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Article Artículo

Elizabeth Warren Is Right on Currency Values (see Second Addendum)

Elizabeth Warren’s proposal to raise the value of the Chinese yuan and other currencies against the dollar is not getting good reviews in the media from economists. As can be expected, some of the arguments are pretty strange.

As the usually astute Noah Smith tells it in his Bloomberg piece, the problem with the trade deficit is:

“U.S. consumers are consistently living beyond their means, which seems unsustainable.”

The implication is that if the trade deficit were lower than we would be forced to cut back consumption. But the major problem the United States has faced over the last decade, according to many economists, is “secular stagnation,” which is an obscure way of saying, not enough demand.

Contrary to what Smith tells us, U.S. consumers are not living beyond their means, rather we actually need them to spend more money to bring the economy to full employment. To be more precise, we need them to spend more in the domestic economy, to increase demand here as opposed to in our trading partners. (We can also bring the economy to full employment by having the government spend more money on things like health care or a green new deal.)

Smith also disagrees with Warren’s mechanism for getting the dollar down, which involves a mixture of negotiations and threats of countervailing measures. The idea is that the biggest actor is China, who for some reason it is assumed would never agree to raise the value of its currency. CNN raises similar concerns. This view seems badly off the mark.

First, it is assumed in both pieces that China is no longer acting to deliberately keep down the value of the yuan against the dollar, even though most economists now concede that it deliberately depressed the value of its currency to maintain large trade surpluses in the last decade. (They did not acknowledge China’s currency management at the time.)

It is wrong to claim that China is not now acting to keep down the value of the yuan. While it is no longer buying large amounts of dollars and other currencies, it holds a stock of more than $3 trillion in reserves, which is well over $4 trillion if we add in its sovereign wealth fund.

This huge stock of foreign assets has the effect of depressing the value of the yuan against the dollar in the same way that the Fed’s holding of more than $3 trillion in assets helps to keep down interest rates. While few economists question that the Fed’s holding of assets leads to lower long-term rates than would otherwise be the case, they seem to deny that China’s holding of a large stock of foreign assets has similar effects in currency markets.

CEPR / June 10, 2019

Article Artículo

The Corporate Debt Stories Show People Still Don’t Understand the Great Recession

The Washington Post had another column telling us about the run-up in corporate debt and how this is going to be 2008 all over again.  This is a popular one with the media. William Cohan has a regular feature in the New York Times telling us how a collapse of the debt bubble is imminent, giving us another financial crisis.

While excessive corporate debt can pose problems, nothing we see now, or will plausibly see in the near future, looks anything like 2008. The fact that ostensibly knowledgeable people can say this shows that they not only missed the housing bubble as it was growing, ten years after it burst, they still don’t have a clue as to what happened.

So let’s try our Econ 101 lesson once again.

The reason the economy collapsed in 2008 was that the housing bubble that had been driving the economy collapsed. The financial crisis was lots of fun (always good to see billionaire types sweating), but it was very much secondary. The issue was that the housing bubble created a massive amount of demand in the economy, which disappeared when the bubble collapsed.

Most economists probably didn’t recognize the impact of the bubble because you would need access to GDP data, as in the data that is readily available on the Commerce Department’s website any time anyone cares to look. Those who did think that GDP data are useful in understanding the economy would see that residential construction, which had averaged a bit more than 4.0 percent of GDP in the 1980s and 1990s, soared to a peak of 6.7 percent of GDP in 2005.

This surge in construction spending was not associated with any developments in the fundamentals of the housing market. After all, the baby boomers, the largest demographic group, were seeing their children move away from home and downsizing. Rents were not sharing in the upswing in house prices, moving more or less in line with inflation. And, vacancy rates were hitting record highs.

All of this should have suggested that the surge in residential construction was transitory and likely to end when house prices came back down to earth. In fact, construction was likely to over-correct since the construction boom meant there was a lot of overbuilding. Construction ultimately bottomed out at 2.4 percent of GDP in 2010 and 2011. (It is 3.8 percent in the most recent data.)

CEPR / June 07, 2019

Article Artículo

United States

Workers

Labor Market Policy Research Reports, May 2019

CEPR regularly publishes a curated collection of original research from academic institutions and nonprofits on the state of the US labor market. The compilation is part of our ongoing effort to promote informed debate on the most important economic and social issues that affect people's lives.


The Brookings Institution

Growing cities that work for all: A capability-based approach to regional economic competitiveness

This report aims to provide a framework and inform policymakers on how the evolving economy is reshaping communities’ distinct opportunities and strengths by proposing a plan for regions to grow quality jobs through capability-based industrial development strategies. This involves firms and cities working together to see what inputs firms need to be productive and for cities to invest in those inputs in order to be more attractive and resilient.

CEPR and Adewale Maye / June 03, 2019

Article Artículo

The Wonderful World of Free Market Drugs

(This post first appeared on my Patreon page.)

I write about the possibility of producing drugs without patent monopolies frequently for several reasons. First, drugs can be essential for people’s health or even life. It should not be a struggle for people to pay for them. Second, there is a huge amount of money at stake, way more than in almost any other realm of public policy. Third, it is such a great example where government intervention, in the form of patents and related monopolies, creates the problem. This is not a story where we need the government to correct an inequity created by the market, we need the government to stop intervening in a way that creates tremendous inequities and inefficiencies. 

I find that people (I mean people engaged in public policy work, not random people grabbed off the bus) have a hard time even understanding what the market for prescription drugs looks like in the absence of patent and related monopolies,[1] so I thought I would devote a blogpost to describing my view of such a world.

The first and most basic point is that in nearly all cases drugs would be cheap. Drugs are very rarely expensive to manufacture. They are expensive for patients because drug companies have patent or related monopolies and they use these monopolies to charge very high prices to the people who need their drugs. If there were dozens of competing manufacturers producing the same drug, they would be no better positioned to get away with charging incredibly high prices than a supermarket could get away with charging incredibly high prices for food. (We need food to survive, too.)  They would be welcome to try, but almost everyone would simply turn to a competitor, likely driving them out of business.

We know that drugs are cheap in the absence of patent monopolies for two reasons. First, because generic prices in the United States are much less than brand prices. In addition, many of the high priced drugs sold with patent protection in the United States are sold as generics elsewhere in the world, in some cases for less than one percent of the price in the U.S.

According to data from the Association for Accessible Medicines, the trade group for the generic industry, brand drugs accounted for 74 percent of spending even though they were only 11 percent of the prescriptions sold. By contrast, generic drugs accounted for just 26 percent of spending even though they were 89 percent of sales. This implies that the average generic prescription cost just 3.6 percent of the price of the average brand prescription, or $29.70 per prescription in 2017. This figure would mean that we could save 96.4 percent of the money spent on brand drugs if we immediately got rid of protections and allowed them to be sold as generics.

CEPR / May 30, 2019