Okay, this is no longer amusing. Can we stop the nonsense about deflation? It doesn’t make a f***ing bit of difference whether prices are rising at a small positive rate or whether they are falling at a slow rate, except for the fact that the inflation rate is lower.
This really should not be hard to understand. The inflation rate is a composite of millions of price changes. When the inflation rate is very low, as it is now in the euro zone, a large portion of these price changes are already negative. Since the overall inflation rate is positive, it means that the increases are either somewhat more numerous or larger in absolute size than the decreases.
However, suppose the ratio shifts, from say 55 percent increases against 45 percent decreases, to the reverse. How can this shake the economy? Many businesses were already looking at falling prices, now a few more are looking falling prices, so what?
The point should be simple, the problem in the euro zone is an inflation rate that is too low, which means the real interest is higher than would be desirable given the weakness of the economy. Having the inflation fall further makes matters worse, but crossing zero does not matter. Crossing zero does not matter. Someone please tell the NYT’s editors and reporters. It should not be hard to get this one straight. (Here‘s the I.M.F. on the topic for those who care more about authority than evidence and logic.)
Okay, this is no longer amusing. Can we stop the nonsense about deflation? It doesn’t make a f***ing bit of difference whether prices are rising at a small positive rate or whether they are falling at a slow rate, except for the fact that the inflation rate is lower.
This really should not be hard to understand. The inflation rate is a composite of millions of price changes. When the inflation rate is very low, as it is now in the euro zone, a large portion of these price changes are already negative. Since the overall inflation rate is positive, it means that the increases are either somewhat more numerous or larger in absolute size than the decreases.
However, suppose the ratio shifts, from say 55 percent increases against 45 percent decreases, to the reverse. How can this shake the economy? Many businesses were already looking at falling prices, now a few more are looking falling prices, so what?
The point should be simple, the problem in the euro zone is an inflation rate that is too low, which means the real interest is higher than would be desirable given the weakness of the economy. Having the inflation fall further makes matters worse, but crossing zero does not matter. Crossing zero does not matter. Someone please tell the NYT’s editors and reporters. It should not be hard to get this one straight. (Here‘s the I.M.F. on the topic for those who care more about authority than evidence and logic.)
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It’s too bad the NYT can’t find a conservative columnist who doesn’t have to resort to name-calling to make his arguments. Apparently he is upset that some of the economists close to Hillary Clinton now believe that the upward redistribution of the last three decades is a problem and that education is not the answer. He describes these people as “redistributionist” and insists that redistribution cannot do much to help the poor and middle class.
In fact, there is nothing inherent in the “redistributionist” agenda that should slow growth. Apparently, Brooks only wants people to think about tax and transfer policy, but that is not what Brooks’ “redistributionists” are talking about. Suppose, for example, that corporate directors were not all friends of the CEOs who get payoffs to turn the other way as the CEOs ripoff shareholders. We could have a corporate governance structure where the directors lose their generous stipends if they overpay the CEO (as determined for example by losing a “say on pay vote”). That would likely help to bring CEO pay down to earth while increasing efficiency.
Similarly if the government stopped subsidizing non-profits that are so inept that they can only get competent people by paying high six figure or seven figure salaries. This would also be a market oriented reform that would reduce inequality. And we can take away the tax breaks that make folks like Mitt Romney and Jeff Bezos incredibly rich. Again, this would increase efficiency and reduce inequality.
We can have more open trade for doctors to give these one percenters the benefit of international competition. And we can have a Wall Street sales tax to subject the financial sector to the same sorts of taxes as other sectors.
None of these are tax and transfer policies. These are all policies that make the economy more efficient while reducing inequality. Brooks wants to pretend such policies don’t exist, but ignorance is not much of an argument.
Note: Link and typos corrected, thank ltr and Robert Salzberg.
It’s too bad the NYT can’t find a conservative columnist who doesn’t have to resort to name-calling to make his arguments. Apparently he is upset that some of the economists close to Hillary Clinton now believe that the upward redistribution of the last three decades is a problem and that education is not the answer. He describes these people as “redistributionist” and insists that redistribution cannot do much to help the poor and middle class.
In fact, there is nothing inherent in the “redistributionist” agenda that should slow growth. Apparently, Brooks only wants people to think about tax and transfer policy, but that is not what Brooks’ “redistributionists” are talking about. Suppose, for example, that corporate directors were not all friends of the CEOs who get payoffs to turn the other way as the CEOs ripoff shareholders. We could have a corporate governance structure where the directors lose their generous stipends if they overpay the CEO (as determined for example by losing a “say on pay vote”). That would likely help to bring CEO pay down to earth while increasing efficiency.
Similarly if the government stopped subsidizing non-profits that are so inept that they can only get competent people by paying high six figure or seven figure salaries. This would also be a market oriented reform that would reduce inequality. And we can take away the tax breaks that make folks like Mitt Romney and Jeff Bezos incredibly rich. Again, this would increase efficiency and reduce inequality.
We can have more open trade for doctors to give these one percenters the benefit of international competition. And we can have a Wall Street sales tax to subject the financial sector to the same sorts of taxes as other sectors.
None of these are tax and transfer policies. These are all policies that make the economy more efficient while reducing inequality. Brooks wants to pretend such policies don’t exist, but ignorance is not much of an argument.
Note: Link and typos corrected, thank ltr and Robert Salzberg.
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In a Washington Post column on the Trans-Pacific Partnership (TPP) Summers raises the right cautions. He argues that a trade deal should have rules that prevent countries from gaining a competitive advantage by deliberately lowering the value of their currency. He also argues that a deal should not be about special privileges for corporations. And, he says that a trade deal should not jeopardize public health by raising drug prices.
Nonetheless it looks like Summers is likely still going to come down for the TPP. His rationale is that a deal has large potential gains for the United States by making East Asian markets more open to the United States.
This is hard to see. Most of these markets are already largely open, so there will not be much gain from removing whatever barriers still exist to exporting to countries like Australia. Some of the other countries, most notably Vietnam, still have substantial barriers, but it’s difficult to see large gains given their limited size.
In the case of Vietnam, our current exports are around $35 billion a year. Suppose this increases by 30 percent as a result of the TPP. (This would be a large increase; remember barriers to its imports from other countries are falling as well.) This would translate into a bit more than $10 billion a year in additional exports to Vietnam. If we assume that we get 20 percent more from selling these exports to Vietnam than they would otherwise fetch (a quite large premium) that would translate into $2 billion a year. That is equal to 0.01 percent of GDP.
Of course there will be gains from openings with other countries but the total is not likely to be very impressive. A study published by the Peterson Institute for International Economics put the gains from the TPP at $77 billion a year. This is equal to about 0.4 percent of GDP. That’s not trivial, but not exactly a sea change in terms of American prosperity. (It’s equal to about 2 months of normal growth.) And remember, the projection is that we don’t see this full gain for a decade or more. Also, this says nothing about the distribution of the gains, which may go disproportionately to those at the top. (The model assumes full employment.)
Furthermore, this estimate took no account of measures that will almost surely slow growth, most notably higher drug prices due to stronger patent protections and higher prices for other goods due to stronger copyright protection. These increased protections have the same impact as imposing large excise taxes on the items covered. (The impact of patents on drug prices is comparable to taxes in the range of 1,000-10,000 percent.)
There is an argument that these measures will provide more incentive to innovate and do creative work, but don’t hold your breath on that one. When we retroactively increased the length of copyright protection from 75 to 95 years, did we give a lot of incentive to people in 1920 to do more creative work?
Anyhow, it is likely that the actual deal will have bad provisions on drugs, will include large corporate giveaways on the regulatory front, and have nothing on currency. For this reason, the TPP looks like lots of downside with not much upside.
In a Washington Post column on the Trans-Pacific Partnership (TPP) Summers raises the right cautions. He argues that a trade deal should have rules that prevent countries from gaining a competitive advantage by deliberately lowering the value of their currency. He also argues that a deal should not be about special privileges for corporations. And, he says that a trade deal should not jeopardize public health by raising drug prices.
Nonetheless it looks like Summers is likely still going to come down for the TPP. His rationale is that a deal has large potential gains for the United States by making East Asian markets more open to the United States.
This is hard to see. Most of these markets are already largely open, so there will not be much gain from removing whatever barriers still exist to exporting to countries like Australia. Some of the other countries, most notably Vietnam, still have substantial barriers, but it’s difficult to see large gains given their limited size.
In the case of Vietnam, our current exports are around $35 billion a year. Suppose this increases by 30 percent as a result of the TPP. (This would be a large increase; remember barriers to its imports from other countries are falling as well.) This would translate into a bit more than $10 billion a year in additional exports to Vietnam. If we assume that we get 20 percent more from selling these exports to Vietnam than they would otherwise fetch (a quite large premium) that would translate into $2 billion a year. That is equal to 0.01 percent of GDP.
Of course there will be gains from openings with other countries but the total is not likely to be very impressive. A study published by the Peterson Institute for International Economics put the gains from the TPP at $77 billion a year. This is equal to about 0.4 percent of GDP. That’s not trivial, but not exactly a sea change in terms of American prosperity. (It’s equal to about 2 months of normal growth.) And remember, the projection is that we don’t see this full gain for a decade or more. Also, this says nothing about the distribution of the gains, which may go disproportionately to those at the top. (The model assumes full employment.)
Furthermore, this estimate took no account of measures that will almost surely slow growth, most notably higher drug prices due to stronger patent protections and higher prices for other goods due to stronger copyright protection. These increased protections have the same impact as imposing large excise taxes on the items covered. (The impact of patents on drug prices is comparable to taxes in the range of 1,000-10,000 percent.)
There is an argument that these measures will provide more incentive to innovate and do creative work, but don’t hold your breath on that one. When we retroactively increased the length of copyright protection from 75 to 95 years, did we give a lot of incentive to people in 1920 to do more creative work?
Anyhow, it is likely that the actual deal will have bad provisions on drugs, will include large corporate giveaways on the regulatory front, and have nothing on currency. For this reason, the TPP looks like lots of downside with not much upside.
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That’s inevitable, since any fair-minded newspaper that ran a column on improper approvals would surely want to balance it out. For those who missed it, the Wall Street Journal had a column by George Mason economist Mark Warshawsky and his grad student Ross Marchand complaining about a limited number of administrative-law judges who approve disability appeals at a very high rate.
The piece referred back to data from 2008, which showed that 9 percent of Social Security administrative law judges had approval rates of more than 90 percent in a year when the overall approval rate was 70 percent. They conclude that these judges cost the disability program more than $23 billion due to wrongly approved claims.
Clearly there are judges who are too lenient and accept claims that probably should be denied, however there are also judges who are too harsh and reject claims that should probably be approved. In these cases, workers are being denied the insurance benefits for which they have paid.
The Social Security Administration (SSA) analyzed the approval patterns of 12 low-allowance judges over the period from 2010-2013. It found their approval rate increased from 21 to 24 percent over this four year period. During this period the overall approval rate had fallen from 67 to 56 percent, implying gaps of between 32 percentage points and 56 percentage points. Note that the gaps between the overall approval rate and the approval rate of the low-allowance judges is considerably larger than the gap between overall approval rate and the approval rate of the high-allowance judges highlighted in the Wall Street Journal column.
The takeaway is that there are clearly judges who error on the reject side as well as the approval side. It appears that SSA has taken steps to limit unwarranted approvals. It is not clear that measures have been taken to address the problem of judges wrongly denying appeals. We should not want to waste money on undeserving claims, but we also should not want to see workers who are genuinely disabled being denied the benefits for which they have paid. It is far from clear that at present the program errors more in awarding undeserving claims than in denying deserving ones.
That’s inevitable, since any fair-minded newspaper that ran a column on improper approvals would surely want to balance it out. For those who missed it, the Wall Street Journal had a column by George Mason economist Mark Warshawsky and his grad student Ross Marchand complaining about a limited number of administrative-law judges who approve disability appeals at a very high rate.
The piece referred back to data from 2008, which showed that 9 percent of Social Security administrative law judges had approval rates of more than 90 percent in a year when the overall approval rate was 70 percent. They conclude that these judges cost the disability program more than $23 billion due to wrongly approved claims.
Clearly there are judges who are too lenient and accept claims that probably should be denied, however there are also judges who are too harsh and reject claims that should probably be approved. In these cases, workers are being denied the insurance benefits for which they have paid.
The Social Security Administration (SSA) analyzed the approval patterns of 12 low-allowance judges over the period from 2010-2013. It found their approval rate increased from 21 to 24 percent over this four year period. During this period the overall approval rate had fallen from 67 to 56 percent, implying gaps of between 32 percentage points and 56 percentage points. Note that the gaps between the overall approval rate and the approval rate of the low-allowance judges is considerably larger than the gap between overall approval rate and the approval rate of the high-allowance judges highlighted in the Wall Street Journal column.
The takeaway is that there are clearly judges who error on the reject side as well as the approval side. It appears that SSA has taken steps to limit unwarranted approvals. It is not clear that measures have been taken to address the problem of judges wrongly denying appeals. We should not want to waste money on undeserving claims, but we also should not want to see workers who are genuinely disabled being denied the benefits for which they have paid. It is far from clear that at present the program errors more in awarding undeserving claims than in denying deserving ones.
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My mistake, Will said record exports, but of course both are true, and in the real world (as opposed to the Washington Post opinion pages) it is the net that matters, and that has soared into negative territory in the last two decades. But, I don’t won’t to get into the sort of arithmetic that is clearly over Will and his editors’ heads.
Just to explain the logic, many of our manufacturing exports are items are assembled overseas to be re-imported back to the United States. For example, if we export the car parts to an assembly plant in Mexico, instead of sending them to be assembled in Ohio, we have a big increase in U.S. exports. Fortunately for the state of U.S. manufacturing, our autoworkers understand that this does not create jobs in the United States. Unfortunately for those trying to push trade agreements like the Trans-Pacific Partnership (TPP), our autoworkers understand that this does not create jobs in the United States.
Will gets some other points in his piece wrong. He repeatedly refers to the TPP as a “free trade” agreement. Perhaps he added the word “free” to meet his word quota at the WaPo, but it is not accurate. The deal does not seek to free all trade. For example, it will do little or nothing to open up trade in the services of doctors, dentists, and lawyers and other highly paid professionals. That could save consumers hundreds of billions a year and provide a large boost to growth. But these groups have enough power that they can ensure the protectionist barriers that support their high pay remain in place.
The deal also quite explicitly seeks to increase protectionist barriers in the form of patent and copyright protection. These barriers have the same effect on markets as tariffs in the hundreds or even thousands of percents. It is wrong to call a deal with large increases in protection a “free trade” pact.
Anyhow, this is the WaPo opinion page, so no one expects much by the way of accuracy, but even by WaPo standards, Will is stretching it.
My mistake, Will said record exports, but of course both are true, and in the real world (as opposed to the Washington Post opinion pages) it is the net that matters, and that has soared into negative territory in the last two decades. But, I don’t won’t to get into the sort of arithmetic that is clearly over Will and his editors’ heads.
Just to explain the logic, many of our manufacturing exports are items are assembled overseas to be re-imported back to the United States. For example, if we export the car parts to an assembly plant in Mexico, instead of sending them to be assembled in Ohio, we have a big increase in U.S. exports. Fortunately for the state of U.S. manufacturing, our autoworkers understand that this does not create jobs in the United States. Unfortunately for those trying to push trade agreements like the Trans-Pacific Partnership (TPP), our autoworkers understand that this does not create jobs in the United States.
Will gets some other points in his piece wrong. He repeatedly refers to the TPP as a “free trade” agreement. Perhaps he added the word “free” to meet his word quota at the WaPo, but it is not accurate. The deal does not seek to free all trade. For example, it will do little or nothing to open up trade in the services of doctors, dentists, and lawyers and other highly paid professionals. That could save consumers hundreds of billions a year and provide a large boost to growth. But these groups have enough power that they can ensure the protectionist barriers that support their high pay remain in place.
The deal also quite explicitly seeks to increase protectionist barriers in the form of patent and copyright protection. These barriers have the same effect on markets as tariffs in the hundreds or even thousands of percents. It is wrong to call a deal with large increases in protection a “free trade” pact.
Anyhow, this is the WaPo opinion page, so no one expects much by the way of accuracy, but even by WaPo standards, Will is stretching it.
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We all know that robots are making it impossible for people without a college degree to get jobs. That’s a basic fact about the economy known to all right-thinking people. And, just like most of the other “facts” about the economy known by right-thinking people, it happens not to be true.
The figure below shows the change in the employment to population ratio (EPOP) for people over 25 from before the recession to the present. (It compares the average for the last four months with the year-round average for 2006.)
Source: Bureau of Labor Statistics and author’s calculations.
As can be seen the drop in the EPOP for college grads, at 4.0 percentage points, is somewhat smaller than the 6.1 percentage point drop for those with some college and the 5.9 percentage point drop for those with just a high school degree. But before anyone jumps on this as evidence of the education bias in today’s economy, note that the EPOP for people without high school degrees is only 1.2 percentage points. The data sure make it look like the recovery has disproportionately benefited the least educated.
In fact, these comparisons actually tilt the case against the less-educated. We all know the demographic story in which we are not supposed to be concerned about the decline in EPOPs from pre-recession levels because it’s the result of baby boomers retiring. For the most part this is not true (the drop in EPOPs among workers 25-54 is almost as large as for the adult population as a whole), but insofar as retirement is an issue, it would disproportionately affect less-educated workers.
The people who have crossed into their sixties since 2006 are much less educated on average than the people turning age 25 during this nine year period. This means that the percentage of people with a high school degree or less who have decided to retiree would have risen much more than the percentage of college grads. An age-adjusted measure of EPOPs would surely show a much worse story for college grads than this chart.
Don’t expect these cheap statistics to affect the public debate about technology, education, and the labor market (that depends on what important people say, not data), but folks should know it ain’t true.
We all know that robots are making it impossible for people without a college degree to get jobs. That’s a basic fact about the economy known to all right-thinking people. And, just like most of the other “facts” about the economy known by right-thinking people, it happens not to be true.
The figure below shows the change in the employment to population ratio (EPOP) for people over 25 from before the recession to the present. (It compares the average for the last four months with the year-round average for 2006.)
Source: Bureau of Labor Statistics and author’s calculations.
As can be seen the drop in the EPOP for college grads, at 4.0 percentage points, is somewhat smaller than the 6.1 percentage point drop for those with some college and the 5.9 percentage point drop for those with just a high school degree. But before anyone jumps on this as evidence of the education bias in today’s economy, note that the EPOP for people without high school degrees is only 1.2 percentage points. The data sure make it look like the recovery has disproportionately benefited the least educated.
In fact, these comparisons actually tilt the case against the less-educated. We all know the demographic story in which we are not supposed to be concerned about the decline in EPOPs from pre-recession levels because it’s the result of baby boomers retiring. For the most part this is not true (the drop in EPOPs among workers 25-54 is almost as large as for the adult population as a whole), but insofar as retirement is an issue, it would disproportionately affect less-educated workers.
The people who have crossed into their sixties since 2006 are much less educated on average than the people turning age 25 during this nine year period. This means that the percentage of people with a high school degree or less who have decided to retiree would have risen much more than the percentage of college grads. An age-adjusted measure of EPOPs would surely show a much worse story for college grads than this chart.
Don’t expect these cheap statistics to affect the public debate about technology, education, and the labor market (that depends on what important people say, not data), but folks should know it ain’t true.
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You may have heard reports on Friday’s jobs numbers saying that wage growth slowed sharply from January. It did not.
As I point out each time this becomes an issue, the data on hourly wage growth are highly erratic. This means the change from one month to the next is largely driven by errors in the data. Since errors do not tend to repeat in the same direction, a sharp uptick is likely to be followed by a sharp downtick and vice-versa. This pattern should be familiar to any economist or economic reporter who deals with the topic regularly.
For this reason, I largely ignore the monthly changes. I take the average wage for the last three months and compare to the average for the prior three months. If we do this with the February data we get an annualized rate of wage growth of 1.8 percent. That’s down slightly from the 2.0 percent rate over the last year. I wouldn’t make much of the slowdown, but there certainly is no case for an acceleration of wage growth, nor was there in November, December, or January.
You may have heard reports on Friday’s jobs numbers saying that wage growth slowed sharply from January. It did not.
As I point out each time this becomes an issue, the data on hourly wage growth are highly erratic. This means the change from one month to the next is largely driven by errors in the data. Since errors do not tend to repeat in the same direction, a sharp uptick is likely to be followed by a sharp downtick and vice-versa. This pattern should be familiar to any economist or economic reporter who deals with the topic regularly.
For this reason, I largely ignore the monthly changes. I take the average wage for the last three months and compare to the average for the prior three months. If we do this with the February data we get an annualized rate of wage growth of 1.8 percent. That’s down slightly from the 2.0 percent rate over the last year. I wouldn’t make much of the slowdown, but there certainly is no case for an acceleration of wage growth, nor was there in November, December, or January.
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The answer appears to be no, given the lack of news coverage. Anyhow, the Commerce Department released data on the January trade deficit yesterday. The nominal numbers were good, with a drop in the deficit from $45.6 billion to $41.8 billion, but this decline was driven mostly by lower prices for imported oil.
If we look at the deficit measured in constant dollars (i.e. adjusted for inflation), it rose by almost $3 billion compared to the average monthly deficit for the prior quarter. On an annual basis, this would imply an increase of close to $36 billion. If February and March produce similar numbers (the data are erratic), the trade numbers would shave more than 0.6 percentage points off growth for the first quarter. This one should have been worth at least a mention in the business pages.
The answer appears to be no, given the lack of news coverage. Anyhow, the Commerce Department released data on the January trade deficit yesterday. The nominal numbers were good, with a drop in the deficit from $45.6 billion to $41.8 billion, but this decline was driven mostly by lower prices for imported oil.
If we look at the deficit measured in constant dollars (i.e. adjusted for inflation), it rose by almost $3 billion compared to the average monthly deficit for the prior quarter. On an annual basis, this would imply an increase of close to $36 billion. If February and March produce similar numbers (the data are erratic), the trade numbers would shave more than 0.6 percentage points off growth for the first quarter. This one should have been worth at least a mention in the business pages.
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Mark Cuban should know something about bubbles. After all, he became a billionaire in the 1990s stock bubble selling his start-up to Yahoo for what almost certainly was a grossly inflated price. But just as winning the lottery doesn’t make someone an expert on probabilities and statistics, hitting the jackpot once doesn’t mean someone knows much about bubbles.
Cuban demonstrated this point in a blogpost headlined, “Why This Tech Bubble is Worse than the Tech Bubble of 2000.” The gist of his argument is that the inflated stock prices of 2000 were in publicly traded companies. By contrast, many of the most inflated prices in the tech sector today are in companies that are still private. His remedy is for the Securities and Exchange Commission to make it easier for people to buy into these companies. It’s not clear which part is worse, Cuban’s diagnosis of the problem or the proposed solution.
On the former point, he misses the fact that the size of the bubbles are nowhere comparable. At its peak in 2000 the value of corporate stock was more than 30 times trend earnings, today it is closer to 20. The bubble was clearly moving the economy both by sending investment to its highest share of GDP since the 1970s and by causing a consumption boom through the wealth effect.
Neither story is close to being true today. If over-valued tech companies were to lose 95 percent of their value tomorrow, few people outside of Silicon Valley would notice.
This issue about these companies being privately traded makes between little and no sense. If Mark Zuckerberg paid $19 billion too much for Whatsapp, who cares? It’s a form of redistribution from the incredibly rich to the new superrich. That’s hardly a publicly policy problem.
Cuban’s real concern seems to be the small time operations being hawked through equity crowd funding. He’s worried that small time types will lose the $5,000 they put up to buy into hare-brained schemes that only make sense to those infected with ignorant greed. Cuban’s solution is to relax the restrictions imposed by the Security and Exchange Commission so that it will be easier to resell these shares to other suckers.
As a way for dealing with the problem of a bubble, this would be like relaxing margin requirements in 2000 so that it would be easier for investors to buy Internet stocks on credit. Cuban should have saved this one for the first of the month.
Mark Cuban should know something about bubbles. After all, he became a billionaire in the 1990s stock bubble selling his start-up to Yahoo for what almost certainly was a grossly inflated price. But just as winning the lottery doesn’t make someone an expert on probabilities and statistics, hitting the jackpot once doesn’t mean someone knows much about bubbles.
Cuban demonstrated this point in a blogpost headlined, “Why This Tech Bubble is Worse than the Tech Bubble of 2000.” The gist of his argument is that the inflated stock prices of 2000 were in publicly traded companies. By contrast, many of the most inflated prices in the tech sector today are in companies that are still private. His remedy is for the Securities and Exchange Commission to make it easier for people to buy into these companies. It’s not clear which part is worse, Cuban’s diagnosis of the problem or the proposed solution.
On the former point, he misses the fact that the size of the bubbles are nowhere comparable. At its peak in 2000 the value of corporate stock was more than 30 times trend earnings, today it is closer to 20. The bubble was clearly moving the economy both by sending investment to its highest share of GDP since the 1970s and by causing a consumption boom through the wealth effect.
Neither story is close to being true today. If over-valued tech companies were to lose 95 percent of their value tomorrow, few people outside of Silicon Valley would notice.
This issue about these companies being privately traded makes between little and no sense. If Mark Zuckerberg paid $19 billion too much for Whatsapp, who cares? It’s a form of redistribution from the incredibly rich to the new superrich. That’s hardly a publicly policy problem.
Cuban’s real concern seems to be the small time operations being hawked through equity crowd funding. He’s worried that small time types will lose the $5,000 they put up to buy into hare-brained schemes that only make sense to those infected with ignorant greed. Cuban’s solution is to relax the restrictions imposed by the Security and Exchange Commission so that it will be easier to resell these shares to other suckers.
As a way for dealing with the problem of a bubble, this would be like relaxing margin requirements in 2000 so that it would be easier for investors to buy Internet stocks on credit. Cuban should have saved this one for the first of the month.
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I generally agree with Paul Krugman in his arguments on macro policy, but sometimes it is worth emphasizing a point of agreement. Krugman really nails the issue today in discussing the Fed’s approach to tightening.
The question is at what point should the Fed start raising interest rates to keep the unemployment rate from falling further. The concern is that if unemployment gets too low, the inflation rate would start to accelerate. Krugman points out that we really don’t know the level of unemployment that is low enough to trigger accelerating inflation, although many people have put it in the 5.3-5.5 percent range. If the Fed acted on this view then it would be raising interest rates very soon to keep the unemployment rate from falling below this level.
But there was a widely held view in the 1990s, backed up by a considerable amount of evidence, that the magic number was close to 6.0 percent. Alan Greenspan had the good sense to ignore this view and allowed the unemployment rate to continue to fall, eventually bottoming out at 3.8 percent in some months in 2000. The result was that millions of people had jobs who would not otherwise have been able to, and tens of millions saw pay increases. And, we had trillions of dollars in additional output.
The gains from lower unemployment contrasted with the risks of higher inflation seem so asymmetric that it is difficult to see why the Fed should move to dampen growth until there is real evidence of higher wage growth and accelerating inflation. There clearly is none now, so why shouldn’t the Fed be prepared to take the Greenspan gamble?
I generally agree with Paul Krugman in his arguments on macro policy, but sometimes it is worth emphasizing a point of agreement. Krugman really nails the issue today in discussing the Fed’s approach to tightening.
The question is at what point should the Fed start raising interest rates to keep the unemployment rate from falling further. The concern is that if unemployment gets too low, the inflation rate would start to accelerate. Krugman points out that we really don’t know the level of unemployment that is low enough to trigger accelerating inflation, although many people have put it in the 5.3-5.5 percent range. If the Fed acted on this view then it would be raising interest rates very soon to keep the unemployment rate from falling below this level.
But there was a widely held view in the 1990s, backed up by a considerable amount of evidence, that the magic number was close to 6.0 percent. Alan Greenspan had the good sense to ignore this view and allowed the unemployment rate to continue to fall, eventually bottoming out at 3.8 percent in some months in 2000. The result was that millions of people had jobs who would not otherwise have been able to, and tens of millions saw pay increases. And, we had trillions of dollars in additional output.
The gains from lower unemployment contrasted with the risks of higher inflation seem so asymmetric that it is difficult to see why the Fed should move to dampen growth until there is real evidence of higher wage growth and accelerating inflation. There clearly is none now, so why shouldn’t the Fed be prepared to take the Greenspan gamble?
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