serving the poor.
This argument is incredibly wrongheaded for many reasons, but let’s just focus on its basic structure. The story goes that in the last three and a half decades we have seen substantial growth in the incomes of the poor in the developing world. (Actually the bulk of this story is in East Asia, but we’ll leave that aside for the moment.) During this period incomes of ordinary workers in the United States, and to a lesser extent Europe and Japan, have stagnated. Therefore, stagnating wages for rich country workers was a necessary condition for hundreds of millions of people to escape poverty.
Obviously there was a link between these events, but the serious question (okay, that leaves the WaPo folks out) is whether it was a necessary link. Suppose that a natural disaster, like a flood or earthquake, devastates a major city. In response the federal government throws in tens of billions in assistance to rebuild the city. Ten years later, the city has a thriving economy.
In Charles Lane Eliteland the disaster was a good thing, because otherwise the city never would have been revitalized. But that is not the real question. The question is whether we could have had a path that allowed developing countries to prosper without impoverishing U.S. workers.
The simple answer is we certainly could have gone a different route and most of the story is textbook economics. I lay this out more fully in a piece that was solicited for the Post Outlook/Post Everything section, but never run there because they lost the ability to reply to e-mails.
The basic story is that there is no reason that we had to run large trade deficits with developing countries like China. In the economics textbooks, capital is supposed to flow from rich countries to poor countries to finance their development. That would mean we run trade surpluses with developing countries. Furthermore, the reason that our autoworkers compete with low-paid autoworkers in the developing world, but our doctors don’t compete with their much lower paid counterparts (trained to U.S. standards), is that doctors have much more power than autoworkers. And, we enriched our one percent, while making developing countries poorer, by making patent and copyright monopolies stronger and longer.
Anyhow the story that U.S. workers had to suffer to help the world’s poor is very comforting for the country’s elite, and let’s face it, they own the media outlets. This means that we can look forward to hearing it repeated endlessly, no matter how little sense it makes.
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Eduardo Porter had an interesting piece discussing the extent to which patents can pose an obstacle to the diffusion of technology, especially in the case of drugs and clean energy. The piece points out that some folks have suggested alternatives to patent financing for drug research, generously linking to a CEPR paper. However, the piece only mentions the routes of buying up patents and placing them in the public domain and paying drug makers based on how much their drugs increased quality adjusted life-years.
There is another route preferred by some of us, which would just pay for the research upfront. The United States already does this to a substantial extent with the National Institutes of Health, which funds over $30 billion annually in biomedical research. The advantage of paying for the research upfront is that the results can be fully public and available to other researchers from the beginning. Also, there is no need for complex calculations to determine how important a specific contribution was to the end product.
An obvious point of entry would be to finance clinical trials, which account for more than 60 percent of research costs. The trial results would be fully public with detailed data (consistent with anonymity) on individual outcomes. Also, the drugs themselves would be available as generics from the day they are approved. The trials would be paid for on a contract basis, similar to the way the Department of Defense pays contractors to develop new technologies, with the difference that everything is placed in the public domain.
Eduardo Porter had an interesting piece discussing the extent to which patents can pose an obstacle to the diffusion of technology, especially in the case of drugs and clean energy. The piece points out that some folks have suggested alternatives to patent financing for drug research, generously linking to a CEPR paper. However, the piece only mentions the routes of buying up patents and placing them in the public domain and paying drug makers based on how much their drugs increased quality adjusted life-years.
There is another route preferred by some of us, which would just pay for the research upfront. The United States already does this to a substantial extent with the National Institutes of Health, which funds over $30 billion annually in biomedical research. The advantage of paying for the research upfront is that the results can be fully public and available to other researchers from the beginning. Also, there is no need for complex calculations to determine how important a specific contribution was to the end product.
An obvious point of entry would be to finance clinical trials, which account for more than 60 percent of research costs. The trial results would be fully public with detailed data (consistent with anonymity) on individual outcomes. Also, the drugs themselves would be available as generics from the day they are approved. The trials would be paid for on a contract basis, similar to the way the Department of Defense pays contractors to develop new technologies, with the difference that everything is placed in the public domain.
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The Obama administration is starting its full court press to get Congress to approve the Trans-Pacific Partnership. Yesterday, Secretary of State John Kerry gave a speech in support of the pact according to the Washington Post.
According to the Post, in his speech blamed technology rather than trade for eliminating jobs in manufacturing. It is easy to show that this is mistaken. The number of jobs in manufacturing was little changed, apart from cyclical fluctuations from the early 1970s to the late 1990s. From the late 1990s to 2006 we lost more than 3.5 million manufacturing jobs, almost 20 percent of employment in the sector, as the trade deficit exploded.
Manufacturing Employment
Source: Bureau of Labor Statistics.
There had been large gains in productivity due to technology throughout this period. It was only when the trade deficit soared from just over 1.0 percent of GDP in 1996 to almost 6.0 percent of GDP in 2005 that we saw massive job loss in manufacturing. It would have been helpful if the Washington Post had corrected Mr. Kerry’s misstatement, as it might have done for other public figures, like Senator Bernie Sanders.
The Obama administration is starting its full court press to get Congress to approve the Trans-Pacific Partnership. Yesterday, Secretary of State John Kerry gave a speech in support of the pact according to the Washington Post.
According to the Post, in his speech blamed technology rather than trade for eliminating jobs in manufacturing. It is easy to show that this is mistaken. The number of jobs in manufacturing was little changed, apart from cyclical fluctuations from the early 1970s to the late 1990s. From the late 1990s to 2006 we lost more than 3.5 million manufacturing jobs, almost 20 percent of employment in the sector, as the trade deficit exploded.
Manufacturing Employment
Source: Bureau of Labor Statistics.
There had been large gains in productivity due to technology throughout this period. It was only when the trade deficit soared from just over 1.0 percent of GDP in 1996 to almost 6.0 percent of GDP in 2005 that we saw massive job loss in manufacturing. It would have been helpful if the Washington Post had corrected Mr. Kerry’s misstatement, as it might have done for other public figures, like Senator Bernie Sanders.
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I’m glad to see that Paul Krugman has the same story about falling oil prices, inflation, and real interest rates as me. He pointed out that to the extent that falling oil prices reduce the overall rate of inflation it should not matter for real interest rates. What matters for the real interest rate is the expected rate of inflation for goods and services in general. Lower oil prices will matter for energy investment, but not for the vast majority of goods and services in the economy.
I made this point a couple of months back, although probably many times before that as well.
I’m glad to see that Paul Krugman has the same story about falling oil prices, inflation, and real interest rates as me. He pointed out that to the extent that falling oil prices reduce the overall rate of inflation it should not matter for real interest rates. What matters for the real interest rate is the expected rate of inflation for goods and services in general. Lower oil prices will matter for energy investment, but not for the vast majority of goods and services in the economy.
I made this point a couple of months back, although probably many times before that as well.
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