• Economic Crisis and RecoveryCrisis económica y recuperaciónEconomic GrowthEl DesarolloJobsTrabajosUnited StatesEE. UU.
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• IMFFondo Monetario InternacionalMediaWorldEl Mundo
Maybe you have some idea, but I sure as hell don’t. I was struck by seeing this number in a column on why the birth rate in South Korea has declined so much. While it is a very interesting column, this sentence left me scratching my head:
Over 16 years, 280 trillion won ($210 billion) has been poured into programs encouraging procreation, such as a monthly allowance for parents of newborns.
I suspect I have more knowledge of Korea’s economy than most NYT readers, but offhand I really had no idea of how large a commitment this spending is. I had to go to the IMF’s website and find that Korea’s GDP over the last sixteen years has been $22.9 trillion, which puts this spending at a bit more than 0.9 percent of GDP.
This would be the equivalent of around $2 trillion in spending in the United States, which is a pretty sizable commitment. It would have been useful if the NYT had insisted that the number be expressed as a share of GDP or personal income or some measure that would be meaningful to a substantial portion of its readers.
As it is, I doubt that almost any NYT reader had much sense of whether this money was a big or small commitment. Presumably, the intent was to convey information to readers. This figure did not.
Maybe you have some idea, but I sure as hell don’t. I was struck by seeing this number in a column on why the birth rate in South Korea has declined so much. While it is a very interesting column, this sentence left me scratching my head:
Over 16 years, 280 trillion won ($210 billion) has been poured into programs encouraging procreation, such as a monthly allowance for parents of newborns.
I suspect I have more knowledge of Korea’s economy than most NYT readers, but offhand I really had no idea of how large a commitment this spending is. I had to go to the IMF’s website and find that Korea’s GDP over the last sixteen years has been $22.9 trillion, which puts this spending at a bit more than 0.9 percent of GDP.
This would be the equivalent of around $2 trillion in spending in the United States, which is a pretty sizable commitment. It would have been useful if the NYT had insisted that the number be expressed as a share of GDP or personal income or some measure that would be meaningful to a substantial portion of its readers.
As it is, I doubt that almost any NYT reader had much sense of whether this money was a big or small commitment. Presumably, the intent was to convey information to readers. This figure did not.
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The New York Times had an interesting article on how the drug company AbbVie made billions of dollars on the arthritis drug Humira by exploiting the patent system. AbbVie’s strategy was to file hundreds of patents on Humira, long after the drug had already been brought to market. This meant that even after its main patents had expired it would still have other patents that were still in effect.
The legal status of these secondary patents may have been dubious, but the company was prepared to spend large amounts of money suing potential generic competitors for patent infringement. This threat was sufficiently credible to get competitors to agree to delay entry for many years, and also to pay a licensing fee after they did enter the market.
This is now a common pattern for drug companies to protect their blockbuster drugs. There is a fundamental asymmetry in contesting infringement lawsuits.
The patent holder is suing to maintain a patent that allows it to sell its drug at the monopoly price. The potential generic competitor is trying to get the right to sell a drug at the free market price. Since there is so much more money at stake for the patent holder, it can profitably deploy far more resources to press its case than a generic competitor. That is why it is common for potential generic competitors to agree to delaying entry or just give up altogether.
This is the sort of corruption that economics predicts will result from government-granted patent monopolies.
The New York Times had an interesting article on how the drug company AbbVie made billions of dollars on the arthritis drug Humira by exploiting the patent system. AbbVie’s strategy was to file hundreds of patents on Humira, long after the drug had already been brought to market. This meant that even after its main patents had expired it would still have other patents that were still in effect.
The legal status of these secondary patents may have been dubious, but the company was prepared to spend large amounts of money suing potential generic competitors for patent infringement. This threat was sufficiently credible to get competitors to agree to delay entry for many years, and also to pay a licensing fee after they did enter the market.
This is now a common pattern for drug companies to protect their blockbuster drugs. There is a fundamental asymmetry in contesting infringement lawsuits.
The patent holder is suing to maintain a patent that allows it to sell its drug at the monopoly price. The potential generic competitor is trying to get the right to sell a drug at the free market price. Since there is so much more money at stake for the patent holder, it can profitably deploy far more resources to press its case than a generic competitor. That is why it is common for potential generic competitors to agree to delaying entry or just give up altogether.
This is the sort of corruption that economics predicts will result from government-granted patent monopolies.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónEconomic GrowthEl DesarolloInflationUnited StatesEE. UU.
While the media keep touting the prospects for a recession, it is difficult to see why there would be one in the immediate future. To start with the basic picture, growth in the fourth quarter was a very solid 2.9 percent, following a slightly stronger 3.1 percent in the third quarter. This is very far from the negative growth we see in a recession.
When we look at the individual components, the picture is somewhat mixed. Inventory accumulation accounted for half the growth, adding 1.46 percentage points to growth in the quarter. This obviously will not be sustained, and after the rapid growth in the fourth quarter, we are likely to see inventories as a drag on growth in future quarters.
However, the flip side is that some of the items dragging growth down in the fourth quarter will have less of a negative impact in future quarters. Housing stands out here, and the drop in residential investment knocked 1.29 percentage points off the quarter’s growth, after lowering third-quarter growth by 1.42 percentage points.
The reason for thinking the hit to growth will be much smaller in future quarters is that housing has already fallen so far. The 1.38 million rate of starts in December is roughly the same as the pre-pandemic pace. The December figure was only a small drop from the November rate, so the rapid plunges of the summer and fall seem to be behind us for the moment.
New home sales actually rose slightly in the last two months. And, with vacancy rates still near historic lows, it’s hard to envision builders cutting back on construction much further from what is already a slow pace of construction. In addition, mortgage interest rates have been falling in the last couple of months and are likely to fall further, barring a big hawkish turn by the Fed.
Another bright spot for housing is that mortgage refinancing has fallen to almost zero. The costs associated with refinancing a mortgage count as residential investment. The plunge in refinancing and new mortgages accounted for 34.6 percent of the decline in residential investment over the last year.
Non-residential investment is also likely to look better in future quarters. It rose at just a 0.7 percent annual rate in the fourth quarter. It was held down by a 3.7 percent drop in equipment investment. This component will likely turn around in 2023 due to a surge in airplane orders.
Structure investment seems to also be turning upward. There was a sharp falloff in most categories of structure investment in the pandemic, especially office buildings and hotels. These components seem to have hit bottom. A recent surge in factory construction is likely to pull this component further into positive territory in 2023. Overall structure investment grew at a 0.4 percent rate in the fourth quarter.
Consumption is the bulk of the story for GDP, and here we should see a picture of continuing modest growth. Consumption grew at a 2.1 percent rate in the fourth quarter, nearly identical to the 2.0 percent rate of the second quarter and 2.3 percent rate of the third quarter.
The data on unemployment claims indicate we are not seeing any noticeable jump in unemployment, in spite of some large layoff announcements. With a healthy pace of job growth and rising real wages, there is no reason to expect any sharp downturn in consumption.
This stable growth rate has gone along with a rebalancing of consumption back to services after a sharp rise in goods consumption during the pandemic. Goods consumption rose at a 1.1 percent annual rate in the fourth quarter after declining in the prior three quarters. Services rose at a 2.6 percent annual rate.
The share of goods consumption in GDP is still roughly 2.0 percentage points above its pre-pandemic level. It is likely to continue to decline modestly, with the growth in services more than offsetting it and keeping overall consumption growth in positive territory.
The drop in goods consumption will also have the benefit of leading to a smaller trade deficit. After rising sharply during the pandemic, the trade deficit has been decreasing for the last three quarters. As we see less demand for consumption goods, and also a reduction in the pace of inventory accumulation, we should see further declines in imports in 2023.
The dollar has also been dropping in the last couple of months, losing close to 10 percent of its value against the euro and other major currencies. While the dollar is still well above its pre-pandemic level, the recent drop in the dollar should help to reduce the trade deficit by making U.S. goods and services more competitive.
In addition, the fact that Europe’s economy is looking better than had been generally expected, and that China’s economy is now largely reopened, should be a boost to U.S. exports. Together, these factors should mean that the trade deficit continues to shrink and be a positive factor in growth.
The most recent data also suggest continued improvement on inflation. The core PCE rose at a 3.9 percent rate in Q4, down from 4.7 percent in Q3. This is still well above the Fed’s 2.0 percent target, but we know that rental inflation will be slowing sharply in the coming months, which will be a huge factor in lowering the core inflation rate.
Also, the fourth quarter GDP report provided more evidence to support the view that wage growth is moderating. Total labor compensation grew at a 4.9 percent annual rate in the fourth quarter. If we assume that hours grew at a 1.5 percent rate, that translates into a 3.4 percent pace of growth in average hourly compensation. This would be very much consistent with the Fed’s 2.0 percent target.
This is especially true with productivity growth in the range of 1.5 percent. After falling in the first half of 2022, productivity grew at a modest 0.8 percent rate in the third quarter. If hours growth comes to around 1.5 percent (the index of aggregate hours increased at a 1.1 percent rate, but there was a sharp rise in reported self-employment), then productivity growth should be close to 1.5 percent in the quarter.
Compared to the falling productivity in the first half, even a modest pace of positive growth will go far toward alleviating inflationary pressure. And of course, with modest positive productivity growth, we can sustain a modest rate of real wage growth without causing inflation.
In short, the world is looking good, we just have to keep the Fed from messing it up.
While the media keep touting the prospects for a recession, it is difficult to see why there would be one in the immediate future. To start with the basic picture, growth in the fourth quarter was a very solid 2.9 percent, following a slightly stronger 3.1 percent in the third quarter. This is very far from the negative growth we see in a recession.
When we look at the individual components, the picture is somewhat mixed. Inventory accumulation accounted for half the growth, adding 1.46 percentage points to growth in the quarter. This obviously will not be sustained, and after the rapid growth in the fourth quarter, we are likely to see inventories as a drag on growth in future quarters.
However, the flip side is that some of the items dragging growth down in the fourth quarter will have less of a negative impact in future quarters. Housing stands out here, and the drop in residential investment knocked 1.29 percentage points off the quarter’s growth, after lowering third-quarter growth by 1.42 percentage points.
The reason for thinking the hit to growth will be much smaller in future quarters is that housing has already fallen so far. The 1.38 million rate of starts in December is roughly the same as the pre-pandemic pace. The December figure was only a small drop from the November rate, so the rapid plunges of the summer and fall seem to be behind us for the moment.
New home sales actually rose slightly in the last two months. And, with vacancy rates still near historic lows, it’s hard to envision builders cutting back on construction much further from what is already a slow pace of construction. In addition, mortgage interest rates have been falling in the last couple of months and are likely to fall further, barring a big hawkish turn by the Fed.
Another bright spot for housing is that mortgage refinancing has fallen to almost zero. The costs associated with refinancing a mortgage count as residential investment. The plunge in refinancing and new mortgages accounted for 34.6 percent of the decline in residential investment over the last year.
Non-residential investment is also likely to look better in future quarters. It rose at just a 0.7 percent annual rate in the fourth quarter. It was held down by a 3.7 percent drop in equipment investment. This component will likely turn around in 2023 due to a surge in airplane orders.
Structure investment seems to also be turning upward. There was a sharp falloff in most categories of structure investment in the pandemic, especially office buildings and hotels. These components seem to have hit bottom. A recent surge in factory construction is likely to pull this component further into positive territory in 2023. Overall structure investment grew at a 0.4 percent rate in the fourth quarter.
Consumption is the bulk of the story for GDP, and here we should see a picture of continuing modest growth. Consumption grew at a 2.1 percent rate in the fourth quarter, nearly identical to the 2.0 percent rate of the second quarter and 2.3 percent rate of the third quarter.
The data on unemployment claims indicate we are not seeing any noticeable jump in unemployment, in spite of some large layoff announcements. With a healthy pace of job growth and rising real wages, there is no reason to expect any sharp downturn in consumption.
This stable growth rate has gone along with a rebalancing of consumption back to services after a sharp rise in goods consumption during the pandemic. Goods consumption rose at a 1.1 percent annual rate in the fourth quarter after declining in the prior three quarters. Services rose at a 2.6 percent annual rate.
The share of goods consumption in GDP is still roughly 2.0 percentage points above its pre-pandemic level. It is likely to continue to decline modestly, with the growth in services more than offsetting it and keeping overall consumption growth in positive territory.
The drop in goods consumption will also have the benefit of leading to a smaller trade deficit. After rising sharply during the pandemic, the trade deficit has been decreasing for the last three quarters. As we see less demand for consumption goods, and also a reduction in the pace of inventory accumulation, we should see further declines in imports in 2023.
The dollar has also been dropping in the last couple of months, losing close to 10 percent of its value against the euro and other major currencies. While the dollar is still well above its pre-pandemic level, the recent drop in the dollar should help to reduce the trade deficit by making U.S. goods and services more competitive.
In addition, the fact that Europe’s economy is looking better than had been generally expected, and that China’s economy is now largely reopened, should be a boost to U.S. exports. Together, these factors should mean that the trade deficit continues to shrink and be a positive factor in growth.
The most recent data also suggest continued improvement on inflation. The core PCE rose at a 3.9 percent rate in Q4, down from 4.7 percent in Q3. This is still well above the Fed’s 2.0 percent target, but we know that rental inflation will be slowing sharply in the coming months, which will be a huge factor in lowering the core inflation rate.
Also, the fourth quarter GDP report provided more evidence to support the view that wage growth is moderating. Total labor compensation grew at a 4.9 percent annual rate in the fourth quarter. If we assume that hours grew at a 1.5 percent rate, that translates into a 3.4 percent pace of growth in average hourly compensation. This would be very much consistent with the Fed’s 2.0 percent target.
This is especially true with productivity growth in the range of 1.5 percent. After falling in the first half of 2022, productivity grew at a modest 0.8 percent rate in the third quarter. If hours growth comes to around 1.5 percent (the index of aggregate hours increased at a 1.1 percent rate, but there was a sharp rise in reported self-employment), then productivity growth should be close to 1.5 percent in the quarter.
Compared to the falling productivity in the first half, even a modest pace of positive growth will go far toward alleviating inflationary pressure. And of course, with modest positive productivity growth, we can sustain a modest rate of real wage growth without causing inflation.
In short, the world is looking good, we just have to keep the Fed from messing it up.
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• Economic Crisis and RecoveryCrisis económica y recuperaciónUnited StatesEE. UU.
The economy can have a problem of too much demand, leading to serious inflationary pressures. It can also have a problem of too little demand, leading to slow growth and unemployment. But can it have both at the same time?
Apparently, the leading lights in economic policy circles seem to think so. As I noted a few days ago, back in the 1990s and 00s economists were almost universally warning of the bad effects of an aging population. The issue was that we would have too many retirees and too few workers to support them.
This meant a problem of excess demand. Since much of the money to support retirees comes from government programs for the elderly, like Social Security and Medicare, this meant we would see this show up as large government budget deficits, unless we had big tax increases to reduce demand.
In recent years, this view had largely been replaced with concerns over secular stagnation. This is a story where an aging population implies a slow-growing or shrinking labor force. This reduces the need for investment spending. The reduction in investment spending, coupled with other factors increasing saving, gives what Larry Summers referred to as a “savings glut.” This is a story of too little demand.
Okay, so it’s January of 2023, the Republicans are threatening to blow up the economy by not raising the debt ceiling, do we have a problem of too much demand or too little demand? Which way is up?
New York Times columnist Peter Coy weighed in firmly on the side of too much demand in a piece arguing we have to do something about deficits. He tells us:
“Unless you subscribe to modern monetary theory, which holds that deficits don’t matter unless they cause inflation, something has to be done, and soon. In textbook macroeconomics, higher debt leads to ‘higher real interest rates, greater interest payments to foreign investors, reduced business investment and lower consumer investment in durable goods,’ James Poterba, a public finance economist at the Massachusetts Institute of Technology, wrote for the Peter G. Peterson Foundation website in 2021.”
Okay, that’s a pretty clear statement of the too much demand story, coming from the foundation created by that great deficit hawk Peter Peterson. But, let’s take a look at Coy’s dismissive comment, “unless you subscribe to modern monetary theory,” and think about the issue at hand.[1]
I have never been a card-carrying member of Modern Monetary Theory (MMT), but I do take its arguments seriously. Let’s say that we run large budget deficits and have the Federal Reserve Board buy up much of the debt. To people who have been alive in the last 15 years, this policy goes under the name “quantitative easing.”
To my knowledge, none of the current or past members of the Fed consider themselves followers of MMT, but they basically followed an MMT prescription. They had the Fed buying up large amounts of debt to keep interest rates low and boost the economy.
The reason this is important is that we don’t get the exploding debt scare story that Coy, along with the Peter Peterson gang, are trying to push. When the Fed buys up bonds, guess who gets the interest on the bonds?
That’s right folks, it goes to the Fed. And, the Fed refunds it to the Treasury. So, our crushing interest burden ends up being a simple accounting transaction where the Treasury essentially ends up paying interest to itself.
Okay, but how long can this go on? The short answer is forever, the slightly longer answer is until we see a problem with inflation. This gets us back to the basic issue, are we worried that we have too much demand or too little demand?
If Larry Summers and other proponents of the secular stagnation view are correct, then we have very little reason to fear exploding budget deficits. Our major concern going forward will be too little demand. That means the Fed can do an awful lot of quantitative easing without causing any problems for the economy.
If that one is stretching people’s brains, let’s look to Japan. It has a debt-to-GDP ratio of 264 percent, the equivalent of a debt of more than $66 trillion in the United States. The interest rate on its long-term bonds is 0.35 percent. Its net interest payments on its government debt come to 0.3 percent of its GDP, compared to 1.7 percent in the United States. And, apart from a modest pandemic uptick, it has been struggling to raise its inflation rate to its central bank’s 2.0 percent target.
Long and short, if Larry Summers and the secular stagnation crew are correct, then the debt fears being pushed by many are unfounded. If, on the other hand, we are likely to run up against real and lasting supply constraints going forward, then too much spending or too little taxes, can be a problem.
What About Patent and Copyright Monopolies?
I just feel the need to ask, since no one else ever does. Granting patent and copyright monopolies is one way the government pays people to do things. For some reason, this obvious point is never mentioned in public discussions of debt and deficits.
If, for example, we were to decide to spend $100 billion more annually (we currently spend a bit more than $50 billion) on biomedical research, we would get an immediate chorus of “how are you going to pay for it?” from all knowledgeable policy types. However, if we tell the drug companies to spend $100 billion a year on research, and we will give you patent monopolies that allow you to raise your prices by $100 billion annually above the free market price, no asks about how we pay for it. Of course, this is exactly what we do, but drug companies use these monopolies to raise their prices by somewhere around $400 billion annually.
Anyhow, it is more than a bit bizarre that almost everyone involved in budget debates has a clear conception of how we can impoverish our kids by imposing high taxes, but it seems none of them have given a second thought to how high prices for drugs, medical equipment, computer software and a whole range of other items, due to government-granted monopolies, can be a burden.
As the saying goes, economists are not very good at economics.
[1] It’s also worth noting that the budget horror stories, past and present, project that health care spending will grow rapidly as a share of GDP. We actually have seen very limited increases in health care spending as a share of GDP, and since the pandemic, the health care spending share has actually fallen.
The economy can have a problem of too much demand, leading to serious inflationary pressures. It can also have a problem of too little demand, leading to slow growth and unemployment. But can it have both at the same time?
Apparently, the leading lights in economic policy circles seem to think so. As I noted a few days ago, back in the 1990s and 00s economists were almost universally warning of the bad effects of an aging population. The issue was that we would have too many retirees and too few workers to support them.
This meant a problem of excess demand. Since much of the money to support retirees comes from government programs for the elderly, like Social Security and Medicare, this meant we would see this show up as large government budget deficits, unless we had big tax increases to reduce demand.
In recent years, this view had largely been replaced with concerns over secular stagnation. This is a story where an aging population implies a slow-growing or shrinking labor force. This reduces the need for investment spending. The reduction in investment spending, coupled with other factors increasing saving, gives what Larry Summers referred to as a “savings glut.” This is a story of too little demand.
Okay, so it’s January of 2023, the Republicans are threatening to blow up the economy by not raising the debt ceiling, do we have a problem of too much demand or too little demand? Which way is up?
New York Times columnist Peter Coy weighed in firmly on the side of too much demand in a piece arguing we have to do something about deficits. He tells us:
“Unless you subscribe to modern monetary theory, which holds that deficits don’t matter unless they cause inflation, something has to be done, and soon. In textbook macroeconomics, higher debt leads to ‘higher real interest rates, greater interest payments to foreign investors, reduced business investment and lower consumer investment in durable goods,’ James Poterba, a public finance economist at the Massachusetts Institute of Technology, wrote for the Peter G. Peterson Foundation website in 2021.”
Okay, that’s a pretty clear statement of the too much demand story, coming from the foundation created by that great deficit hawk Peter Peterson. But, let’s take a look at Coy’s dismissive comment, “unless you subscribe to modern monetary theory,” and think about the issue at hand.[1]
I have never been a card-carrying member of Modern Monetary Theory (MMT), but I do take its arguments seriously. Let’s say that we run large budget deficits and have the Federal Reserve Board buy up much of the debt. To people who have been alive in the last 15 years, this policy goes under the name “quantitative easing.”
To my knowledge, none of the current or past members of the Fed consider themselves followers of MMT, but they basically followed an MMT prescription. They had the Fed buying up large amounts of debt to keep interest rates low and boost the economy.
The reason this is important is that we don’t get the exploding debt scare story that Coy, along with the Peter Peterson gang, are trying to push. When the Fed buys up bonds, guess who gets the interest on the bonds?
That’s right folks, it goes to the Fed. And, the Fed refunds it to the Treasury. So, our crushing interest burden ends up being a simple accounting transaction where the Treasury essentially ends up paying interest to itself.
Okay, but how long can this go on? The short answer is forever, the slightly longer answer is until we see a problem with inflation. This gets us back to the basic issue, are we worried that we have too much demand or too little demand?
If Larry Summers and other proponents of the secular stagnation view are correct, then we have very little reason to fear exploding budget deficits. Our major concern going forward will be too little demand. That means the Fed can do an awful lot of quantitative easing without causing any problems for the economy.
If that one is stretching people’s brains, let’s look to Japan. It has a debt-to-GDP ratio of 264 percent, the equivalent of a debt of more than $66 trillion in the United States. The interest rate on its long-term bonds is 0.35 percent. Its net interest payments on its government debt come to 0.3 percent of its GDP, compared to 1.7 percent in the United States. And, apart from a modest pandemic uptick, it has been struggling to raise its inflation rate to its central bank’s 2.0 percent target.
Long and short, if Larry Summers and the secular stagnation crew are correct, then the debt fears being pushed by many are unfounded. If, on the other hand, we are likely to run up against real and lasting supply constraints going forward, then too much spending or too little taxes, can be a problem.
What About Patent and Copyright Monopolies?
I just feel the need to ask, since no one else ever does. Granting patent and copyright monopolies is one way the government pays people to do things. For some reason, this obvious point is never mentioned in public discussions of debt and deficits.
If, for example, we were to decide to spend $100 billion more annually (we currently spend a bit more than $50 billion) on biomedical research, we would get an immediate chorus of “how are you going to pay for it?” from all knowledgeable policy types. However, if we tell the drug companies to spend $100 billion a year on research, and we will give you patent monopolies that allow you to raise your prices by $100 billion annually above the free market price, no asks about how we pay for it. Of course, this is exactly what we do, but drug companies use these monopolies to raise their prices by somewhere around $400 billion annually.
Anyhow, it is more than a bit bizarre that almost everyone involved in budget debates has a clear conception of how we can impoverish our kids by imposing high taxes, but it seems none of them have given a second thought to how high prices for drugs, medical equipment, computer software and a whole range of other items, due to government-granted monopolies, can be a burden.
As the saying goes, economists are not very good at economics.
[1] It’s also worth noting that the budget horror stories, past and present, project that health care spending will grow rapidly as a share of GDP. We actually have seen very limited increases in health care spending as a share of GDP, and since the pandemic, the health care spending share has actually fallen.
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I rarely disagree in a big way with Paul Krugman, but I think he misses the boat in an important way in his piece on China’s alleged demographic crisis. Before getting to my point of disagreement, first let me emphasis a key point of agreement.
Krugman points out that many countries, notably Japan, have managed to do just fine in the face of a declining population and shrinking workforce. Their people continue to enjoy rising standards of living as their population shrinks. In the case of Japan, its population has been declining for more than a decade and its workforce has been pretty much stagnant over this period. Nonetheless, its per capita income is nearly 10 percent higher than it was a decade ago.
This actually understates the improvement in living standards enjoyed by the Japanese population over this period. The average number of hours worked in a year also fell by more than 7.0 percent, meaning a typical Japanese worker has more leisure time now than they did a decade ago.
It’s also worth mentioning that Japan’s cities are less crowded than they would be if its population had continued to grow. This means less congestion and pollution, less time spent getting to and from work, and less crowded, beaches, parks, and museums. These quality of life factors don’t get picked up in GDP.
Japan has been running large deficits and built up a large debt to sustain economic growth in the last two decades, but this has not created a major burden for its economy. Its interest payments on its debt are less than 0.3 percent of GDP, compared to 1.7 percent of GDP for the United States. Its inflation rate has consistently been well below its central bank’s 2.0 percent target, although it did see a modest Covid uptick in the last two years.
This point about inflation is central. Back in the good old days, when the Peter Peterson anti-Social Security warriors were in their prime in the 1990s, the standard story on an aging society was that we would have too few workers to support all the old-timers. The retirement of the baby boomers was supposed to break the camel’s back. There would have to be massive tax increases, otherwise the government would run huge deficits which would lead to cascading interest payments on the debt. Alternatively, it could finance its deficits by printing money, leading to out of control inflation.
The Peterson story was never very honest, since the real factor driving its deficit horror story was the projection of exploding private sector health care costs. Since the government picks up roughly half the national tab on health care through programs like Medicare and Medicaid, the explosion in health care costs then being projected would have meant a massive burden on the public sector, even without the aging of the population.
As it turns out, we didn’t see anywhere near the explosive growth in health care costs projected at the time, but we have seen the aging of the population and an increase in the ratio of retirees to workers. But rather than seeing excess demand (Covid shutdown and recovery excepted), our problem has been inadequate demand. The same problem that has afflicted Japan.
This story, which now passes under the name of “secular stagnation,” is 180 degrees opposite the problem pushed by the deficit hawks. Back then, the problem of an aging population was supposed to be that we would be seeing so much demand that our shrinking labor force would not be able to produce enough goods and services. Now the story is that we see less demand with our aging population, so we will see weak growth, unemployment, and deflation.
It’s good that the economics profession has been able to adjust its theories to reality, but we should at least acknowledge the complete shift in perspectives. It is a bit embarrassing that the nearly universally accepted dogma within the profession twenty or thirty years ago proved to be the exact opposite of the reality.
On to China!
Okay, now that we know the terrain, the question is whether China should be terrified that its population is now falling, as all our leading news outlets are telling us? Well, as people who have listened to the media’s sky is falling tales should recognize, China’s falling population crisis is just our old friend, the story of not enough workers to meet the demands of an aging population.[1] So the question is whether China’s economy will be able to meet the demands created by a growing population of retirees.
As Krugman correctly points out in his column, there is no reason in principle that China should not be able to support its elderly. The question is a political one of whether its government is prepared to establish adequate Social Security and Medicare-type systems to ensure that its elderly have sufficient income and decent health care. Not having any special expertise on China’s politics, I can’t answer that question, but it is important to recognize that it is not a problem of an inadequate labor force.
Where Krugman left me scratching my head was his discussion of this problem of shifting resources to support the elderly:
“For China has long had a wildly unbalanced economy. For reasons I admit I don’t fully understand, policymakers there have been reluctant to allow the full benefits of past economic growth to pass through to households, and that has led to relatively low consumer demand.
“Instead, China has sustained its economy with extremely high rates of investment, far higher even than those that prevailed in Japan at the height of its infamous late-1980s bubble. Normally, investing in the future is good, but when extremely high investment collides with a falling population, much of that investment inevitably yields diminishing returns.”
There are two points I would make here. First, while Krugman is entirely right about the high rates of investment preventing households from enjoying the full benefits of economic growth, it is worth noting that China’s population has enjoyed enormous improvements in living standards over the last four decades. In the 1970s, the standard of living for the bulk of the population was only slightly better in many respects than for people in Sub Saharan Africa.
Today, hundreds of millions of people in China have near European standards of living. Krugman is right that the country’s growth could allow for even more gains (especially in rural areas), but the enormous gains seen by the bulk of the population probably meant that there was more tolerance for waste than in a context where say, a declining workforce was leading to stagnant or declining living standards.
The other point is simply the flip side of Krugman’s point about the massive investment spending in China. This is a waste of resources that can in principle be converted to meet the needs of the elderly population. In other words, if anyone believed the not enough workers story, we can point to all the people and resources tied up in nearly pointless investment projects. They could instead be building hospitals, retirement facilities, and in other ways producing the goods and services demanded by a growing elderly population. Of course, China couldn’t accomplish this sort of conversion overnight, but its population isn’t aging overnight.
Again, if China can undertake this sort of conversion is a political question. Maybe people more expert on China’s politics can answer it, but it clearly is not an issue of too few workers to meet the demands of an aging population.
One final issue: as I have pointed out on many occasions, the impact of even modest rates of productivity growth swamp the impact of demographics. China’s productivity growth has slowed in recent years, but even at a pace of 3-4 percent annually (what we have been seeing in recent years), it should easily be able to produce enough so that in ten or twenty years both workers and retirees can enjoy much higher living standards than they do today.
Whether its productivity growth will continue at recent rates, or slow further, is an open question, but anyone claiming that it will not have enough output to be able to support its retirees is predicting a massive slowing of productivity growth. For what it’s worth, the International Monetary Fund (I.M.F) is projecting that China continues to sustain strong productivity growth. It projects that GDP growth will average more than 4.5 percent annually even as its workforce shrinks.
The I.M.F. projection can of course be wrong, but clearly it does not accept the declining population crisis story. For now, that one is best filed under “fiction.”
[1] There is also the silliness around turning negative. There is very little difference to the economy if its population or labor force is shrinking slowly, say 0.2 percent a year, or growing by the same amount. We saw the same hysteria around the issue of deflation, as though economies would somehow face a crisis if their rate of inflation was a small negative number instead of a small positive number. The lesson that actually serious people everywhere know, is that crossing zero doesn’t matter.
I rarely disagree in a big way with Paul Krugman, but I think he misses the boat in an important way in his piece on China’s alleged demographic crisis. Before getting to my point of disagreement, first let me emphasis a key point of agreement.
Krugman points out that many countries, notably Japan, have managed to do just fine in the face of a declining population and shrinking workforce. Their people continue to enjoy rising standards of living as their population shrinks. In the case of Japan, its population has been declining for more than a decade and its workforce has been pretty much stagnant over this period. Nonetheless, its per capita income is nearly 10 percent higher than it was a decade ago.
This actually understates the improvement in living standards enjoyed by the Japanese population over this period. The average number of hours worked in a year also fell by more than 7.0 percent, meaning a typical Japanese worker has more leisure time now than they did a decade ago.
It’s also worth mentioning that Japan’s cities are less crowded than they would be if its population had continued to grow. This means less congestion and pollution, less time spent getting to and from work, and less crowded, beaches, parks, and museums. These quality of life factors don’t get picked up in GDP.
Japan has been running large deficits and built up a large debt to sustain economic growth in the last two decades, but this has not created a major burden for its economy. Its interest payments on its debt are less than 0.3 percent of GDP, compared to 1.7 percent of GDP for the United States. Its inflation rate has consistently been well below its central bank’s 2.0 percent target, although it did see a modest Covid uptick in the last two years.
This point about inflation is central. Back in the good old days, when the Peter Peterson anti-Social Security warriors were in their prime in the 1990s, the standard story on an aging society was that we would have too few workers to support all the old-timers. The retirement of the baby boomers was supposed to break the camel’s back. There would have to be massive tax increases, otherwise the government would run huge deficits which would lead to cascading interest payments on the debt. Alternatively, it could finance its deficits by printing money, leading to out of control inflation.
The Peterson story was never very honest, since the real factor driving its deficit horror story was the projection of exploding private sector health care costs. Since the government picks up roughly half the national tab on health care through programs like Medicare and Medicaid, the explosion in health care costs then being projected would have meant a massive burden on the public sector, even without the aging of the population.
As it turns out, we didn’t see anywhere near the explosive growth in health care costs projected at the time, but we have seen the aging of the population and an increase in the ratio of retirees to workers. But rather than seeing excess demand (Covid shutdown and recovery excepted), our problem has been inadequate demand. The same problem that has afflicted Japan.
This story, which now passes under the name of “secular stagnation,” is 180 degrees opposite the problem pushed by the deficit hawks. Back then, the problem of an aging population was supposed to be that we would be seeing so much demand that our shrinking labor force would not be able to produce enough goods and services. Now the story is that we see less demand with our aging population, so we will see weak growth, unemployment, and deflation.
It’s good that the economics profession has been able to adjust its theories to reality, but we should at least acknowledge the complete shift in perspectives. It is a bit embarrassing that the nearly universally accepted dogma within the profession twenty or thirty years ago proved to be the exact opposite of the reality.
On to China!
Okay, now that we know the terrain, the question is whether China should be terrified that its population is now falling, as all our leading news outlets are telling us? Well, as people who have listened to the media’s sky is falling tales should recognize, China’s falling population crisis is just our old friend, the story of not enough workers to meet the demands of an aging population.[1] So the question is whether China’s economy will be able to meet the demands created by a growing population of retirees.
As Krugman correctly points out in his column, there is no reason in principle that China should not be able to support its elderly. The question is a political one of whether its government is prepared to establish adequate Social Security and Medicare-type systems to ensure that its elderly have sufficient income and decent health care. Not having any special expertise on China’s politics, I can’t answer that question, but it is important to recognize that it is not a problem of an inadequate labor force.
Where Krugman left me scratching my head was his discussion of this problem of shifting resources to support the elderly:
“For China has long had a wildly unbalanced economy. For reasons I admit I don’t fully understand, policymakers there have been reluctant to allow the full benefits of past economic growth to pass through to households, and that has led to relatively low consumer demand.
“Instead, China has sustained its economy with extremely high rates of investment, far higher even than those that prevailed in Japan at the height of its infamous late-1980s bubble. Normally, investing in the future is good, but when extremely high investment collides with a falling population, much of that investment inevitably yields diminishing returns.”
There are two points I would make here. First, while Krugman is entirely right about the high rates of investment preventing households from enjoying the full benefits of economic growth, it is worth noting that China’s population has enjoyed enormous improvements in living standards over the last four decades. In the 1970s, the standard of living for the bulk of the population was only slightly better in many respects than for people in Sub Saharan Africa.
Today, hundreds of millions of people in China have near European standards of living. Krugman is right that the country’s growth could allow for even more gains (especially in rural areas), but the enormous gains seen by the bulk of the population probably meant that there was more tolerance for waste than in a context where say, a declining workforce was leading to stagnant or declining living standards.
The other point is simply the flip side of Krugman’s point about the massive investment spending in China. This is a waste of resources that can in principle be converted to meet the needs of the elderly population. In other words, if anyone believed the not enough workers story, we can point to all the people and resources tied up in nearly pointless investment projects. They could instead be building hospitals, retirement facilities, and in other ways producing the goods and services demanded by a growing elderly population. Of course, China couldn’t accomplish this sort of conversion overnight, but its population isn’t aging overnight.
Again, if China can undertake this sort of conversion is a political question. Maybe people more expert on China’s politics can answer it, but it clearly is not an issue of too few workers to meet the demands of an aging population.
One final issue: as I have pointed out on many occasions, the impact of even modest rates of productivity growth swamp the impact of demographics. China’s productivity growth has slowed in recent years, but even at a pace of 3-4 percent annually (what we have been seeing in recent years), it should easily be able to produce enough so that in ten or twenty years both workers and retirees can enjoy much higher living standards than they do today.
Whether its productivity growth will continue at recent rates, or slow further, is an open question, but anyone claiming that it will not have enough output to be able to support its retirees is predicting a massive slowing of productivity growth. For what it’s worth, the International Monetary Fund (I.M.F) is projecting that China continues to sustain strong productivity growth. It projects that GDP growth will average more than 4.5 percent annually even as its workforce shrinks.
The I.M.F. projection can of course be wrong, but clearly it does not accept the declining population crisis story. For now, that one is best filed under “fiction.”
[1] There is also the silliness around turning negative. There is very little difference to the economy if its population or labor force is shrinking slowly, say 0.2 percent a year, or growing by the same amount. We saw the same hysteria around the issue of deflation, as though economies would somehow face a crisis if their rate of inflation was a small negative number instead of a small positive number. The lesson that actually serious people everywhere know, is that crossing zero doesn’t matter.
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• InequalityLa DesigualdadUnited StatesEE. UU.
I was happy to see this segment of Ezra Klein’s show (hosted by Rogé Karma) which featured an interview with Columbia University Law Professor Katharina Pistor. Pistor is the author of The Code of Capital: How the Law Creates Wealth and Inequality.
I’ve not yet read the book, but got the gist from the interview. Pistor is arguing that we have structured the market in ways that generate enormous inequality. In the interview, she presents several ways in which the law has been written that facilitate the accumulation of wealth by a small group of people. These include rules on property in land, intellectual property, and the creation of corporations as distinct entities with an existence independent of their owners.
Pistor’s point is that the way these rules are structured is not set in stone. They can be written differently so that they don’t lead to so much inequality.[1] Having written several books and endless blogposts in this vein, Pistor’s interview almost made my day. (There is also the video version.)
I say almost because, even though her work was getting a high-profile spot in the New York Times (and I gather her book has also been well-received), I doubt very much that any of the intellectual types who write on politics will absorb its main point. With few exceptions, the people who write about and pontificate on politics have their brain hard-wired to the view that liberals want the government and conservatives want to leave things to the market. They insist that this is the main conflict in political debates both in the United States and around the world.
Of course, Pistor’s point is that we have allowed the market to be structured in a way that leads to an enormous share of income flowing to those at the top. We didn’t have to do it that way.
We don’t need to have patent and copyright monopolies and other forms of intellectual property. Creating intellectual property and making these monopolies longer and stronger is a political decision. It has led to enormous inequality, both in making people like Bill Gates tremendously wealthy, and also providing the basis for the alleged bias in technology that allows people with STEM skills to do very well in the current economy. STEM skills would likely be far less valuable in an economy that had weaker intellectual property rules and relied more on alternative methods to finance innovation and creative work.
There is a similar story with rules on incorporation. We don’t have to give corporations legal personhood, as our courts have done. We can also have different rules of corporate governance that make it more difficult for top executives to pay themselves salaries in the tens of millions annually.
I can go on at length on this, as I have. Those who are interested can read my books (they are free) or Pistor’s. But the point is that the market has been structured in ways that lead to enormous inequality. It could be structured differently.
Taking the current structure of the market as a given puts progressives at an enormous disadvantage. To my view, government social programs like Social Security, Medicare, and public education are enormously important. But the need for redistributive program increases enormously if we allow the market to be structured in a way that leads to massive inequality. And, the ability for pay for them decreases, especially in a political system that allows the wealthy to have such disproportionate influence.
Accepting that conservatives want the free market, after we have allowed them to rig the rules to redistribute massive amounts of income upward, is like saying that supporters of grandfather rules for voting believed in race-blind democracy. After all, anyone whose grandfather was a registered voter was eligible to vote, regardless of race. Defining the battle lines as being about the role of the government versus the market, as opposed to a battle over the structure of the market, essentially gives away the store.
If there is a counter anywhere to the argument that Pistor is making (others have also made a similar argument, notably Yale political science professor Jacob Hacker), I have not seen it and cannot imagine what it would be. The rules of the market are pretty much infinitely malleable. There is no natural market outcome. Many right-wingers may want the world to believe the rules of the market are just given to us by god or nature, but nothing could be further from the truth.
For some reason, this point doesn’t seem to affect political debate. I suspect that even the people embracing Pistor’s argument last week will turn around in the near future and tell us that conservatives want to leave things to the market. It seems that, even though the structure of the market is not fixed by god or nature, it is a fact of nature that this view must be central to our political debates.
[1] Pistor repeatedly refers to these rules as “fictions.” I think that framing is unfortunate. The rules are very real, but her point, as I take it, is that they could be different. The fact that something is socially created doesn’t make it fiction.
I was happy to see this segment of Ezra Klein’s show (hosted by Rogé Karma) which featured an interview with Columbia University Law Professor Katharina Pistor. Pistor is the author of The Code of Capital: How the Law Creates Wealth and Inequality.
I’ve not yet read the book, but got the gist from the interview. Pistor is arguing that we have structured the market in ways that generate enormous inequality. In the interview, she presents several ways in which the law has been written that facilitate the accumulation of wealth by a small group of people. These include rules on property in land, intellectual property, and the creation of corporations as distinct entities with an existence independent of their owners.
Pistor’s point is that the way these rules are structured is not set in stone. They can be written differently so that they don’t lead to so much inequality.[1] Having written several books and endless blogposts in this vein, Pistor’s interview almost made my day. (There is also the video version.)
I say almost because, even though her work was getting a high-profile spot in the New York Times (and I gather her book has also been well-received), I doubt very much that any of the intellectual types who write on politics will absorb its main point. With few exceptions, the people who write about and pontificate on politics have their brain hard-wired to the view that liberals want the government and conservatives want to leave things to the market. They insist that this is the main conflict in political debates both in the United States and around the world.
Of course, Pistor’s point is that we have allowed the market to be structured in a way that leads to an enormous share of income flowing to those at the top. We didn’t have to do it that way.
We don’t need to have patent and copyright monopolies and other forms of intellectual property. Creating intellectual property and making these monopolies longer and stronger is a political decision. It has led to enormous inequality, both in making people like Bill Gates tremendously wealthy, and also providing the basis for the alleged bias in technology that allows people with STEM skills to do very well in the current economy. STEM skills would likely be far less valuable in an economy that had weaker intellectual property rules and relied more on alternative methods to finance innovation and creative work.
There is a similar story with rules on incorporation. We don’t have to give corporations legal personhood, as our courts have done. We can also have different rules of corporate governance that make it more difficult for top executives to pay themselves salaries in the tens of millions annually.
I can go on at length on this, as I have. Those who are interested can read my books (they are free) or Pistor’s. But the point is that the market has been structured in ways that lead to enormous inequality. It could be structured differently.
Taking the current structure of the market as a given puts progressives at an enormous disadvantage. To my view, government social programs like Social Security, Medicare, and public education are enormously important. But the need for redistributive program increases enormously if we allow the market to be structured in a way that leads to massive inequality. And, the ability for pay for them decreases, especially in a political system that allows the wealthy to have such disproportionate influence.
Accepting that conservatives want the free market, after we have allowed them to rig the rules to redistribute massive amounts of income upward, is like saying that supporters of grandfather rules for voting believed in race-blind democracy. After all, anyone whose grandfather was a registered voter was eligible to vote, regardless of race. Defining the battle lines as being about the role of the government versus the market, as opposed to a battle over the structure of the market, essentially gives away the store.
If there is a counter anywhere to the argument that Pistor is making (others have also made a similar argument, notably Yale political science professor Jacob Hacker), I have not seen it and cannot imagine what it would be. The rules of the market are pretty much infinitely malleable. There is no natural market outcome. Many right-wingers may want the world to believe the rules of the market are just given to us by god or nature, but nothing could be further from the truth.
For some reason, this point doesn’t seem to affect political debate. I suspect that even the people embracing Pistor’s argument last week will turn around in the near future and tell us that conservatives want to leave things to the market. It seems that, even though the structure of the market is not fixed by god or nature, it is a fact of nature that this view must be central to our political debates.
[1] Pistor repeatedly refers to these rules as “fictions.” I think that framing is unfortunate. The rules are very real, but her point, as I take it, is that they could be different. The fact that something is socially created doesn’t make it fiction.
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• Intellectual PropertyPropiedad IntelectualUnited StatesEE. UU.
A Washington Post editorial, following the outcome of a Congressional investigation, complained that the Food and Drug Administration (FDA) wrongly moved ahead with an accelerated approval process for the Alzheimer’s drug Adulhelm. It then approved a label that suggested the drug, which was being marketed for $56,000 for a year’s dosage, could be a general treatment for Alzheimer’s, even though the clinical trial evidence suggested it was at best appropriate for a small portion of patients with Alzheimer’s.
The editorial attributed the special treatment of the drug to the close relationship between Biogen, the drug’s manufacturer, and FDA staff. It implied that if there had been a more arms-length relationship, the FDA would not have been so positive towards the drug.
Missing from the editorial is any discussion of the government-granted patent monopolies that provide the incentive for this sort of corruption. If Adulhelm was being assessed for approval as a generic, selling for a few hundred dollars a year, there would be little incentive for its developers to devote lots of time and money to push the FDA to approve it, when the clinical trial data did not show clear evidence of its effectiveness. It was only the enormous amount of money at stake from having a monopoly on a presumably effective Alzheimer’s drug that gave Biogen the incentive to push the FDA to take steps not warranted by the evidence.
It is striking that the Washington Post can’t see the connection between granting patent monopolies, that can raise drug prices by 10,000 percent above the free market price, and corruption. It routinely complains about the corruption that can result from trade tariffs that may raise the price of manufacturers goods by 10-25 percent above the free market price.
There are alternative mechanisms for financing the development of prescription drugs, such as direct government funding, as we currently have with the National Institutes of Health. (See here and chapter 5 of Rigged [it’s free].) Apparently, the Washington Post does not allow these alternatives to be discussed in its pages, even as it notes the dangers of the patent monopoly system.
A Washington Post editorial, following the outcome of a Congressional investigation, complained that the Food and Drug Administration (FDA) wrongly moved ahead with an accelerated approval process for the Alzheimer’s drug Adulhelm. It then approved a label that suggested the drug, which was being marketed for $56,000 for a year’s dosage, could be a general treatment for Alzheimer’s, even though the clinical trial evidence suggested it was at best appropriate for a small portion of patients with Alzheimer’s.
The editorial attributed the special treatment of the drug to the close relationship between Biogen, the drug’s manufacturer, and FDA staff. It implied that if there had been a more arms-length relationship, the FDA would not have been so positive towards the drug.
Missing from the editorial is any discussion of the government-granted patent monopolies that provide the incentive for this sort of corruption. If Adulhelm was being assessed for approval as a generic, selling for a few hundred dollars a year, there would be little incentive for its developers to devote lots of time and money to push the FDA to approve it, when the clinical trial data did not show clear evidence of its effectiveness. It was only the enormous amount of money at stake from having a monopoly on a presumably effective Alzheimer’s drug that gave Biogen the incentive to push the FDA to take steps not warranted by the evidence.
It is striking that the Washington Post can’t see the connection between granting patent monopolies, that can raise drug prices by 10,000 percent above the free market price, and corruption. It routinely complains about the corruption that can result from trade tariffs that may raise the price of manufacturers goods by 10-25 percent above the free market price.
There are alternative mechanisms for financing the development of prescription drugs, such as direct government funding, as we currently have with the National Institutes of Health. (See here and chapter 5 of Rigged [it’s free].) Apparently, the Washington Post does not allow these alternatives to be discussed in its pages, even as it notes the dangers of the patent monopoly system.
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Like all good Keynesian economists, I’m a big fan of the platinum coin. The law explicitly allows the Treasury to print platinum coins in any denomination. That means it absolutely could deal with the debt ceiling by printing a platinum coin denominated for $1 trillion and selling it to the Fed.
This would not count as debt for debt ceiling purposes. The government would have sold an asset, the coin, in exchange for $1 trillion that it could then use to meet its bills. From an accounting standpoint, it would be the same thing as selling off blocs of government land for $1 trillion.
Unfortunately, the Biden administration seems reluctant to go the coin route, at least for now. But there is a slightly less gimmicky way for the Treasury to buy some room on the debt ceiling.
In 2020 and 2021 the Treasury issued trillions of dollars of debt at very low interest rates. Much of this was longer term debt, with maturities of 10 or even 30 years. Since interest rates are now much higher (the interest rate on 10-year Treasury bonds is now near 3.5 percent), the bonds issued at low interest rates in 2020 and 2021 would sell for much lower prices in the market today.
This might mean, for example, that a $1,000 10-year Treasury bond, issued at an interest rate of less than 1.0 percent in the summer of 2020, would sell for just $850 in the market today. For purposes of the debt ceiling, the law calculates debt at its face value, rather than its market value.
This means that Treasury could buy this bond for $850, and thereby reduce the value of outstanding debt by $150. With trillions of dollars of debt now selling for prices that are lower, and in some cases substantially lower, than their face value, the Treasury can reduce the amount of outstanding debt by hundreds of billions of dollars simply by buying up this debt at the current market price.
This will not end the standoff, we are running large deficits and eventually the Treasury will run out of bonds to buy, but this move could allow President Biden to delay the standoff over the debt ceiling for many months. (Maybe he’ll get out the coin at that point.)
As policy, this is of course absurd. The government has better things to do than to play around shuffling Treasury bonds. But the debt ceiling is also absurd. So, like the coin, it is an absurd solution to an absurd problem.
This sort of scheming on manipulating the measured size of the debt is not new, some of us have played with it for a long time. But absurd standoffs on the debt are also not new, so it’s always good to remember our stock of off-the-shelf fixes.
Like all good Keynesian economists, I’m a big fan of the platinum coin. The law explicitly allows the Treasury to print platinum coins in any denomination. That means it absolutely could deal with the debt ceiling by printing a platinum coin denominated for $1 trillion and selling it to the Fed.
This would not count as debt for debt ceiling purposes. The government would have sold an asset, the coin, in exchange for $1 trillion that it could then use to meet its bills. From an accounting standpoint, it would be the same thing as selling off blocs of government land for $1 trillion.
Unfortunately, the Biden administration seems reluctant to go the coin route, at least for now. But there is a slightly less gimmicky way for the Treasury to buy some room on the debt ceiling.
In 2020 and 2021 the Treasury issued trillions of dollars of debt at very low interest rates. Much of this was longer term debt, with maturities of 10 or even 30 years. Since interest rates are now much higher (the interest rate on 10-year Treasury bonds is now near 3.5 percent), the bonds issued at low interest rates in 2020 and 2021 would sell for much lower prices in the market today.
This might mean, for example, that a $1,000 10-year Treasury bond, issued at an interest rate of less than 1.0 percent in the summer of 2020, would sell for just $850 in the market today. For purposes of the debt ceiling, the law calculates debt at its face value, rather than its market value.
This means that Treasury could buy this bond for $850, and thereby reduce the value of outstanding debt by $150. With trillions of dollars of debt now selling for prices that are lower, and in some cases substantially lower, than their face value, the Treasury can reduce the amount of outstanding debt by hundreds of billions of dollars simply by buying up this debt at the current market price.
This will not end the standoff, we are running large deficits and eventually the Treasury will run out of bonds to buy, but this move could allow President Biden to delay the standoff over the debt ceiling for many months. (Maybe he’ll get out the coin at that point.)
As policy, this is of course absurd. The government has better things to do than to play around shuffling Treasury bonds. But the debt ceiling is also absurd. So, like the coin, it is an absurd solution to an absurd problem.
This sort of scheming on manipulating the measured size of the debt is not new, some of us have played with it for a long time. But absurd standoffs on the debt are also not new, so it’s always good to remember our stock of off-the-shelf fixes.
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The December Consumer Price Index (CPI), following a great December jobs report, shows the economy has turned the corner and seems on a path to stable growth with moderate inflation. The CPI showed prices actually fell by 0.1 percent for the month. This brought the annualized rate of inflation over the last three months in the overall index to just 1.8 percent.
With the drop in prices reported in December, the real average hourly wage for all workers is now 0.3 percent above its pre-pandemic level. For production and non-supervisory workers it is 0.8 percent higher. And, for production and non-supervisory workers in the low-paying hotel and restaurant sector it is up 5.7 percent.
The overall index for December was held down by a 4.5 percent plunge in energy prices, but the 0.3 percent rise in the core index should not be terribly troubling. The biggest factor pushing the core index higher was a 0.8 percent rise in both the rent proper index and the owners equivalent rent index, which together comprise almost 40 percent of the core index. The core index, excluding shelter, fell by 0.1 percent in December.
We know the rent indexes will be showing much lower inflation in 2023, and possibly even deflation, based on private indexes of rents in marketed units. Research from the Bureau of Labor Statistics shows that these private indexes lead the CPI rent indexes by six months to a year. With inflation in these indexes having turned downward in the summer, we know that in the not distant future, the inflation rate shown in the CPI rent indexes will fall sharply.
After leading the surge in inflation in 2021 and the first half of this year, due to supply chain problems, most goods are now seeing flat or falling prices. New vehicle prices fell 0.1 percent, the first drop since January of 2021. With demand for vehicles slowing, and most production largely back to normal, we should be seeing more drops in vehicle prices going forward.
Used vehicle prices fell by 2.5 percent in December, continuing a decline that began in July, but with prices still almost 40 percent higher than their pre-pandemic level, they have much further to fall. Prices of other items driven up by supply chain issues, like apparel, furniture, and appliances, were mixed in December, but there is little doubt that the direction in 2023 will be flat or downward.
With goods inflation clearly under control, the Fed has said that it wanted to focus on non-rent services. Here also the picture was largely positive in December. The index for medical services rose just 0.1 percent, although it was held down by an anomalous 3.4 percent decline in the health insurance index. But even pulling this out the picture is mixed at worst. The index for professional medical services rose just 0.1 percent, putting the year over year increase at 3.0 percent. The index for hospital services rose a more concerning 1.5 percent, but that followed declines in the prior two months. It is up 4.6 percent year over year.
The picture in other services is mixed. Recreation services rose 0.3 percent, well below the rates in recent months. The index is up 5.7 percent over the year. College tuition rose 0.3 percent in December, putting the year over year increase at 2.3 percent. Transportation services rose 0.2 percent, but the year over year increase is a still a double-digit 14.6 percent.
A big factor in the year over year rise is a 28.5 percent jump in air fares, which was reversing the decline earlier in the pandemic. Air fares actually fell by 3.1 percent in December.
But there also have been sharp increases in other components of transportation services. Car repairs rose 1.0 percent in December and are up 13.0 percent year over year. The auto insurance index rose 0.6 percent in the month and 14.2 percent over the last year.
These sharp increases show how the supply chain goods problems are intertwined with the service indexes. The index for motor vehicle parts and equipment rose 9.9 percent over the last year. These increases get passed on the price of the services. With the supply chain problems now largely under control, these price pressures will lessen in the months ahead, but some of the price increase in these services is reflecting price hikes in inputs from earlier in the year. As the prices of these inputs level off, or even fall, we should see slower inflation in these services.
This is similar to the story with restaurant prices. These rose 0.4 percent in December and are up 8.3 percent over the last year. Some of this rise is due to the reduction in government subsidies for school lunches, the price of which rose 305.2 percent over the last year. But inflation in the larger category was driven to a substantial extent by an 11.8 percent rise in the price of store-bought food.
We actually got some very good news in that category in December, as grocery prices rose just 0.2 percent, the smallest increase since March of 2021. Chicken prices actually fell by 0.6 percent in the month and milk prices dropped by 1.0 percent, although the indexes for both are still up by double digit amounts year over year.
It is likely that we will see more good news on food prices going forward. The price of many commodities, like wheat, corn, and coffee, have fallen sharply from pandemic peaks. With shipping costs also having reversed the vast majority of their pandemic increases, we should be seeing lower prices for many food items in stores.
We always need caution when looking at a single month’s report, but the good December CPI report follows several months in which inflation has slowed sharply from the pace earlier in the year. All the evidence suggests that the economy is still growing at solid pace. (The latest projection for the fourth quarter from the Atlanta Fed’s GDPNow is 4.1 percent.)
It looks like the Fed has largely accomplished its mission of taming inflation, without bringing on a recession. Plenty of things can mess up this picture, like another surge of Covid or an escalation of the war in Ukraine, but for now, the economy is looking very good.
The December Consumer Price Index (CPI), following a great December jobs report, shows the economy has turned the corner and seems on a path to stable growth with moderate inflation. The CPI showed prices actually fell by 0.1 percent for the month. This brought the annualized rate of inflation over the last three months in the overall index to just 1.8 percent.
With the drop in prices reported in December, the real average hourly wage for all workers is now 0.3 percent above its pre-pandemic level. For production and non-supervisory workers it is 0.8 percent higher. And, for production and non-supervisory workers in the low-paying hotel and restaurant sector it is up 5.7 percent.
The overall index for December was held down by a 4.5 percent plunge in energy prices, but the 0.3 percent rise in the core index should not be terribly troubling. The biggest factor pushing the core index higher was a 0.8 percent rise in both the rent proper index and the owners equivalent rent index, which together comprise almost 40 percent of the core index. The core index, excluding shelter, fell by 0.1 percent in December.
We know the rent indexes will be showing much lower inflation in 2023, and possibly even deflation, based on private indexes of rents in marketed units. Research from the Bureau of Labor Statistics shows that these private indexes lead the CPI rent indexes by six months to a year. With inflation in these indexes having turned downward in the summer, we know that in the not distant future, the inflation rate shown in the CPI rent indexes will fall sharply.
After leading the surge in inflation in 2021 and the first half of this year, due to supply chain problems, most goods are now seeing flat or falling prices. New vehicle prices fell 0.1 percent, the first drop since January of 2021. With demand for vehicles slowing, and most production largely back to normal, we should be seeing more drops in vehicle prices going forward.
Used vehicle prices fell by 2.5 percent in December, continuing a decline that began in July, but with prices still almost 40 percent higher than their pre-pandemic level, they have much further to fall. Prices of other items driven up by supply chain issues, like apparel, furniture, and appliances, were mixed in December, but there is little doubt that the direction in 2023 will be flat or downward.
With goods inflation clearly under control, the Fed has said that it wanted to focus on non-rent services. Here also the picture was largely positive in December. The index for medical services rose just 0.1 percent, although it was held down by an anomalous 3.4 percent decline in the health insurance index. But even pulling this out the picture is mixed at worst. The index for professional medical services rose just 0.1 percent, putting the year over year increase at 3.0 percent. The index for hospital services rose a more concerning 1.5 percent, but that followed declines in the prior two months. It is up 4.6 percent year over year.
The picture in other services is mixed. Recreation services rose 0.3 percent, well below the rates in recent months. The index is up 5.7 percent over the year. College tuition rose 0.3 percent in December, putting the year over year increase at 2.3 percent. Transportation services rose 0.2 percent, but the year over year increase is a still a double-digit 14.6 percent.
A big factor in the year over year rise is a 28.5 percent jump in air fares, which was reversing the decline earlier in the pandemic. Air fares actually fell by 3.1 percent in December.
But there also have been sharp increases in other components of transportation services. Car repairs rose 1.0 percent in December and are up 13.0 percent year over year. The auto insurance index rose 0.6 percent in the month and 14.2 percent over the last year.
These sharp increases show how the supply chain goods problems are intertwined with the service indexes. The index for motor vehicle parts and equipment rose 9.9 percent over the last year. These increases get passed on the price of the services. With the supply chain problems now largely under control, these price pressures will lessen in the months ahead, but some of the price increase in these services is reflecting price hikes in inputs from earlier in the year. As the prices of these inputs level off, or even fall, we should see slower inflation in these services.
This is similar to the story with restaurant prices. These rose 0.4 percent in December and are up 8.3 percent over the last year. Some of this rise is due to the reduction in government subsidies for school lunches, the price of which rose 305.2 percent over the last year. But inflation in the larger category was driven to a substantial extent by an 11.8 percent rise in the price of store-bought food.
We actually got some very good news in that category in December, as grocery prices rose just 0.2 percent, the smallest increase since March of 2021. Chicken prices actually fell by 0.6 percent in the month and milk prices dropped by 1.0 percent, although the indexes for both are still up by double digit amounts year over year.
It is likely that we will see more good news on food prices going forward. The price of many commodities, like wheat, corn, and coffee, have fallen sharply from pandemic peaks. With shipping costs also having reversed the vast majority of their pandemic increases, we should be seeing lower prices for many food items in stores.
We always need caution when looking at a single month’s report, but the good December CPI report follows several months in which inflation has slowed sharply from the pace earlier in the year. All the evidence suggests that the economy is still growing at solid pace. (The latest projection for the fourth quarter from the Atlanta Fed’s GDPNow is 4.1 percent.)
It looks like the Fed has largely accomplished its mission of taming inflation, without bringing on a recession. Plenty of things can mess up this picture, like another surge of Covid or an escalation of the war in Ukraine, but for now, the economy is looking very good.
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