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Article Artículo

Health and Social Programs

Seniors Should See an Increase in their Social Security of 1.5 – 1.6 Percent in 2014

If the government had not been shut down on October 1, the Bureau of Labor Statistics (BLS) would be releasing the consumer price index (CPI) for September this morning. September’s data, together with the data for July and August, provide the basis for the annual cost of living adjustment (COLA) for Social Security.

While we do not yet have September’s data, based on the data from the prior two months, it is likely that the COLA will end up being either 1.5 or 1.6 percent, depending on exactly what the September data show. It is unfortunate that this number is not yet available.

Dean Baker / October 15, 2013

Article Artículo

If the Dollar Stopped Being the Preeminent Reserve Currency It Would Mean More Jobs and Growth

There's a lot of silliness going around about how the dollar may lose its status as the world's reserve currency if we default. The ordinarily astute Floyd Norris contributed to this confusion in a column last week implying that we may no longer be able to borrow internationally in dollars if this happened.

In reality, it is unlikely that we do risk being the world's preeminent currency in any plausible scenario. (This is also Norris' conclusion.) Furthermore, the immediate result of this loss of status would be positive in any case.

A first point is useful just for clarification. Being a reserve currency is not a zero-one proposition. The dollar is the preeminent reserve currency, which means that most of the world's reserves (@70 percent, last time I checked) are held in dollars. However other currencies like the euro, the British pound, the Japanese yen, and even the Swiss franc are also held as reserves.

If there was a loss of confidence in the dollar, we are presumably talking about a drop in the ratio of reserves held as dollars. Maybe it would fall to 40 percent, perhaps 30 percent. It is almost impossible it will fall anywhere near zero as long as the United States is in one piece with a functioning economy.

The effect of this loss of confidence would not be to deny the United States the ability to borrow in its own currency. Many countries borrow in their own currency, including countries like Malaysia and Colombia, which are not ordinarily thought of as titans of the world financial system.

Less stable countries typically pay somewhat of risk premium based on the risk of inflation in that country's currency and the risk of the demise of the country (think Yugoslavia). In several cases this risk premium is negative. For example, the interest rates on Japanese, Swedish, and Danish bonds are all lower than the interest rates on U.S. bonds. These countries do not appear to have suffered from not having the world's preeminent reserve currency. 

There is the second issue of the dollar falling in value relative to the currencies of other countries if the dollar loses its status as the preeminent reserve currency. This possibility should be cause for celebration, not fear. First of all, a lower valued dollar was the ostensible goal of both the Bush and Obama administration when they demanded that China and other countries stop "manipulating" their currency.

In this context, "manipulation" means holding down the value of their currency against the dollar. In other words, it means pushing up the value of the dollar. In spite of it being official policy that we want a lower valued dollar we are now supposed to be terrified that we might get a lower valued dollar. Welcome to economics in Washington.

The reason why we would want a lower valued dollar is that it would make U.S. goods more competitive in the world economy. We would cut back our imports and increase our exports. This is hardly a novel theory, this is econ 101. And, in fact the world follows pretty closely on what the textbooks say should happen. The trade deficit exploded in the late 1990s when the value of the dollar soared following the East Asian financial crisis. (This is when developing countries like China first decided that they needed massive amounts of dollar reserves). The trade deficit then shrank in the last decade, with a lag, after the dollar fell in value. The chart shows the non-oil deficit, since we would not expect the demand for oil to be very responsive to the value of the dollar. (The chart does not include the increase in oil exports, since that data was not immediately available when I put the chart together and BEA's website is now down.)

btp-2013-10-15

 

Dean Baker / October 15, 2013

Article Artículo

Lawsuit Filed in Federal Court Against UN over Cholera
In a development that has received much media attention, lawyers working on behalf of Haitian cholera victims brought a class action lawsuit against the United Nations on Wednesday over U.N. troops’ role in introducing the cholera bacteria to Haiti three

CEPR / October 13, 2013

Article Artículo

The Ravings of Niall Ferguson, the Real World, and the Needless Suffering of Tens of Millions

For reasons I cannot imagine, Niall Ferguson has achieved some standing as an intellectual with interesting things to say about the economy. Whenever I have read one of his pieces I almost always find it so confused that it would take a blog post at least as long as the original to set it straight. This is why I generally ignore Ferguson, except when prodded by friends and readers.

For this reason I was struck to see that my occasional Niall Ferguson corrections got me on the list of Paul Krugman’s

“like-minded bloggers who play a sinister game of tag with him, endorsing his attacks and adding vitriol of their own. I would like to name and shame in this context Dean Baker, Josh Barro, Brad DeLong, Matthew O'Brien, Noah Smith, Matthew Yglesias and Justin Wolfers.”

This was in the concluding segment of a three part tirade from Ferguson directed at Krugman. Krugman is of course highly visible, and has been especially effective in calling attention to some of Ferguson’s more absurd claims.

I have great respect for Paul Krugman and consider him a friend, but Ferguson’s list of “like-minded” bloggers seems more than a bit bizarre. There is certainly overlap in the views of this group of bloggers, but not all that much. For example, I believe that Josh Barro considers himself a libertarian. The only attribute that we really have in common is that we took offense at some of the ridiculous pronouncements from Ferguson and used our blogs to correct them.

But it is hardly worth wasting time and killing electrons in a tit for tat with Ferguson. What matters is the underlying issues of economic policy. These affect the lives of billions of people. The absurdities pushed by Ferguson and like-minded people in positions of power, in direct defiance of massive evidence to the contrary, have ruined millions of lives and cost the world more than $10 trillion in lost output since the crisis began.

First, contrary to what Ferguson claims, the downturn is not primarily a “financial crisis.” The story of the downturn is a simple story of a collapsed housing bubble. The $8 trillion housing bubble was driving demand in the U.S. economy in the last decade until it collapsed in 2007. When the bubble burst we lost more than 4 percentage points of GDP worth of demand due to a plunge in residential construction. We lost roughly the same amount of demand due to a falloff in consumption associated with the disappearance of $8 trillion in housing wealth. (FWIW, none of this was a surprise to folks who follow the economy with their eyes open. I warned of this disaster beginning in 2002, see also here and here.)

The collapse of the bubble created a hole in annual demand equal to 8 percent of GDP, which would be $1.3 trillion in today’s economy. The central problem facing the U.S., the euro zone, and the U.K. was finding ways to fill this hole. Government stimulus is the most obvious answer. This is where the Ferguson types first began to obstruct efforts to boost the economy. They warned that stimulus would not be an effective way to boost growth and create jobs. We also heard dire tale of exploding interest rates and runaway inflation.

In fact, the stimulus in the United States went pretty much according to the textbook. It was far too small and too short to get the economy back to full employment (again, this was predictable at the time, see here and here), but it did create around 2-3 million jobs. The problem was that that the economy needed 10-12 million jobs.

Dean Baker / October 11, 2013