The NYT ran an a piece by Hugo Dixon that boldly proclaimed that if Alex Tsipras, the prime minister of Greece is rational, he will get tough with his left-wing supporters and impose more austerity measures. This is an interesting notion of rationality.
Greece’s economy has shrunk by more than 25 percent since 2008. Its unemployment rate is close to 25 percent. The current projections from the I.M.F. and others show little improvement in these numbers by the end of the decade if it sticks to this austerity path. By contrast, if it breaks with the euro its goods and services would suddenly become far more competitive in the world economy as their price would fall due to a lower valued currency. It would also no longer have to run primary budget surpluses since it would be able to avoid payments on its debt for a period of time.
While this break would undoubtedly lead to a short-term hit to the economy as it put its new currency place and worked out patchwork arrangements on trade, it is likely that it would bounce back quickly. The model here is Argentina which went into default in December of 2001. It’s economy went into a free fall for three months, then stabilized in the second quarter of 2002. By the fall of the year it was growing rapidly and it continued to grow rapidly for the next five years. It made up all the lost ground before the end of 2003.
It is worth noting that at the time, the I.M.F. and most other “experts” confidently predicted a disaster for Argentina. While there are issues about the accuracy of Argentina’s numbers, this has mostly been more a problem in the post-recession period when an over-valued currency and extensive price controls have led to serious economic distortions.
If we want to use the words “tough” and “rational,” they would probably better be applied to the strategy of breaking with the euro rather than continuing an austerity policy that promises a level of pain for the Greek period that far exceeds that experienced by the United States in the Great Depression.
The NYT ran an a piece by Hugo Dixon that boldly proclaimed that if Alex Tsipras, the prime minister of Greece is rational, he will get tough with his left-wing supporters and impose more austerity measures. This is an interesting notion of rationality.
Greece’s economy has shrunk by more than 25 percent since 2008. Its unemployment rate is close to 25 percent. The current projections from the I.M.F. and others show little improvement in these numbers by the end of the decade if it sticks to this austerity path. By contrast, if it breaks with the euro its goods and services would suddenly become far more competitive in the world economy as their price would fall due to a lower valued currency. It would also no longer have to run primary budget surpluses since it would be able to avoid payments on its debt for a period of time.
While this break would undoubtedly lead to a short-term hit to the economy as it put its new currency place and worked out patchwork arrangements on trade, it is likely that it would bounce back quickly. The model here is Argentina which went into default in December of 2001. It’s economy went into a free fall for three months, then stabilized in the second quarter of 2002. By the fall of the year it was growing rapidly and it continued to grow rapidly for the next five years. It made up all the lost ground before the end of 2003.
It is worth noting that at the time, the I.M.F. and most other “experts” confidently predicted a disaster for Argentina. While there are issues about the accuracy of Argentina’s numbers, this has mostly been more a problem in the post-recession period when an over-valued currency and extensive price controls have led to serious economic distortions.
If we want to use the words “tough” and “rational,” they would probably better be applied to the strategy of breaking with the euro rather than continuing an austerity policy that promises a level of pain for the Greek period that far exceeds that experienced by the United States in the Great Depression.
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Alexandra Levit tells readers of her NYT column that we should be thankful that Generation Z is entering the workforce because, “the United States is facing a skills gap in most industries.”
Really? I wonder how Ms. Levit knows about this skills gap? Usually we would look to things like high vacancy rates, longer hours for the workers that employers can find, and of course, rapidly rising wages. We don’t see this for any major occupation group. So what is the basis for asserting there is a skills gap?
Note: Thanks to Stefano Monti for calling this one to my attention.
Alexandra Levit tells readers of her NYT column that we should be thankful that Generation Z is entering the workforce because, “the United States is facing a skills gap in most industries.”
Really? I wonder how Ms. Levit knows about this skills gap? Usually we would look to things like high vacancy rates, longer hours for the workers that employers can find, and of course, rapidly rising wages. We don’t see this for any major occupation group. So what is the basis for asserting there is a skills gap?
Note: Thanks to Stefano Monti for calling this one to my attention.
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The Washington Post missed the opportunity to correct Stanley Fisher, the vice-chair of the Federal Reserve Board, on his arguments for raising interest rates. An article on the prospect of Fed rate hikes later this year quoted Fisher on the desirability of raising rates so that the Fed would have room to use normal monetary policy (i.e. lower interest rates) if there was a shock to the economy leading to a slowdown. There are two major flaws in this logic.
First, if the Fed delays raising interest rates and allows more job creation and economic growth, we are more likely to see higher inflation. If the inflation rate starts to rise, the Fed could raise the federal funds rate along with it, leaving real interest rates unchanged. If the inflation rate goes to a somewhat higher level, this would provide the Fed with considerably more ability to boost the economy in a downturn with conventional monetary policy since it could have lower real interest rates. (The real interest rate is the nominal interest rate minus the inflation rate.) This would be especially the case if it allowed the inflation rate to rise above its current 2.0 percent target.
In this respect, it is important to remember that the 2.0 percent target is just a number chosen by former chair Ben Bernanke. It is not part of the Fed’s legal mandate to promote high employment and price stability.
The other flaw in Fisher’s logic is that he is effectively advocating that the Fed deliberately slow growth now so that it will have more ability to speed growth later. This is a rather peculiar argument, sort of like committing suicide to ensure that you won’t be killed. Would it make sense to say, slow growth by a total of 1.0 percentage points over the next two years to ensure that the Fed has enough room to lower interest rates and thereby speed growth by 1.0 percentage point in response to a possible future shock? (Fisher undoubtedly would have different numbers.)
It is at least peculiar to argue that we should for certain take a large loss now, in the form of higher unemployment and lower wages for those at the middle and bottom of the wage distribution, in exchange for being better able to respond to a possible loss in the future. Unless the potential gains from the latter action are much larger than the certain losses from raising interest rates, this would be a bad trade-off.
The Washington Post missed the opportunity to correct Stanley Fisher, the vice-chair of the Federal Reserve Board, on his arguments for raising interest rates. An article on the prospect of Fed rate hikes later this year quoted Fisher on the desirability of raising rates so that the Fed would have room to use normal monetary policy (i.e. lower interest rates) if there was a shock to the economy leading to a slowdown. There are two major flaws in this logic.
First, if the Fed delays raising interest rates and allows more job creation and economic growth, we are more likely to see higher inflation. If the inflation rate starts to rise, the Fed could raise the federal funds rate along with it, leaving real interest rates unchanged. If the inflation rate goes to a somewhat higher level, this would provide the Fed with considerably more ability to boost the economy in a downturn with conventional monetary policy since it could have lower real interest rates. (The real interest rate is the nominal interest rate minus the inflation rate.) This would be especially the case if it allowed the inflation rate to rise above its current 2.0 percent target.
In this respect, it is important to remember that the 2.0 percent target is just a number chosen by former chair Ben Bernanke. It is not part of the Fed’s legal mandate to promote high employment and price stability.
The other flaw in Fisher’s logic is that he is effectively advocating that the Fed deliberately slow growth now so that it will have more ability to speed growth later. This is a rather peculiar argument, sort of like committing suicide to ensure that you won’t be killed. Would it make sense to say, slow growth by a total of 1.0 percentage points over the next two years to ensure that the Fed has enough room to lower interest rates and thereby speed growth by 1.0 percentage point in response to a possible future shock? (Fisher undoubtedly would have different numbers.)
It is at least peculiar to argue that we should for certain take a large loss now, in the form of higher unemployment and lower wages for those at the middle and bottom of the wage distribution, in exchange for being better able to respond to a possible loss in the future. Unless the potential gains from the latter action are much larger than the certain losses from raising interest rates, this would be a bad trade-off.
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The Washington Post likely misled many readers in an article on a Republican proposal to cut benefits for federal employees. It noted that the proposal calls for federal workers to increase the amount they pay for their pensions by 7 percent of their salary. It then quoted Richard Thissen, the president of the National Active and Retired Federal Employees Association, as saying that the higher contribution is,”nothing more than a pay cut for federal employees.”
This is not just the view of a person representing the affected workers. Virtually all economists would agree that requiring workers to pay more money for the same benefit amounts to a cut in pay. This is not really an arguable point, although the Post’s discussion of the topic likely led many readers to believe it is a matter of opinion.
The piece also errors in referring to the proposals of the “bipartisan Simpson-Bowles committee.” The commission actually did not make any proposals since its by-laws required that to be approved a proposal needed the support of 12 of the 16 members of the commission. Since no proposal got the necessary 12 votes it is inaccurate to refer to recommendations of the commission. The proposal in question was put forward by the co-chairs and had the support of 10 of the 16 commission members.
The Washington Post likely misled many readers in an article on a Republican proposal to cut benefits for federal employees. It noted that the proposal calls for federal workers to increase the amount they pay for their pensions by 7 percent of their salary. It then quoted Richard Thissen, the president of the National Active and Retired Federal Employees Association, as saying that the higher contribution is,”nothing more than a pay cut for federal employees.”
This is not just the view of a person representing the affected workers. Virtually all economists would agree that requiring workers to pay more money for the same benefit amounts to a cut in pay. This is not really an arguable point, although the Post’s discussion of the topic likely led many readers to believe it is a matter of opinion.
The piece also errors in referring to the proposals of the “bipartisan Simpson-Bowles committee.” The commission actually did not make any proposals since its by-laws required that to be approved a proposal needed the support of 12 of the 16 members of the commission. Since no proposal got the necessary 12 votes it is inaccurate to refer to recommendations of the commission. The proposal in question was put forward by the co-chairs and had the support of 10 of the 16 commission members.
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Okay, for the 64,512th time, it is net exports that contribute to GDP, not exports. Apparently this distinction is difficult for people involved in economic policy to understand since they keep making the same mistake.
The point is straightforward. If the United States increases its exports because GM is exporting car parts to be assembled in Mexico and then imported back as a finished car to the United States, it will not be a net job creator. We used to have jobs at assembly plants in the United States. These are being replaced by jobs in assembly plants in Mexico. In this story exports increase, but net exports (exports minus imports) fall. Fans of intro econ know the accounting identity that GDP = C + I + G +(X-M), where the X-M stands for exports minus imports.
This is why the NYT seriously misled readers in an article on the impact of the rising dollar when it wrote:
“the sharp rise of the dollar threatens to undercut one of the principal drivers of the recovery in recent years: strong export growth for American companies.”
While exports have been a positive for growth, imports have been an even larger negative. According to our good friends at the Bureau of Economic Analysis (Table 1.1.2), the fall in net exports reduced growth by 0.22 percentage points in 2014. They added the same amount to growth in 2013, but have been a net negative since 2010. Of course net exports will almost certainly be more of a drag on growth due to the recent rise in the dollar, but it is not true that they had previously been a driver of the recovery.
Okay, for the 64,512th time, it is net exports that contribute to GDP, not exports. Apparently this distinction is difficult for people involved in economic policy to understand since they keep making the same mistake.
The point is straightforward. If the United States increases its exports because GM is exporting car parts to be assembled in Mexico and then imported back as a finished car to the United States, it will not be a net job creator. We used to have jobs at assembly plants in the United States. These are being replaced by jobs in assembly plants in Mexico. In this story exports increase, but net exports (exports minus imports) fall. Fans of intro econ know the accounting identity that GDP = C + I + G +(X-M), where the X-M stands for exports minus imports.
This is why the NYT seriously misled readers in an article on the impact of the rising dollar when it wrote:
“the sharp rise of the dollar threatens to undercut one of the principal drivers of the recovery in recent years: strong export growth for American companies.”
While exports have been a positive for growth, imports have been an even larger negative. According to our good friends at the Bureau of Economic Analysis (Table 1.1.2), the fall in net exports reduced growth by 0.22 percentage points in 2014. They added the same amount to growth in 2013, but have been a net negative since 2010. Of course net exports will almost certainly be more of a drag on growth due to the recent rise in the dollar, but it is not true that they had previously been a driver of the recovery.
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That is the implication of his column touting the virtues of inequality. Will seems to think that we could not get people to work hard to master skills or to be great innovators if they didn’t have the prospect of earning billions or tens of billions of dollars. But if we look back through history we can identify an enormous number of tremendously talented and creative individuals who did not get fabulously wealthy or even have any plausible hope of getting fabulously wealthy.
Mays was of course well-paid, but adjusting for inflation, his best paychecks would probably be less than one-tenth of the pay of today’s stars. And, there is no shortage of great athletes, writers, musicians, and other performers who never even made Willie Mays type salaries. The same is true of inventors. Jonas Salk, the inventor of the first effective polio vaccine, undoubtedly had a comfortable standard of living, but nothing approaching the wealth of a Bill Gates or even Jamie Dimon.
In fact, if we look back to the period of relative equality from the end of World War II to 1980, the economy made far more rapid progress than it did in the next three and a half decades of rising inequality. If the argument is that people need material incentive to do their best work, then Will has a case. If the argument is that people need the motivation of immense wealth to work hard and innovate, then Will is demonstrably wrong.
Note: Links added, thanks to Robert Salzberg.
That is the implication of his column touting the virtues of inequality. Will seems to think that we could not get people to work hard to master skills or to be great innovators if they didn’t have the prospect of earning billions or tens of billions of dollars. But if we look back through history we can identify an enormous number of tremendously talented and creative individuals who did not get fabulously wealthy or even have any plausible hope of getting fabulously wealthy.
Mays was of course well-paid, but adjusting for inflation, his best paychecks would probably be less than one-tenth of the pay of today’s stars. And, there is no shortage of great athletes, writers, musicians, and other performers who never even made Willie Mays type salaries. The same is true of inventors. Jonas Salk, the inventor of the first effective polio vaccine, undoubtedly had a comfortable standard of living, but nothing approaching the wealth of a Bill Gates or even Jamie Dimon.
In fact, if we look back to the period of relative equality from the end of World War II to 1980, the economy made far more rapid progress than it did in the next three and a half decades of rising inequality. If the argument is that people need material incentive to do their best work, then Will has a case. If the argument is that people need the motivation of immense wealth to work hard and innovate, then Will is demonstrably wrong.
Note: Links added, thanks to Robert Salzberg.
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Just when you thought economics reporting could not get any worse, the NYT leads the way. The headline of a news article told readers that “Japan’s recovery is complicated by a decline in household savings.” The piece reports that consumption is now increasing (barely), but because real wages have not risen, it has led to a decline in household savings. The household saving rate in Japan is now negative. It then tells us that businesses are big savers, but that money is needed to finance the government’s budget deficit.
Okay, now if the NYT could find someone who had taken an intro econ course that person could explain to its reporters and editors that if consumers, businesses, or the government spends more money, it will lead to additional income and employment, and additional saving. If the economy is below full employment, its spending is not limited by its current saving. (If it’s not below full employment then it doesn’t have a problem with a recovery, by definition its economy would have already recovered.)
Anyhow, that’s what folks who learned economics would say.
Just when you thought economics reporting could not get any worse, the NYT leads the way. The headline of a news article told readers that “Japan’s recovery is complicated by a decline in household savings.” The piece reports that consumption is now increasing (barely), but because real wages have not risen, it has led to a decline in household savings. The household saving rate in Japan is now negative. It then tells us that businesses are big savers, but that money is needed to finance the government’s budget deficit.
Okay, now if the NYT could find someone who had taken an intro econ course that person could explain to its reporters and editors that if consumers, businesses, or the government spends more money, it will lead to additional income and employment, and additional saving. If the economy is below full employment, its spending is not limited by its current saving. (If it’s not below full employment then it doesn’t have a problem with a recovery, by definition its economy would have already recovered.)
Anyhow, that’s what folks who learned economics would say.
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At least this is what he says in his column today. The data strongly disagree with him. In the last four years productivity growth has averaged less than 1.0 percent a year. Productivity growth measures the rate at which robots and other technology replace people. In the years from 1995-2005 productivity growth averaged over 2.5 percent annually. In the period from 1947 to 1973 it averaged close to 3.0 percent.
The data indicate that we are seeing a slowdown in technology replacing labor (which should allow for rising living standards) rather than the speedup in the robot story. As a practical matter, workers should be far more concerned that the Federal Reserve Board will take their job, by slowing the economy with higher interest rates, than a robot will take their job.
Note: correction made, thanks Ethan.
At least this is what he says in his column today. The data strongly disagree with him. In the last four years productivity growth has averaged less than 1.0 percent a year. Productivity growth measures the rate at which robots and other technology replace people. In the years from 1995-2005 productivity growth averaged over 2.5 percent annually. In the period from 1947 to 1973 it averaged close to 3.0 percent.
The data indicate that we are seeing a slowdown in technology replacing labor (which should allow for rising living standards) rather than the speedup in the robot story. As a practical matter, workers should be far more concerned that the Federal Reserve Board will take their job, by slowing the economy with higher interest rates, than a robot will take their job.
Note: correction made, thanks Ethan.
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