February 19, 2016

19 Febrero 2016

Catherine Rampell joined the chorus of critics of the Gerald Friedman analysis of the economic impact of Bernie Sanders’ platform. For folks who missed it, Friedman is an economics professor at the University of Massachusetts who produced a 53 page paper that projects the budgetary and economic impact of Sanders’ proposals. (Friedman’s relation to the Sanders campaign is not clear.) Many economists do not find the projections credible. Among other things, Friedman projects average annual productivity growth of 3.6 percent. This compares to a Golden Age average of 3.0 percent and a post-crash average of just over 1.0 percent. It also projects that the share of the population that is employed will reach new highs. This is in spite of the fact that the population will be considerably older at the end of Friedman’s projection period than at its previous peak and that Sanders also has a number of proposals that will make it easier for people not to work. Rampell and other Friedman critics have rightly noted these elements of his program. Sanders proposes to increase Social Security benefits and have universal Medicare. This will make it easier for many people to retire earlier than might currently be the case. Sanders also proposes to make college free. This would likely reduce the percentage of college students who work, as well as increase the number of people who go to college. These policies are both likely to lead to sharp reductions in labor force participation at both the older and younger ends of the age distribution. This highlights a point that many of us have made in comparisons of employment rates in European welfare states and the United States. The United States does better than countries like France (although worse than Germany and Denmark) when we look at employment rates for the population as a whole, but it looks pretty much the same if we focus on prime age workers (ages 25-54). The difference is that France and other European countries have more generous pensions and universal health care coverage, which make it easier for older workers to retire. And college is either free or low cost (often with subsidies for students) so that it is not necessary for college students to work. As Rampell and others have acknowledged, these are not necessarily bad policies, but they do mean less work and less growth.

Is China at Risk of Running Out of Foreign Reserves?

By Dean BakerDean Baker

February 19, 2016

19 Febrero 2016

That is the theme of an article in the NYT yesterday with the headline, “China’s foreign exchange reserves dwindling rapidly.” The gist of the piece is that there has been a large outflow of capital from China in the last year, which has caused them to lose as much as $800 billion from their foreign reserves. According to the piece, China is down to its last $3.2 trillion. If the idea of a country with $3.2 trillion in foreign reserves worrying about empty coffers sounds silly, it should. China has many economic problems (who doesn’t), but a shortage of foreign reserves is not among them. First, just to get oriented, let’s keep in mind why China has been losing its reserves. As the piece notes, it has been trying to keep its currency from falling. Note that for years, the United States and other countries have wanted China to raise the value of its currency. The argument was that it had accumulated vast amounts of reserves to keep the value of its currency low in order to maintain large trade surpluses. Now the story is that if China decided not act — it did not use its reserves to buy up the currency being sold by people trying to get some of their money out of the country — the Chinese currency would fall against the dollar and other currencies. Would this be a problem for China? A lower valued yuan would mean higher prices for the goods China imports and lower priced Chinese goods everywhere else in the world. While China recently saw a modest uptick in prices in January, the conventional wisdom is that the country is far more concerned about deflation than inflation. From this perspective, it’s hard to see how a rise in import prices is a problem. The other side of the equation is that China’s goods and services would suddenly be much cheaper for people in other countries. This would lead to more exports. Since the rise in import prices will reduce imports, the net effect of a decline in the yuan would be a rise in China’s trade surplus. That would be bad news for the United States and other countries, but it is certainly not a problem for China. In other words, there is no obvious economic reason that China could not just let its currency fall in value. It would make other countries unhappy, but China’s government presumably cares more about its own economy than the economies of its trading partners.

John Carney Warns WSJ Readers That Bernie Sanders May Return Wall Street to the 1990s

By Dean BakerDean Baker

February 18, 2016

18 Febrero 2016

In a Wall Street Journal column earlier this week, John Carney warned readers that the financial transactions tax (FTT) proposed by Senator Bernie Sanders “promises a smaller, slower market offering lower returns to investors.” He also warned that middle class investors will see higher costs in their mutual funds as a result of the tax.

While Carney treats the tax as a bit of a leap into the unknown, we actually have been there very recently. A FTT increases the cost of buying and selling shares of stock or other financial assets. We have had higher costs for buying and selling financial assets in the very recent past. The cost has fallen due to the rapid improvement in computer technology that has allowed for the price of trading to plummet in recent decades.

An FTT would raise the cost back to where it had been in prior decades. If a tax was structured along the lines being considered by European Union countries (0.1 percent on stock trades, 0.01 percent on derivative trades), then it would be raising costs roughly to where they were in the 1990s. These higher costs should then cause returns to investors to be comparable to what investors saw in the 1990s. (Past returns are no guarantee of future performance.) Markets don’t care if costs are higher due to a tax or less efficient technology, the impact is the same.

The amount of costs borne by middle class investors will depend on the extent to which their trading responds to higher costs. Most research indicates that trading will decline roughly in proportion to any increase in costs, meaning that most middle class investors would pay the same amount in trading costs after the tax as they did before the tax. (The recent study by the Tax Policy Center assumed that trading volume actually declined more than any increase in costs associated with the tax.)

The column also cited a study by the European Commission that purportedly showed a tax reducing GDP by 1.76 to 2.05 percent. Those numbers are from a preliminary study. A revised study found that the impact on growth would be less than 0.2 percent of GDP and that if the revenue was invested in the economy, it would be a positive 0.2 percent of GDP. That probably would not sound too scary to WSJ readers.

In a Wall Street Journal column earlier this week, John Carney warned readers that the financial transactions tax (FTT) proposed by Senator Bernie Sanders “promises a smaller, slower market offering lower returns to investors.” He also warned that middle class investors will see higher costs in their mutual funds as a result of the tax.

While Carney treats the tax as a bit of a leap into the unknown, we actually have been there very recently. A FTT increases the cost of buying and selling shares of stock or other financial assets. We have had higher costs for buying and selling financial assets in the very recent past. The cost has fallen due to the rapid improvement in computer technology that has allowed for the price of trading to plummet in recent decades.

An FTT would raise the cost back to where it had been in prior decades. If a tax was structured along the lines being considered by European Union countries (0.1 percent on stock trades, 0.01 percent on derivative trades), then it would be raising costs roughly to where they were in the 1990s. These higher costs should then cause returns to investors to be comparable to what investors saw in the 1990s. (Past returns are no guarantee of future performance.) Markets don’t care if costs are higher due to a tax or less efficient technology, the impact is the same.

The amount of costs borne by middle class investors will depend on the extent to which their trading responds to higher costs. Most research indicates that trading will decline roughly in proportion to any increase in costs, meaning that most middle class investors would pay the same amount in trading costs after the tax as they did before the tax. (The recent study by the Tax Policy Center assumed that trading volume actually declined more than any increase in costs associated with the tax.)

The column also cited a study by the European Commission that purportedly showed a tax reducing GDP by 1.76 to 2.05 percent. Those numbers are from a preliminary study. A revised study found that the impact on growth would be less than 0.2 percent of GDP and that if the revenue was invested in the economy, it would be a positive 0.2 percent of GDP. That probably would not sound too scary to WSJ readers.

NYT Invents Left-Leaning Economists to Attack Bernie Sanders

By Dean BakerDean Baker

February 17, 2016

17 Febrero 2016

A NYT piece headlined “left-leaning economists question cost of Bernie Sanders’ plans” may have misled readers about the extent of skepticism among economists who consider themselves left-leaning. I can say this as a card-carrying left-leaning economist who often talks to other card-carrying left-leaning economists.

While there are undoubtedly many left of center economists who have serious objections to the proposals Sanders has put forward, there are also many who have publicly indicated support for them. Remarkably, none of those economists were referenced in this article. In fact, to make its case on left of center economists’ views, the NYT even presented the comments of Ezra Klein, who is neither an economist nor a liberal, by his own identification.

It also misrepresented the comments of Jared Bernstein (a personal friend), implying that they were criticisms of Sanders’ program. In fact his comments were addressed to the analysis of Sanders’ proposals by Gerald Friedman, an economist at the University of Massachusetts who is not affiliated with the Sanders campaign.

It also presented the comments of Brookings economist Henry Aaron about the views expressed by “other economists in a ‘lefty chat group’ he joins online.” This would seem to violate the NYT’s usual policy on anonymous sources.

Sanders has a very ambitious agenda covering everything from universal Medicare, reforming the financial sector, paid sick days and vacation, free college, and universal childcare. If an economist, left-leaning or otherwise, can’t find some grounds for skepticism on any of these proposals they should probably be in a different line of work.

These are all big ideas, each of which will face enormous political opposition even if Bernie Sanders were in the White House. Sanders has not given a fully worked out proposal in any of these areas, nor is it reasonable to expect a fully worked out proposal from a candidate for the presidency. His campaign platform outlines general approaches. In the event Sanders got to the White House, it would be necessary to draft fully worked out legislative language which would almost certainly amount to hundreds of pages, and quite possibly thousands of pages, in each area. In addition, whatever he initially put on the table would have to be haggled over with Congress, even assuming that he had a much more sympathetic group than the current crew.

While it is nice that the NYT is subjecting Sanders’ views to serious scrutiny, it would be good if it also subjected the views of other candidates to the same scrutiny. For example, Secretary Clinton has indicated a desire to give more opportunity to African Americans and Hispanics, yet she has not commented on the decision by the Federal Reserve Board to raise interest rates at the end of last year. This rate hike was intended to be the first of a sequence of rate hikes.

The purpose of raising interest rates is to slow the economy and the rate of job creation, ostensibly to prevent inflation. The people who will be disproportionately hurt by slower job growth and high unemployment are African American and Hispanic. NYT readers would likely be interested in knowing how Secretary Clinton can reconcile her commitment to helping African Americans and Hispanics with her apparent lack of concern over the Fed’s decision to raise interest rates and deny them jobs.

Whatever standard of scrutiny the NYT chooses to apply to presidential candidates it should apply them equally. It is not good reporting to apply one standard to Senator Sanders, and even inventing credentials to press its points, and then apply lesser standards to the other candidates.