There is a bizarre cult in the Washington elite that insists that Social Security, Medicare, and Medicaid must be cut for our own good. Unfortunately, the NYT seems to be part of this cult.
In its piece on the House of Representatives vote to approve the budget compromise worked out this week, it told readers:
“Some conservatives feel betrayed, as they often have since the Republicans took control of the House in 2011. Representative Jim Jordan, Republican of Ohio, said the House Republican conference agreed in the spring that spending levels exacted by the sequestration cuts would not change unless Congress and the White House could strike an accord to control the long-term causes of the rising costs of the federal debt, Medicare, Medicaid and Social Security.”
It would have been useful to point out that Mr. Jones is wrong. The projected cost of Medicare and Medicaid has fallen sharply over the last five years due to slower projected growth in health care costs. The Congressional Budget Office (CBO) has already lowered projected spending on Medicare and Medicaid for 2020 by 15 percent, which is more than 1 percent of GDP (@ $170 billion in today’s economy). If CBO were to adjust its budget projections fully in accord with the slowdown in spending over the last five years the reduction in projected spending would be even larger.
The slowdown in health care costs has led to sharper reductions in spending that almost any politician likely would have advocated. This means that when someone like Mr. Jones complains about the cost of these programs they are either uninformed about current budget projections or they want to make cuts in these programs apart from any concern about the budget.
It is also worth pointing out that Social Security cannot be a driver of the deficit. Under the law, the program can only spend money from its designated trust fund. If this fund is exhausted then benefits would have to be adjusted downward to correspond to Social Security tax revenue. There is no way that Social Security can contribute to the long-term deficit unless Congress votes to change the law as it now stands.
There is a bizarre cult in the Washington elite that insists that Social Security, Medicare, and Medicaid must be cut for our own good. Unfortunately, the NYT seems to be part of this cult.
In its piece on the House of Representatives vote to approve the budget compromise worked out this week, it told readers:
“Some conservatives feel betrayed, as they often have since the Republicans took control of the House in 2011. Representative Jim Jordan, Republican of Ohio, said the House Republican conference agreed in the spring that spending levels exacted by the sequestration cuts would not change unless Congress and the White House could strike an accord to control the long-term causes of the rising costs of the federal debt, Medicare, Medicaid and Social Security.”
It would have been useful to point out that Mr. Jones is wrong. The projected cost of Medicare and Medicaid has fallen sharply over the last five years due to slower projected growth in health care costs. The Congressional Budget Office (CBO) has already lowered projected spending on Medicare and Medicaid for 2020 by 15 percent, which is more than 1 percent of GDP (@ $170 billion in today’s economy). If CBO were to adjust its budget projections fully in accord with the slowdown in spending over the last five years the reduction in projected spending would be even larger.
The slowdown in health care costs has led to sharper reductions in spending that almost any politician likely would have advocated. This means that when someone like Mr. Jones complains about the cost of these programs they are either uninformed about current budget projections or they want to make cuts in these programs apart from any concern about the budget.
It is also worth pointing out that Social Security cannot be a driver of the deficit. Under the law, the program can only spend money from its designated trust fund. If this fund is exhausted then benefits would have to be adjusted downward to correspond to Social Security tax revenue. There is no way that Social Security can contribute to the long-term deficit unless Congress votes to change the law as it now stands.
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Harold Meyerson has a good column in the Post talking about how workers in the United States have little bargaining power with employers. This explains why profits have soared and wages have stagnated.
While Meyerson focuses on the weakening of unions it would also have been worth noting that part of the reason for the decline in workers’ bargaining power is that the government has decided to run a high unemployment policy. Congress and the president have approved budgets that keep the unemployment rate high. They also support a high dollar policy that leads to large trade deficits and reduces employment. By keeping unemployment high, these policies have a substantial effect on the wages of large segments of the workforce, especially those in the bottom third of the wage distribution.
The piece also notes that Boeing wants to pay new hires $17 an hour and keep them at a below union wage for their first 16 years of employment. It notes that this pay is still well above the minimum wage. In fact, if the minimum wage had tracked productivity since 1968, as it had between its creation in 1938 and 1968, it would be almost $17 an hour at present.
Harold Meyerson has a good column in the Post talking about how workers in the United States have little bargaining power with employers. This explains why profits have soared and wages have stagnated.
While Meyerson focuses on the weakening of unions it would also have been worth noting that part of the reason for the decline in workers’ bargaining power is that the government has decided to run a high unemployment policy. Congress and the president have approved budgets that keep the unemployment rate high. They also support a high dollar policy that leads to large trade deficits and reduces employment. By keeping unemployment high, these policies have a substantial effect on the wages of large segments of the workforce, especially those in the bottom third of the wage distribution.
The piece also notes that Boeing wants to pay new hires $17 an hour and keep them at a below union wage for their first 16 years of employment. It notes that this pay is still well above the minimum wage. In fact, if the minimum wage had tracked productivity since 1968, as it had between its creation in 1938 and 1968, it would be almost $17 an hour at present.
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The Economist ran a useful piece on the minimum wage in the United States. However in making cross country comparisons it shows the minimum wage relative to the median wage. This can give a somewhat misleading impression of the relative size of the minimum wage in different countries, since the median wage itself reflects distribution.
The median wage in the United States has fallen by roughly 20 percent relative to the average wage over the last three decades. This means that if the minimum wage had kept the same relationship to the median, it would have fallen by 20 percent relative to the average wage, which roughly reflects productivity in the economy. This is also important in considering international comparisons, since the median is lower relative to the average in the United States than in other wealthy countries.
The Economist ran a useful piece on the minimum wage in the United States. However in making cross country comparisons it shows the minimum wage relative to the median wage. This can give a somewhat misleading impression of the relative size of the minimum wage in different countries, since the median wage itself reflects distribution.
The median wage in the United States has fallen by roughly 20 percent relative to the average wage over the last three decades. This means that if the minimum wage had kept the same relationship to the median, it would have fallen by 20 percent relative to the average wage, which roughly reflects productivity in the economy. This is also important in considering international comparisons, since the median is lower relative to the average in the United States than in other wealthy countries.
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Politifact apparently has given up any pretense of being a serious independent news source. It wanted so badly to trash Obama over his “keep your insurance” line that it made this the lie of the year in 2013 even though all its examples were from 2008-2010.
But, when you’re trying to push an agenda there is no reason to let reality get in the way. It also decided to hype the horrors of people losing their insurance, telling readers:
“there was no shortage of powerful anecdotes about canceled coverage.
“One example: PBS Newshour interviewed a woman from Washington, D.C., who was a supporter of the health care law and found her policy canceled. New policies had significantly higher rates. She told Newshour that the only thing the new policy covered that her old one didn’t was maternity care and pediatric services. And she was 58.
“‘The chance of me having a child at this age is zero. So, you know, I ask the president, why do I have to pay an additional $5,000 a year for maternity coverage that I will never, ever need?’ asked Deborah Persico.”
While I have personally not investigated the matter, I would be willing to bet that there are other differences between Ms. Persico’s cancelled policy and the Obamacare compliant one costing $5,000 more than coverage of maternity costs (e.g. lower co-pays and deductibles on the more expensive policy). It is likely that Ms. Persico also opted to buy one of the more expensive plans in the exchange, since low cost plans can generally be purchased for around $5,000 a year and it is likely that her previous plan did carry a positive price.
A real news outlet would have examined Ms. Persico’s claims before highlighting them as a “powerful anecdote” about canceled coverage.
Thanks to Robert Salzberg for calling this one to my attention.
Politifact apparently has given up any pretense of being a serious independent news source. It wanted so badly to trash Obama over his “keep your insurance” line that it made this the lie of the year in 2013 even though all its examples were from 2008-2010.
But, when you’re trying to push an agenda there is no reason to let reality get in the way. It also decided to hype the horrors of people losing their insurance, telling readers:
“there was no shortage of powerful anecdotes about canceled coverage.
“One example: PBS Newshour interviewed a woman from Washington, D.C., who was a supporter of the health care law and found her policy canceled. New policies had significantly higher rates. She told Newshour that the only thing the new policy covered that her old one didn’t was maternity care and pediatric services. And she was 58.
“‘The chance of me having a child at this age is zero. So, you know, I ask the president, why do I have to pay an additional $5,000 a year for maternity coverage that I will never, ever need?’ asked Deborah Persico.”
While I have personally not investigated the matter, I would be willing to bet that there are other differences between Ms. Persico’s cancelled policy and the Obamacare compliant one costing $5,000 more than coverage of maternity costs (e.g. lower co-pays and deductibles on the more expensive policy). It is likely that Ms. Persico also opted to buy one of the more expensive plans in the exchange, since low cost plans can generally be purchased for around $5,000 a year and it is likely that her previous plan did carry a positive price.
A real news outlet would have examined Ms. Persico’s claims before highlighting them as a “powerful anecdote” about canceled coverage.
Thanks to Robert Salzberg for calling this one to my attention.
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Economists like to think that they get to define the word “rationality.” They don’t. Economists tend to define a certain type of narrow behavior as “rational,” implying that anything else is “irrational.”
Binyamin Appelbaum falls into this trap at the end of an interesting piece on Stanley Fisher, when he refers to work by Janet Yellen and others which he says assumes that people are “predictably irrational.” Actually much of the behavior assumed in this work is entirely rational, even if it departs from the standard theory that economists would like to apply.
For example, it is not irrational for workers to resist a nominal wage cut from their employers, because this directly implies a reduction in relative wages, even if they would accept a cut in real wages due to inflation. This simply means that workers care about relative wages. Economists have no basis for calling this concern “irrational.” Economists are not supposed to be in the business of telling people what they should and should not value. If they care about their relative income, then this is fact that economists must accept, not condemn as irrational.
Much of Yellen’s work explores such departure’s from narrow rationality as defined by economic theory. However this points to an inadequacy of the definition of economic rationality, not the pervasiveness of irrational behavior.
Economists like to think that they get to define the word “rationality.” They don’t. Economists tend to define a certain type of narrow behavior as “rational,” implying that anything else is “irrational.”
Binyamin Appelbaum falls into this trap at the end of an interesting piece on Stanley Fisher, when he refers to work by Janet Yellen and others which he says assumes that people are “predictably irrational.” Actually much of the behavior assumed in this work is entirely rational, even if it departs from the standard theory that economists would like to apply.
For example, it is not irrational for workers to resist a nominal wage cut from their employers, because this directly implies a reduction in relative wages, even if they would accept a cut in real wages due to inflation. This simply means that workers care about relative wages. Economists have no basis for calling this concern “irrational.” Economists are not supposed to be in the business of telling people what they should and should not value. If they care about their relative income, then this is fact that economists must accept, not condemn as irrational.
Much of Yellen’s work explores such departure’s from narrow rationality as defined by economic theory. However this points to an inadequacy of the definition of economic rationality, not the pervasiveness of irrational behavior.
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A NYT blog post by Robb Mandelbaum noted the findings of a study showing that more than 40 percent of Internet sales would escape taxation if a small business exemption was put into the law. The last paragraph tells readers:
“Somewhat surprisingly, given their claims to unwavering support for small businesses, House Republican leaders appear to be leaning toward legislation that would offer no small-seller exemption at all.”
Actually, this is not the least bit surprising. The current exemption of Internet sales from the requirement to collect sales tax is comparable to exempting stores whose addresses end in the digit “3.” This rule would effectively subsidize businesses whose last digit ends with “3” at the expense of other businesses.
There is no reason to have such a subsidy even if some of the firms who might take advantage of it are small businesses. The same applies to Internet sales.
A NYT blog post by Robb Mandelbaum noted the findings of a study showing that more than 40 percent of Internet sales would escape taxation if a small business exemption was put into the law. The last paragraph tells readers:
“Somewhat surprisingly, given their claims to unwavering support for small businesses, House Republican leaders appear to be leaning toward legislation that would offer no small-seller exemption at all.”
Actually, this is not the least bit surprising. The current exemption of Internet sales from the requirement to collect sales tax is comparable to exempting stores whose addresses end in the digit “3.” This rule would effectively subsidize businesses whose last digit ends with “3” at the expense of other businesses.
There is no reason to have such a subsidy even if some of the firms who might take advantage of it are small businesses. The same applies to Internet sales.
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I’ve got to take some issue with my friend Paul Krugman over his blog post pronouncing the Trans-Pacific Partnership (TPP) no big deal. As a trade question he is undoubtedly right. The countries in the pact are ones with whom the United States already has extensive trade ties and generally low barriers. Eliminating or reducing the remaining barriers cannot possibly have much impact on the U.S. economy.
However it is a misunderstanding to see the TPP as being about trade. This is a deal that focuses on changes in regulatory structures to lock in pro-corporate rules. Using a “trade” agreement provides a mechanism to lock in rules that it would be difficult, if not impossible, to get through the normal political process.
To take a couple of examples, our drug patent policy (that’s patent protection, as in protectionism) is a seething cesspool of corruption. It increases the amount that we pay for drugs by an order of magnitude and leads to endless tales of corruption. Economic theory predicts that when you raise the price of a product 1000 percent or more above the free market price you will get all forms of illegal and unethical activity from companies pursuing patent rents.
Anyhow, the U.S. and European drug companies face a serious threat in the developing world. If these countries don’t enforce patents in the same way as we do, then the drugs that sell for hundreds or thousands of dollars per prescription in the U.S. may sell for $5 or $10 per prescription in the developing world. With drug prices going ever higher, it will be hard to maintain this sort of segmented market. Either people in the U.S. will go to the cheap drugs or the cheap drugs will come here.
For this reason, trade deals like the TPP, in which they hope to eventually incorporate India and other major suppliers of low cost generics, can be very important. The drug companies would like to bring these producers into line and impose high prices everywhere. (Yes, we need to pay for research. And yes, there are far more efficient mechanisms for financing research than government granted patent monopolies.)
For another example, our gas industry has been pursuing fracking at an ambitious clip with little regard for its environmental impact. I personally am agnostic as to whether natural gas can be a useful bridge fuel until the cost of clean energy falls further. However, I can see no justification for allowing the process in ways that let the gas companies pollute people’s drinking water and ruin their farmland.
In the Bush years the industry arranged a special exemption to the Clean Water Drinking Act so that they do not have to disclose the chemicals used in the fracking process. (They claim their mixes are industrial secrets.) If the industry got similar wording in the TPP it would both lead to open fields for fracking in the other signatories and also make the U.S. law more difficult to reverse.
There are many other areas where industry groups are seeking special treatment along these lines. No, I can’t give a list with links because the draft text is a secret. Public Citizen’s website probably is the best source available. It includes the chapter on intellectual property that was obtained through Wikileaks.
Anyhow, Krugman is on the money in his assessment of the impact of the TPP on trade. But the point is that the TPP is not really about trade, it’s about changing the regulatory process in ways that would almost certainly be opposed by the people in most of the countries included in the deal.
I’ve got to take some issue with my friend Paul Krugman over his blog post pronouncing the Trans-Pacific Partnership (TPP) no big deal. As a trade question he is undoubtedly right. The countries in the pact are ones with whom the United States already has extensive trade ties and generally low barriers. Eliminating or reducing the remaining barriers cannot possibly have much impact on the U.S. economy.
However it is a misunderstanding to see the TPP as being about trade. This is a deal that focuses on changes in regulatory structures to lock in pro-corporate rules. Using a “trade” agreement provides a mechanism to lock in rules that it would be difficult, if not impossible, to get through the normal political process.
To take a couple of examples, our drug patent policy (that’s patent protection, as in protectionism) is a seething cesspool of corruption. It increases the amount that we pay for drugs by an order of magnitude and leads to endless tales of corruption. Economic theory predicts that when you raise the price of a product 1000 percent or more above the free market price you will get all forms of illegal and unethical activity from companies pursuing patent rents.
Anyhow, the U.S. and European drug companies face a serious threat in the developing world. If these countries don’t enforce patents in the same way as we do, then the drugs that sell for hundreds or thousands of dollars per prescription in the U.S. may sell for $5 or $10 per prescription in the developing world. With drug prices going ever higher, it will be hard to maintain this sort of segmented market. Either people in the U.S. will go to the cheap drugs or the cheap drugs will come here.
For this reason, trade deals like the TPP, in which they hope to eventually incorporate India and other major suppliers of low cost generics, can be very important. The drug companies would like to bring these producers into line and impose high prices everywhere. (Yes, we need to pay for research. And yes, there are far more efficient mechanisms for financing research than government granted patent monopolies.)
For another example, our gas industry has been pursuing fracking at an ambitious clip with little regard for its environmental impact. I personally am agnostic as to whether natural gas can be a useful bridge fuel until the cost of clean energy falls further. However, I can see no justification for allowing the process in ways that let the gas companies pollute people’s drinking water and ruin their farmland.
In the Bush years the industry arranged a special exemption to the Clean Water Drinking Act so that they do not have to disclose the chemicals used in the fracking process. (They claim their mixes are industrial secrets.) If the industry got similar wording in the TPP it would both lead to open fields for fracking in the other signatories and also make the U.S. law more difficult to reverse.
There are many other areas where industry groups are seeking special treatment along these lines. No, I can’t give a list with links because the draft text is a secret. Public Citizen’s website probably is the best source available. It includes the chapter on intellectual property that was obtained through Wikileaks.
Anyhow, Krugman is on the money in his assessment of the impact of the TPP on trade. But the point is that the TPP is not really about trade, it’s about changing the regulatory process in ways that would almost certainly be opposed by the people in most of the countries included in the deal.
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Steve Rattner is upset that Congress isn’t voting to cut Social Security and Medicare, complaining about this fact in a NYT column this morning. Much of the problem seems to stem from Rattner’s misunderstanding of budget projections and his failure to pay attention to recent developments in health care spending.
At one point Rattner gives us the distressing news that a do nothing scenario will give us a debt to GDP ratio by 2035 of 99 percent (@ 19 percentage points less than the post World War II peak) then tells us:
“That may be too rosy a picture. The Congressional Budget Office assumes robust growth over the coming decade — not a single year of recession and three annual G.D.P. increases of about 4 percent beginning in 2015. (By comparison, the G.D.P. is likely to grow by just 1.7 percent this year.) Slower growth means a higher debt-to-G.D.P. ratio.”
Actually CBO constructs long-term projections that are supposed to average out the impact of recessions and the more rapid growth that usually follows them. This explains the three years of 4 percent GDP growth. The economy is currently 6 percentage points below its potential according to CBO’s estimates. These three years of rapid growth would allow it to make up this gap. The average growth rate projected for the next 22 years is 2.36 percent, which hardly seems especially fast given the economy’s current position.
The other part of the story is that Rattner apparently missed is the sharp slowdown in the growth of health care spending we’ve seen over the past five years. This has already led CBO to substantially lower its projection for health care spending in future decades. If CBO were to fully incorporate the recent slowdown in health care spending in its projections, then the primary (non-interest) budget would be nearly balanced for decades into the future.
Steve Rattner is upset that Congress isn’t voting to cut Social Security and Medicare, complaining about this fact in a NYT column this morning. Much of the problem seems to stem from Rattner’s misunderstanding of budget projections and his failure to pay attention to recent developments in health care spending.
At one point Rattner gives us the distressing news that a do nothing scenario will give us a debt to GDP ratio by 2035 of 99 percent (@ 19 percentage points less than the post World War II peak) then tells us:
“That may be too rosy a picture. The Congressional Budget Office assumes robust growth over the coming decade — not a single year of recession and three annual G.D.P. increases of about 4 percent beginning in 2015. (By comparison, the G.D.P. is likely to grow by just 1.7 percent this year.) Slower growth means a higher debt-to-G.D.P. ratio.”
Actually CBO constructs long-term projections that are supposed to average out the impact of recessions and the more rapid growth that usually follows them. This explains the three years of 4 percent GDP growth. The economy is currently 6 percentage points below its potential according to CBO’s estimates. These three years of rapid growth would allow it to make up this gap. The average growth rate projected for the next 22 years is 2.36 percent, which hardly seems especially fast given the economy’s current position.
The other part of the story is that Rattner apparently missed is the sharp slowdown in the growth of health care spending we’ve seen over the past five years. This has already led CBO to substantially lower its projection for health care spending in future decades. If CBO were to fully incorporate the recent slowdown in health care spending in its projections, then the primary (non-interest) budget would be nearly balanced for decades into the future.
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The answer seems to be no. Its piece on the budget deal negotiated by Senate Budget Committee Chair Patty Murray and House Budget Committee Chair Paul Ryan told readers:
“The deal, while modest in scope, amounts to a cease-fire in the budget wars that have debilitated Washington since 2011 and gives lawmakers breathing room to try to address the real drivers of federal spending — health care and entitlement programs like Medicare and Social Security — and to reshape the tax code.”
It would be equally valid to say that the budget deal gives lawmakers breathing room to plan an attack in Freedonia. Addressing the “real drivers of federal spending” is the NYT’s agenda, it is not in any obvious way the agenda of Congress. It is also not clear that this is accurate in any important way.
Social Security spending has risen by roughly one percentage point as a share of GDP since 2000. It is projected to rise by roughly the same amount over the next two decades due to the continued aging of the population. It is then projected to remain pretty much flat for the rest of the century. This does not suggest a problem in obvious need of fixing.
Medicare costs are projected to grow more rapidly due to the projected rise in per person health care spending in the private sector. This suggests a need to contain health care costs in the economy as a whole. In the last five years per person costs have grown only slightly more rapidly than per capita GDP. If this trend continues, then there is no need to have further measures containing Medicare costs even without any further increases in revenue or offsetting cuts elsewhere.
The piece also includes some mind reading, telling readers:
“The proposal quickly drew fire from conservatives who saw it as a retreat from earlier spending cuts and a betrayal by senior Republicans.”
A reporter would write this sentence:
“The proposal quickly drew fire from conservatives who claimed to see it as a retreat from earlier spending cuts and a betrayal by senior Republicans.”
The answer seems to be no. Its piece on the budget deal negotiated by Senate Budget Committee Chair Patty Murray and House Budget Committee Chair Paul Ryan told readers:
“The deal, while modest in scope, amounts to a cease-fire in the budget wars that have debilitated Washington since 2011 and gives lawmakers breathing room to try to address the real drivers of federal spending — health care and entitlement programs like Medicare and Social Security — and to reshape the tax code.”
It would be equally valid to say that the budget deal gives lawmakers breathing room to plan an attack in Freedonia. Addressing the “real drivers of federal spending” is the NYT’s agenda, it is not in any obvious way the agenda of Congress. It is also not clear that this is accurate in any important way.
Social Security spending has risen by roughly one percentage point as a share of GDP since 2000. It is projected to rise by roughly the same amount over the next two decades due to the continued aging of the population. It is then projected to remain pretty much flat for the rest of the century. This does not suggest a problem in obvious need of fixing.
Medicare costs are projected to grow more rapidly due to the projected rise in per person health care spending in the private sector. This suggests a need to contain health care costs in the economy as a whole. In the last five years per person costs have grown only slightly more rapidly than per capita GDP. If this trend continues, then there is no need to have further measures containing Medicare costs even without any further increases in revenue or offsetting cuts elsewhere.
The piece also includes some mind reading, telling readers:
“The proposal quickly drew fire from conservatives who saw it as a retreat from earlier spending cuts and a betrayal by senior Republicans.”
A reporter would write this sentence:
“The proposal quickly drew fire from conservatives who claimed to see it as a retreat from earlier spending cuts and a betrayal by senior Republicans.”
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People who follow economic data know that quarterly growth numbers are highly erratic. For example, the 3.6 percent growth rate reported for the third quarter in the United States was driven largely by inventory accumulations. As a result, most analysts expect growth to be close to 1.0 percent for the fourth quarter. It would be foolhardy to tout the 3.6 percent growth in the third quarter as evidence of a robust economy, while it would be equally wrongheaded to treat a weak number in the fourth quarter as evidence of a sagging economy.
Unfortunately the NYT seemed unaware of the volatility of quarterly data as it touted a strong third quarter growth number as evidence of the success of austerity in the UK. It contrasted this number to a weak growth figure in Japan, which it implied meant the failure of stimulus there.
Of course this claim is absurd on its face. Japan will almost certainly have far stronger growth over the calendar year than the UK, and even more so on a per capita basis. (Japan’s population is shrinking at a 0.1 percent annual rate, while the UK’s population is rising at a 0.6 percent annual rate. Therefore we should expect more rapid overall growth in the UK just to sustain the same rate of per capita growth.)
To take a slightly different measure, according to the OECD, Japan’s employment to population ratio is rose by 1.1 percentage point from the third quarter of 2012 to the third quarter of 2013. This would be equivalent to an increase in employment of 2.8 million in the United States. By contrast, the employment to population ratio in the UK increased by just 0.2 percentage points from the second quarter of 2012 to the second quarter of 2013 (the most recent data available).
The piece includes numerous other inaccuracies, at one point telling readers:
“With an even greater dependence on its financial sector than the United States — but neither the shale gas boom nor a reserve currency to help fuel a recovery.”
Actually the UK does have a reserve currency, as hundreds of billions of dollars’ worth of pounds are held as reserves by central banks around the world. It also is not clear that this helps the recovery. Insofar as the dollar or pound falls it helps to boost net exports, stimulating growth and generating jobs.
The piece also contains the bizarre statement:
“Those in the stimulus camp who liked to point to “a natural experiment” playing out between Britain and Japan, where stimulus measures introduced by Prime Minister Shinzo Abe produced a burst of economic activity earlier this year, have gone quiet. Abenomics, as Mr. Abe’s approach was soon dubbed, has not proved to be the panacea some had hoped.”
Since every economist knows that quarterly data is erratic it is questionable whether any have “gone quiet” over the recent economic data. It would have been helpful if the piece could have identified an economist whose opinion of the relative merits of austerity and stimulus was changed by the third quarter data.
People who follow economic data know that quarterly growth numbers are highly erratic. For example, the 3.6 percent growth rate reported for the third quarter in the United States was driven largely by inventory accumulations. As a result, most analysts expect growth to be close to 1.0 percent for the fourth quarter. It would be foolhardy to tout the 3.6 percent growth in the third quarter as evidence of a robust economy, while it would be equally wrongheaded to treat a weak number in the fourth quarter as evidence of a sagging economy.
Unfortunately the NYT seemed unaware of the volatility of quarterly data as it touted a strong third quarter growth number as evidence of the success of austerity in the UK. It contrasted this number to a weak growth figure in Japan, which it implied meant the failure of stimulus there.
Of course this claim is absurd on its face. Japan will almost certainly have far stronger growth over the calendar year than the UK, and even more so on a per capita basis. (Japan’s population is shrinking at a 0.1 percent annual rate, while the UK’s population is rising at a 0.6 percent annual rate. Therefore we should expect more rapid overall growth in the UK just to sustain the same rate of per capita growth.)
To take a slightly different measure, according to the OECD, Japan’s employment to population ratio is rose by 1.1 percentage point from the third quarter of 2012 to the third quarter of 2013. This would be equivalent to an increase in employment of 2.8 million in the United States. By contrast, the employment to population ratio in the UK increased by just 0.2 percentage points from the second quarter of 2012 to the second quarter of 2013 (the most recent data available).
The piece includes numerous other inaccuracies, at one point telling readers:
“With an even greater dependence on its financial sector than the United States — but neither the shale gas boom nor a reserve currency to help fuel a recovery.”
Actually the UK does have a reserve currency, as hundreds of billions of dollars’ worth of pounds are held as reserves by central banks around the world. It also is not clear that this helps the recovery. Insofar as the dollar or pound falls it helps to boost net exports, stimulating growth and generating jobs.
The piece also contains the bizarre statement:
“Those in the stimulus camp who liked to point to “a natural experiment” playing out between Britain and Japan, where stimulus measures introduced by Prime Minister Shinzo Abe produced a burst of economic activity earlier this year, have gone quiet. Abenomics, as Mr. Abe’s approach was soon dubbed, has not proved to be the panacea some had hoped.”
Since every economist knows that quarterly data is erratic it is questionable whether any have “gone quiet” over the recent economic data. It would have been helpful if the piece could have identified an economist whose opinion of the relative merits of austerity and stimulus was changed by the third quarter data.
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