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Article Artículo

Teaching Robert Samuelson About Supply and Demand

Last week we had to teach Robert Samuelson about inflation. He noted that the wealth of households was back to its pre-recession level, but spending was not. This led him to think that the wealth effect no longer applied. However, when we adjusted the data for inflation and then brought in Mr. Arithmetic it turned out that people were spending more than would be predicted by the wealth effect, not less.

This week it looks like we have to teach Mr. Samuelson about supply and demand. His column is a warning that "cheap money" (e.g. the quantitative easing and low interest rate policy pursued by the Fed) may do more harm than good. This comes in the context of the drop in world stock markets following Ben Bernanke's indication of a pullback from these policies.

Never mind that the drop in world stock markets is exactly what would be predicted if cheap money actually was helping the economy (in that case, the pullback would be expected to lead to lower growth and likely lower profits, therefore we would expect to see lower stock prices), let's deal with the rest of his story. The basic problem in the column is an inability to distinguish clearly between supply and demand.

This first comes up when he complains that in spite of cheap money:

"the speed of the U.S. recovery (about 2 percent annually) is roughly half the average of all recoveries from 1960 to 2007. As for the global economy, it grew 2.5 percent in 2012, down from the 3.7 percent average from 2003 to 2007, says IHS Global Insight."

This one is easily explained by lack of demand. Housing bubbles in the United States and elsewhere had been driving the economy prior to the downturn. Those bubbles have mostly burst, although Canada, Australia, and the UK have seen bubbles reemerge. The fact that the downturn was caused by a collapsed bubble instead of the Fed raising interest rates meant that the recovery would be much slower and more difficult than in prior recessions. There was no easy way to replace the consumption and construction demand created by these bubbles. Some of us were yelling this at the top of our lungs back at the start of the recession, but apparently Samuelson didn't hear us and is therefore surprised by the weakness of the recovery.

Dean Baker / June 24, 2013

Article Artículo

Tyler Cowen Goes Off the Track on China's Aging

Tyler Cowen has an interesting piece on the problems facing developing countries going forward. As he notes, these will be different in the future than they were in the past. However the piece is strange due to one of the items it mentions, the aging of the population, and one it leaves out, intellectual property claims. (Btw, Cowen references a column by Dani Rodrick as raising the issue of new problems confronting developing countries. Rodrick does not mention aging in his list of concerns.)

On the former point, Cowen seems determined to apply the Peter Peterson financed obsession with cutting Social Security and Medicare to the whole world. He gives us the bad news:

"It is less well known that fertility rates in much of the Middle East and North Africa are also falling rapidly. In Iran, for example, it is now estimated at 1.86 per woman, which over time would mean that families are not replenishing themselves. And shrinking and older populations, of course, limit future economic growth."

Wow, back when I learned economics we cared about per capita income, not growth per se. Most people would think that Denmark is better off than Bangladesh, even though Bangladesh has a far higher GDP. Fewer people means fewer demands on resources of all types and less greenhouse gas emissions. I suppose Cowen is worried that the beaches will be less crowded and there will be smaller traffic jams. That prospect is not likely to be a major concern for most people in the developing world.

Cowen also gives us the bad news about China:

"Finally, many lower-income countries will be old before they are rich. China’s population, for example, is aging rapidly, given the government’s one-child policy and the decline in birthrates that accompanies rising income."

Let's think about this one for a moment. China has seen unprecedented growth in per capita income over the last three decades. Per capita GDP has risen by a factor of 13. This swamps the growth in almost every other developing country. While aging can impose some burden on the working population, it will not prevent both workers and retirees from enjoying much higher living standards than they did in the recent past.

Dean Baker / June 23, 2013

Article Artículo

Will Immigration Reform Do Wonders for the Budget? Does Anyone Who Reads the NYT Article on the Topic Have Any Idea?

Yesterday I got to make fun of the NYT for telling readers that food stamps was a $760 billion program. I thought they were giving the 10-year cost, but apparently they had just made a mistake and added a zero to the annual cost, as they later acknowledged in a correction.

This helped make my point. No one, apparently including the editors at the NYT, has any idea what these budget numbers mean. If the original article had told readers that spending on the food stamp program was roughly 1.8 percent of this year's budget it would have immediately conveyed meaningful information to readers. And the editors at the NYT probably would have noticed if the piece had said that food stamps were 18 percent of the budget.

Anyhow, today the NYT obliged us with another example of meaningless budget numbers in reporting on the budgetary consequences of immigration reform. According to a new report from the Congressional Budget Office (CBO):

"The report estimates that in the first decade after the immigration bill is carried out, the net effect of adding millions of additional taxpayers would decrease the federal budget deficit by $197 billion. Over the next decade, the report found, the deficit reduction would be even greater — an estimated $700 billion, from 2024 to 2033."

Okay, are we in for a budget bonanza from immigration reform? After all, those are pretty big numbers.

Dean Baker / June 19, 2013

Article Artículo

Latin America and the Caribbean

Venezuela

World

A Timeline of Venezuelan Opposition Reactions to the Recent Elections
October 5, 2012

Henrique Capriles’ campaign coordinator Leopoldo López is quoted in the press saying, "We have been and will continue to be respectful of the established processes," ahead of the October 7 presidential elections.
October 7, 2012

Capriles assures voters that their vote is secret.  His election campaign tweets, “Remember that the vote is secret, only you and God will know who you voted for! Vote without fear” and similar messages during election day.
 

Ignacio Avalos, director of the independent Venezuelan Election Observatory is quoted in the press saying "The government and the opposition both agree that the electoral system is good in general," and, "Opposition experts concluded that you cannot cheat the system."
 

When going to vote, Capriles tells reporters “if I had any doubt whatsoever of the transparency of this process I wouldn’t be here.”
 

Following the National Electoral Council’s (CNE) announcement that President Hugo Chávez has won re-election, Capriles promptly concedes defeat, accepting the electoral results even though other members of the opposition reject the results, citing alleged fraud and “irregularities.”
March 5, 2013

President Chávez dies.
March 8, 2013

The MUD boycotts the swearing-in ceremony of Vice President Nicolás Maduro as interim president, and most of the opposition does not attend.
March 9, 2013

The CNE announces that elections for a new president will take place April 14.
March 25, 2013

Opposition legislators Ricardo Sánchez, Carlos Vargas, and Andrés Avelino announce they are breaking with Capriles’ campaign, warning of a MUD plan to reject the election results, and saying the Capriles campaign was “encouraging a climate of instability and violence, where the terrible and painful consequence ...intensifies the perverse division between Venezuelans.” They also referred to some opposition members’ acceptance of illegal campaign funds.

Dan Beeton and Stephan Lefebvre / June 18, 2013