Robert Samuelson says that we have a weak recovery, that employers are shifting from full-time to part-time employment, and the cause is the Affordable Care Act (ACA). This gives him a batting average of 333, pretty good for the Post.
The first part is undeniably true. This recovery is very weak compared to prior post-war recoveries. Of course that is not surprising to fans of economics and arithmetic. This recession was brought on by the collapse of a housing bubble, not the Fed raising interest rates to slow inflation. That meant that a recovery would be more difficult.
In a normal recession, high interest rates discourage car buying and home building and buying. This means when the Fed lowers interest rates to boost the economy, there is a large amount of pent-up demand in these sectors which provides a powerful boost the recovery.
That was not the case with this downturn as some of us have been saying for the last 5 years (here, here, and here). As they say in Washington, if you repeat something long enough, and it happens to be true, the Washington Post will eventually notice. So yes, Robert Samuelson is right, this is a weak recovery and it is easy to explain by an inadequate stimulus. There is simply no source of demand in the economy that is capable of replacing the more than $1 trillion in annual demand (construction and consumption) that was being generated by the housing bubble.
On the second point Samuelson is suffering from a serious lack of evidence. According to the Bureau of Labor Statistics in 1992, when the economy was slow creating jobs coming out of the 1990-91 recession, involuntary part-time workers accounted for 5.4 percent of total employment. In the first six months the share has been 5.5 percent. Given the far greater severity of the current downturn, it would seem a bit of stretch to describe this 0.1 percentage point increase as implying some sort of sea change in employer behavior.
For those looking at temp employment, we’re hovering near the 2000 levels. There’s not much of a story here either, or at least not a new story.
Since Samuelson is wrong on the second point — employers have not shifted to part-time in a way that is not a predictable result of a weak economy — he is inevitably wrong on the third point: employers are not cutting hours to avoid the employer sanctions under the ACA. Just to be sure, Helene Jorgenson and I checked the percentage of workers who are working 26-29 hours, just under the 30 hour cutoff for the employer penalty. It actually is slightly lower in 2013 than in 2012. So much for the huge shift in hours.
There is one final point worth noting. Samuelson points to surveys of employers where they say they had adjusted their employment patterns because of the ACA. Employers do not always do as they say. It is fashionable in some circles to repeat the job-killer ACA mantra. Many employers fall into this category.
Many have claimed that it deterred employment in 2010-2012, years when the sanctions did not even apply. If demand warranted increased employment, there would be no reason not to hire workers in these years because of the ACA. Since roughly 3 percent of workers leave their jobs every month (half voluntarily and half involuntarily) they would have little reason to fear that they would be stuck with more than 50 workers in 2013, when the sanctions were first scheduled to apply, if their goal was to avoid the sanctions.
Of course if they were not hiring because of fears of the ACA, then they presumably would have increased average hours to meet the demand for labor. There is no evidence of any substantial increase in hours, above pre-recession levels, in any major sector of the economy. In short, it does not appear as though employers were acting in a way consistent with what they were saying.
Robert Samuelson says that we have a weak recovery, that employers are shifting from full-time to part-time employment, and the cause is the Affordable Care Act (ACA). This gives him a batting average of 333, pretty good for the Post.
The first part is undeniably true. This recovery is very weak compared to prior post-war recoveries. Of course that is not surprising to fans of economics and arithmetic. This recession was brought on by the collapse of a housing bubble, not the Fed raising interest rates to slow inflation. That meant that a recovery would be more difficult.
In a normal recession, high interest rates discourage car buying and home building and buying. This means when the Fed lowers interest rates to boost the economy, there is a large amount of pent-up demand in these sectors which provides a powerful boost the recovery.
That was not the case with this downturn as some of us have been saying for the last 5 years (here, here, and here). As they say in Washington, if you repeat something long enough, and it happens to be true, the Washington Post will eventually notice. So yes, Robert Samuelson is right, this is a weak recovery and it is easy to explain by an inadequate stimulus. There is simply no source of demand in the economy that is capable of replacing the more than $1 trillion in annual demand (construction and consumption) that was being generated by the housing bubble.
On the second point Samuelson is suffering from a serious lack of evidence. According to the Bureau of Labor Statistics in 1992, when the economy was slow creating jobs coming out of the 1990-91 recession, involuntary part-time workers accounted for 5.4 percent of total employment. In the first six months the share has been 5.5 percent. Given the far greater severity of the current downturn, it would seem a bit of stretch to describe this 0.1 percentage point increase as implying some sort of sea change in employer behavior.
For those looking at temp employment, we’re hovering near the 2000 levels. There’s not much of a story here either, or at least not a new story.
Since Samuelson is wrong on the second point — employers have not shifted to part-time in a way that is not a predictable result of a weak economy — he is inevitably wrong on the third point: employers are not cutting hours to avoid the employer sanctions under the ACA. Just to be sure, Helene Jorgenson and I checked the percentage of workers who are working 26-29 hours, just under the 30 hour cutoff for the employer penalty. It actually is slightly lower in 2013 than in 2012. So much for the huge shift in hours.
There is one final point worth noting. Samuelson points to surveys of employers where they say they had adjusted their employment patterns because of the ACA. Employers do not always do as they say. It is fashionable in some circles to repeat the job-killer ACA mantra. Many employers fall into this category.
Many have claimed that it deterred employment in 2010-2012, years when the sanctions did not even apply. If demand warranted increased employment, there would be no reason not to hire workers in these years because of the ACA. Since roughly 3 percent of workers leave their jobs every month (half voluntarily and half involuntarily) they would have little reason to fear that they would be stuck with more than 50 workers in 2013, when the sanctions were first scheduled to apply, if their goal was to avoid the sanctions.
Of course if they were not hiring because of fears of the ACA, then they presumably would have increased average hours to meet the demand for labor. There is no evidence of any substantial increase in hours, above pre-recession levels, in any major sector of the economy. In short, it does not appear as though employers were acting in a way consistent with what they were saying.
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There we find an article on House Appropriations Committee approving a bill to cut funding for the National Endowment for Humanities by almost 50 percent. The piece tells readers:
“The measure would allocate $75-million to the NEA, a level last seen in 1974. The president’s proposed fiscal 2014 budget seeks $154.5-million for the grant-making agency.”
Using the CEPR budget calculator, it could explain that:
“The measure would allocate $75-million to the NEA, a level last seen in 1974. The president’s proposed fiscal 2014 budget seeks $154.5-million (0.0045 percent of the federal budget) for the grant-making agency.”
There we find an article on House Appropriations Committee approving a bill to cut funding for the National Endowment for Humanities by almost 50 percent. The piece tells readers:
“The measure would allocate $75-million to the NEA, a level last seen in 1974. The president’s proposed fiscal 2014 budget seeks $154.5-million for the grant-making agency.”
Using the CEPR budget calculator, it could explain that:
“The measure would allocate $75-million to the NEA, a level last seen in 1974. The president’s proposed fiscal 2014 budget seeks $154.5-million (0.0045 percent of the federal budget) for the grant-making agency.”
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The debate over Larry Summers’ potential appointment to Fed chair provides an excellent opportunity to explain the logic behind one of his biggest policy missteps. During the East Asian financial crisis he worked alongside Robert Rubin and Alan Greenspan to impose a solution that required the countries of the region to repay their debts in full. The quid pro quo was that they would have the opportunity to hugely increase their exports to the United States in order to get the dollars needed to make their payments.
This bailout put muscle behind Robert Rubin’s strong dollar policy. Robert Rubin’s predecessor as Treasury Secretary, Lloyd Bentsen, was happy to have the dollar fall. This was part of the textbook story of the deficit reduction being pursued by the Clinton administration. Lower deficits were supposed to mean lower interest rates.
One of the dividends of lower interest rates was supposed to be that investors would hold fewer dollars, causing its value to fall relative to other currencies. This would make U.S. exports cheaper to people in other countries, leading them to buy more of our exports. A lower valued dollar would also make imports more expensive for people in the United States, leading them to buy fewer imports.
More exports and less imports means an improved trade balance which would increase demand and growth. And to some extent this is the story we saw in the first years of the Clinton administration with the trade deficit falling to its lowest non-recession levels as a share of GDP since the Carter years.
However Robert Rubin’s high dollar policy reversed this story. The rise in the dollar led a predictable rise in the trade deficit. Because of the harsh terms imposed in the bailout from East Asian financial crisis developing countries began to accumulate foreign exchange (i.e. dollars) on a massive basis in order to avoid ever being in the same situation. This caused a huge run-up in the dollar, which pushed the trade deficit ever higher.
The deficit reached 4 percent of GDP ($640 billion a year in today’s economy) in 2000 before falling back somewhat in the 2001 recession. It eventually peaked at almost 6 percent of GDP in 2006.
The trade deficit creates a huge gap in demand that must be filled by some other source. This is income that people are spending overseas rather than in the United States. In the late 1990s this gap was filled by the stock bubble. The $10 trillion in wealth generated by the bubble led to a huge surge in consumption as the saving rate was pushed to then record lows. The bubble also led to an increase of investment, although much of it was in hare-brained start-ups like Pets.com.
After the stock bubble burst the economy needed some other source of demand to replace the money lost through the trade deficit. Contrary to conventional wisdom, the economy was very slow to emerge from the 2001 recession. It did not regain the jobs lost in the recession until 2005. At the time this was the longest period without job growth since the Great Depression.
When the economy did emerge from the 2001 downturn it was on the back of the housing bubble. The bubble generated huge amounts of demand both by pushing construction to record levels and through the wealth effect on consumption. Of course it was predictable that this bubble would also end badly, as it did.
While Summers did not hold the levers of power through the housing bubble years, he did set the process in motion in the 1990s with his high dollar policy. He was also a major cheerleader at the time, denouncing those who raised questions about the exotic financing that was supporting the run-up in house prices as “luddites.”
Furthermore, we still have the basic math problem that he left us from his years in the Clinton administration, how do we fill the gap in demand that resulted from his high dollar policy. While a subsequent fall in the dollar has reduced the trade deficit, it is still close to 4.0 percent of GDP ($640 billion). This can be filled by the government’s deficit spending, but Summers has repeatedly warned that this is only a short-term strategy.
So how does Summer want to solve the math problem? Is he going to push for another bubble to juice the economy again or perhaps he has changed his mind and decided that a strong dollar really wasn’t such a good idea after all.
Anyhow, there is no way around this math. You either want a lower dollar, you want to sustain high budget deficits, you want another bubble, or you want high unemployment. That is the math, what is Summers’ answer? We should know this before he gets appointed to the country’s most important economic post.
Note: Correction made on imports becoming more expensive when the dollar falls. Thanks to the people who called it to my attention.
The debate over Larry Summers’ potential appointment to Fed chair provides an excellent opportunity to explain the logic behind one of his biggest policy missteps. During the East Asian financial crisis he worked alongside Robert Rubin and Alan Greenspan to impose a solution that required the countries of the region to repay their debts in full. The quid pro quo was that they would have the opportunity to hugely increase their exports to the United States in order to get the dollars needed to make their payments.
This bailout put muscle behind Robert Rubin’s strong dollar policy. Robert Rubin’s predecessor as Treasury Secretary, Lloyd Bentsen, was happy to have the dollar fall. This was part of the textbook story of the deficit reduction being pursued by the Clinton administration. Lower deficits were supposed to mean lower interest rates.
One of the dividends of lower interest rates was supposed to be that investors would hold fewer dollars, causing its value to fall relative to other currencies. This would make U.S. exports cheaper to people in other countries, leading them to buy more of our exports. A lower valued dollar would also make imports more expensive for people in the United States, leading them to buy fewer imports.
More exports and less imports means an improved trade balance which would increase demand and growth. And to some extent this is the story we saw in the first years of the Clinton administration with the trade deficit falling to its lowest non-recession levels as a share of GDP since the Carter years.
However Robert Rubin’s high dollar policy reversed this story. The rise in the dollar led a predictable rise in the trade deficit. Because of the harsh terms imposed in the bailout from East Asian financial crisis developing countries began to accumulate foreign exchange (i.e. dollars) on a massive basis in order to avoid ever being in the same situation. This caused a huge run-up in the dollar, which pushed the trade deficit ever higher.
The deficit reached 4 percent of GDP ($640 billion a year in today’s economy) in 2000 before falling back somewhat in the 2001 recession. It eventually peaked at almost 6 percent of GDP in 2006.
The trade deficit creates a huge gap in demand that must be filled by some other source. This is income that people are spending overseas rather than in the United States. In the late 1990s this gap was filled by the stock bubble. The $10 trillion in wealth generated by the bubble led to a huge surge in consumption as the saving rate was pushed to then record lows. The bubble also led to an increase of investment, although much of it was in hare-brained start-ups like Pets.com.
After the stock bubble burst the economy needed some other source of demand to replace the money lost through the trade deficit. Contrary to conventional wisdom, the economy was very slow to emerge from the 2001 recession. It did not regain the jobs lost in the recession until 2005. At the time this was the longest period without job growth since the Great Depression.
When the economy did emerge from the 2001 downturn it was on the back of the housing bubble. The bubble generated huge amounts of demand both by pushing construction to record levels and through the wealth effect on consumption. Of course it was predictable that this bubble would also end badly, as it did.
While Summers did not hold the levers of power through the housing bubble years, he did set the process in motion in the 1990s with his high dollar policy. He was also a major cheerleader at the time, denouncing those who raised questions about the exotic financing that was supporting the run-up in house prices as “luddites.”
Furthermore, we still have the basic math problem that he left us from his years in the Clinton administration, how do we fill the gap in demand that resulted from his high dollar policy. While a subsequent fall in the dollar has reduced the trade deficit, it is still close to 4.0 percent of GDP ($640 billion). This can be filled by the government’s deficit spending, but Summers has repeatedly warned that this is only a short-term strategy.
So how does Summer want to solve the math problem? Is he going to push for another bubble to juice the economy again or perhaps he has changed his mind and decided that a strong dollar really wasn’t such a good idea after all.
Anyhow, there is no way around this math. You either want a lower dollar, you want to sustain high budget deficits, you want another bubble, or you want high unemployment. That is the math, what is Summers’ answer? We should know this before he gets appointed to the country’s most important economic post.
Note: Correction made on imports becoming more expensive when the dollar falls. Thanks to the people who called it to my attention.
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Dylan Matthews takes President Obama to task over at Wonkblog for saying in his speech on Wednesday that the typical family’s income has barely budged over the last three decades. As Dylan points out, median family income increased by 17.7 percent from 1979 to 2007. That’s not great, it had increased by 113.2 percent in the prior three decades (State of Working American 2012-2013 [SWA], Table 2.1), but it’s not zero.
So we can say that Obama was not exactly right on this front. But there is one other important item to throw into the mix. The typical family was putting in many more hours of work in 2007 than in 1979. This was primarily a story of women entering the paid labor force. The average number of hours worked for families in the middle quintile increased by 10.3 percent between 1997-2007 (SWA, Table 2.17).
So families did have a bit more money in 2007 than they did in 1979, but they had increased their work hours by almost as much. And of course there are work related expenses (e.g. child care, transportation, clothing) that likely ate up a very large share of the increase in money income for these families. Obama’s claim may not have been exactly right, but if we look at the larger picture, it was not far from the mark.
Dylan Matthews takes President Obama to task over at Wonkblog for saying in his speech on Wednesday that the typical family’s income has barely budged over the last three decades. As Dylan points out, median family income increased by 17.7 percent from 1979 to 2007. That’s not great, it had increased by 113.2 percent in the prior three decades (State of Working American 2012-2013 [SWA], Table 2.1), but it’s not zero.
So we can say that Obama was not exactly right on this front. But there is one other important item to throw into the mix. The typical family was putting in many more hours of work in 2007 than in 1979. This was primarily a story of women entering the paid labor force. The average number of hours worked for families in the middle quintile increased by 10.3 percent between 1997-2007 (SWA, Table 2.17).
So families did have a bit more money in 2007 than they did in 1979, but they had increased their work hours by almost as much. And of course there are work related expenses (e.g. child care, transportation, clothing) that likely ate up a very large share of the increase in money income for these families. Obama’s claim may not have been exactly right, but if we look at the larger picture, it was not far from the mark.
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Harold Meyerson has a good column noting Goldman Sachs role in manipulating prices in the aluminum market and arguing for a new Glass-Steagall Act prohibiting banks from getting into other lines of business. The points are well taken but the description of Goldman’s ability to manipulate prices in the aluminum market go beyond just bank abuses. The allegations against Goldman Sachs raise basic anti-trust issues.
If any firm is able to manipulate prices in a major market in the way Goldman appears to be doing, then the firm clearly has too much control over the market. This should prompt action on anti-trust grounds regardless of whether or not the firm is in the financial sector, as is obviously the case with Goldman. In other words, if the description of Goldman’s conduct in the aluminum market is accurate, not only does it imply the need for new Glass-Steagall legislation, it implies the need for an anti-trust division at the Justice Department that works for its paychecks.
Harold Meyerson has a good column noting Goldman Sachs role in manipulating prices in the aluminum market and arguing for a new Glass-Steagall Act prohibiting banks from getting into other lines of business. The points are well taken but the description of Goldman’s ability to manipulate prices in the aluminum market go beyond just bank abuses. The allegations against Goldman Sachs raise basic anti-trust issues.
If any firm is able to manipulate prices in a major market in the way Goldman appears to be doing, then the firm clearly has too much control over the market. This should prompt action on anti-trust grounds regardless of whether or not the firm is in the financial sector, as is obviously the case with Goldman. In other words, if the description of Goldman’s conduct in the aluminum market is accurate, not only does it imply the need for new Glass-Steagall legislation, it implies the need for an anti-trust division at the Justice Department that works for its paychecks.
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That’s what readers of this Post tidbit would like to know. The item tells readers that Teva will be granted exclusive marketing rights for three years. This means that it can sell the drug for considerably more than its free market price. That implies a transfer of tens or hundreds of millions of dollars to the executives and shareholders in Teva from the rest of us. It’s not clear why we should tax the public as a whole, or women who buy the drug to make these people richer. The Post should at least have given us a hint as to the reason.
That’s what readers of this Post tidbit would like to know. The item tells readers that Teva will be granted exclusive marketing rights for three years. This means that it can sell the drug for considerably more than its free market price. That implies a transfer of tens or hundreds of millions of dollars to the executives and shareholders in Teva from the rest of us. It’s not clear why we should tax the public as a whole, or women who buy the drug to make these people richer. The Post should at least have given us a hint as to the reason.
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Today we are going to use CEPR’s patented new budget calculator to improve a NYT budget article so that it is more meaningful to people who read it. The focus of the piece is efforts by House Republicans to sharply reduce spending from current levels.
One paragraph tells readers:
“For the fiscal year that begins Oct. 1, Mr. Obama requested nearly $3 billion for renewable energy and energy efficiency programs — a mainstay of his economic agenda since he was first elected. The House approved $826 million. Senate Democrats want to give $380 million to ARPA-E, an advanced research program for energy. The House allocated $70 million.”
Here’s how that would read after using the new CEPR budget calculator:
“For the fiscal year that begins Oct. 1, Mr. Obama requested nearly $3 billion (0.08 percent of the budget) for renewable energy and energy efficiency programs — a mainstay of his economic agenda since he was first elected. The House approved $826 million (0.02 percent of federal spending). Senate Democrats want to give $380 million (0.01 percent of spending) to ARPA-E, an advanced research program for energy. The House allocated $70 million (0.002 percent of federal spending).
The piece then told readers:
“A House bill to finance labor and health programs, expected to be unveiled Wednesday, makes good on Republican threats to eliminate the Corporation for Public Broadcasting.”
After using the CEPR budget calculator it would say:
“A House bill to finance labor and health programs, expected to be unveiled Wednesday, makes good on Republican threats to eliminate the Corporation for Public Broadcasting, which currently receives less than 0.01 percent of federal spending.”
Later the article reports:
“Republicans are open about their intentions to target the president’s priorities. The House transportation and housing bill for fiscal 2014 cuts from $3.3 billion to $1.7 billion the financing for Community Development Block Grants, which go mainly to large cities and urban counties for housing and social programs, largely for the poor. That level is below the number secured by President Gerald R. Ford when he created the program — without adjusting for inflation.”
After using the CEPR budget calculator it would say:
“Republicans are open about their intentions to target the president’s priorities. The House transportation and housing bill for fiscal 2014 cuts from $3.3 billion to $1.7 billion (0.09 percent of spending to 0.05 percent) the financing for Community Development Block Grants, which go mainly to large cities and urban counties for housing and social programs, largely for the poor. That level is below the number secured by President Gerald R. Ford when he created the program — without adjusting for inflation.
The next sentence tells readers:
“The Securities and Exchange Commission, which has been flexing its muscle against hedge fund managers and insider trading schemes, would see financing cut 18 percent from the current level.”
After using the CEPR budget calculator it would say:
“The Securities and Exchange Commission, which has been flexing its muscle against hedge fund managers and insider trading schemes, would see financing cut 18 percent from the current level, which is 0.037 percent of federal spending.”
See, with the CEPR budget calculator and just a few minutes work the NYT could do a far better job informing readers about the budget.
Today we are going to use CEPR’s patented new budget calculator to improve a NYT budget article so that it is more meaningful to people who read it. The focus of the piece is efforts by House Republicans to sharply reduce spending from current levels.
One paragraph tells readers:
“For the fiscal year that begins Oct. 1, Mr. Obama requested nearly $3 billion for renewable energy and energy efficiency programs — a mainstay of his economic agenda since he was first elected. The House approved $826 million. Senate Democrats want to give $380 million to ARPA-E, an advanced research program for energy. The House allocated $70 million.”
Here’s how that would read after using the new CEPR budget calculator:
“For the fiscal year that begins Oct. 1, Mr. Obama requested nearly $3 billion (0.08 percent of the budget) for renewable energy and energy efficiency programs — a mainstay of his economic agenda since he was first elected. The House approved $826 million (0.02 percent of federal spending). Senate Democrats want to give $380 million (0.01 percent of spending) to ARPA-E, an advanced research program for energy. The House allocated $70 million (0.002 percent of federal spending).
The piece then told readers:
“A House bill to finance labor and health programs, expected to be unveiled Wednesday, makes good on Republican threats to eliminate the Corporation for Public Broadcasting.”
After using the CEPR budget calculator it would say:
“A House bill to finance labor and health programs, expected to be unveiled Wednesday, makes good on Republican threats to eliminate the Corporation for Public Broadcasting, which currently receives less than 0.01 percent of federal spending.”
Later the article reports:
“Republicans are open about their intentions to target the president’s priorities. The House transportation and housing bill for fiscal 2014 cuts from $3.3 billion to $1.7 billion the financing for Community Development Block Grants, which go mainly to large cities and urban counties for housing and social programs, largely for the poor. That level is below the number secured by President Gerald R. Ford when he created the program — without adjusting for inflation.”
After using the CEPR budget calculator it would say:
“Republicans are open about their intentions to target the president’s priorities. The House transportation and housing bill for fiscal 2014 cuts from $3.3 billion to $1.7 billion (0.09 percent of spending to 0.05 percent) the financing for Community Development Block Grants, which go mainly to large cities and urban counties for housing and social programs, largely for the poor. That level is below the number secured by President Gerald R. Ford when he created the program — without adjusting for inflation.
The next sentence tells readers:
“The Securities and Exchange Commission, which has been flexing its muscle against hedge fund managers and insider trading schemes, would see financing cut 18 percent from the current level.”
After using the CEPR budget calculator it would say:
“The Securities and Exchange Commission, which has been flexing its muscle against hedge fund managers and insider trading schemes, would see financing cut 18 percent from the current level, which is 0.037 percent of federal spending.”
See, with the CEPR budget calculator and just a few minutes work the NYT could do a far better job informing readers about the budget.
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A Washington Post article reporting on Neil Wolin’s departure from a top Treasury Department job discussed his work on the Dodd-Frank, then noted the controversy around the bill:
“with conservatives saying it is holding back economic growth and liberals complaining it falls short of what’s needed to rein in Wall Street.”
Actually, the liberal position would also be that the bill would slow growth. By allowing Wall Street to continue in its current practices, the government is effectively subsidizing too big to fail banks by tens of billions of dollars a year.
This is money that is effectively being diverted from the productive economy into the hands of the large Wall Street banks. It has the same effect on growth as if the government taxed people this amount to send large checks to the big banks. The fact that the government also did nothing to restrain the speculative practices of large banks, such as Goldman Sachs foray into the aluminum market, also will impede growth by leading to higher prices for consumers and less money for producers.
A Washington Post article reporting on Neil Wolin’s departure from a top Treasury Department job discussed his work on the Dodd-Frank, then noted the controversy around the bill:
“with conservatives saying it is holding back economic growth and liberals complaining it falls short of what’s needed to rein in Wall Street.”
Actually, the liberal position would also be that the bill would slow growth. By allowing Wall Street to continue in its current practices, the government is effectively subsidizing too big to fail banks by tens of billions of dollars a year.
This is money that is effectively being diverted from the productive economy into the hands of the large Wall Street banks. It has the same effect on growth as if the government taxed people this amount to send large checks to the big banks. The fact that the government also did nothing to restrain the speculative practices of large banks, such as Goldman Sachs foray into the aluminum market, also will impede growth by leading to higher prices for consumers and less money for producers.
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Imagine that, interference in the market that raises prices to hundreds or thousands of times the free market price leads to corruption in the research process in China. Interesting piece in NYT.
Imagine that, interference in the market that raises prices to hundreds or thousands of times the free market price leads to corruption in the research process in China. Interesting piece in NYT.
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A NYT article on the fate of Detroit’s retired workers following its bankruptcy made reference to the pension funds’ assumption of an 8 percent return following its bankruptcy. There are two points worth making on this issue. First, it was an error to assume an 8 percent return in 2007 given the ratio of stock prices to trend earnings. At the time, that was over 20, which meant that stock could be expected to provide a real return of less than 5 percent going forward. Adding in an inflation premium of 3 percent would have meant that share of the fund invested in stock could have been expected to give an 8 percent nominal return.
If stock accounted for 70 percent of the fund, this would provide a return of 5.6 percentage points to the funds. If the remaining 30 percent of the fund had an average yield of 5 percent, then it would have provided a yield of 1.5 percentage points for a total yield of 7.1 percent. (It would have also been reasonable to include an adjustment for the expectation that stock prices would revert to their mean price-to-earnings ratio of 15.) Anyhow, the point is that an 8.0 percent return assumption would have been too high in 2007, it would not be today since the ratio of stock prices to trend earnings is close to its historic average of 15 to 1, meaning that stocks can be expected to provide their historic nominal rate of return which is close to 10 percent. (This is discussed at more length here and here.)
The second point is that implied preference in this piece for using the municipal bond interest rate for assessing liabilities would have mattered relatively little in this last decade. This rate, which averaged around 4.5 percent, also substantially exceeded pension fund returns in the economic crisis. In other words, whatever shortfall exists today in Detroit’s pension funds was not caused primarily by overly-optimistic return assumptions.
A NYT article on the fate of Detroit’s retired workers following its bankruptcy made reference to the pension funds’ assumption of an 8 percent return following its bankruptcy. There are two points worth making on this issue. First, it was an error to assume an 8 percent return in 2007 given the ratio of stock prices to trend earnings. At the time, that was over 20, which meant that stock could be expected to provide a real return of less than 5 percent going forward. Adding in an inflation premium of 3 percent would have meant that share of the fund invested in stock could have been expected to give an 8 percent nominal return.
If stock accounted for 70 percent of the fund, this would provide a return of 5.6 percentage points to the funds. If the remaining 30 percent of the fund had an average yield of 5 percent, then it would have provided a yield of 1.5 percentage points for a total yield of 7.1 percent. (It would have also been reasonable to include an adjustment for the expectation that stock prices would revert to their mean price-to-earnings ratio of 15.) Anyhow, the point is that an 8.0 percent return assumption would have been too high in 2007, it would not be today since the ratio of stock prices to trend earnings is close to its historic average of 15 to 1, meaning that stocks can be expected to provide their historic nominal rate of return which is close to 10 percent. (This is discussed at more length here and here.)
The second point is that implied preference in this piece for using the municipal bond interest rate for assessing liabilities would have mattered relatively little in this last decade. This rate, which averaged around 4.5 percent, also substantially exceeded pension fund returns in the economic crisis. In other words, whatever shortfall exists today in Detroit’s pension funds was not caused primarily by overly-optimistic return assumptions.
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