Author Archive

Global Warming and Secular Stagnation

November 23, 2015 5 comments

from Dean Baker

As the world prepares for another round of climate negotiations, it is worth repeating a few simple points. First, it is becoming increasingly obvious that the world is already paying a substantial price for global warming.

Extreme weather events will never come with a stamp that says “caused by global warming.” We know that global warming will change weather patterns in ways that are not entirely predictable. That means that we will see unusual weather events where global warming was likely a factor, but we can never know for certain.

One of the leading candidates in this respect is the extreme drought that afflicted Syria in the last decade, destroying much of its agriculture and leading to a mass migration to its cities. This migration was likely a factor in the unrest that had led the country’s civil war. Syria’s civil war in turn has led to hundreds of thousands of deaths, the displacement of millions, and of course the rise of ISIS.

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Why the cure for a sluggish economy is actually longer vacations

November 13, 2015 6 comments

from Dean Baker

What if we could boost the economy with longer vacations? Or with paid family leave? With shorter workweeks?

It may sound too good to be true, but hear me out.

Economists have long dismissed the idea that an economy could suffer from a persistent shortfall in demand. While most acknowledged that in periods of recession, growth and jobs could be limited by inadequate demand, this was viewed as a temporary story. In the decades since World War II, the economy generally bounced back quickly from recessions. Once the economy recovered from recession, the basic constraint was supply. We would only have more growth and jobs if we could make the economy more productive and/or persuade more people to work. In this context, additional demand, such as a burst of consumption or increase in government spending, would only create inflationary pressures and undermine the effort to boost growth.

This view has been badly shaken by the Great Recession. Many prominent economists, including Paul Krugman and Larry Summers, now warn quite explicitly about the country facing a prolonged period of what’s known as secular stagnation. Secular stagnation means the main constraint on the economy is inadequate demand, not a lack of supply. If we are facing secular stagnation, policies that boost demand will lead to more growth and jobs.

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The TPP’s children’s table: Labor rights and currency

November 12, 2015 Leave a comment

from Dean Baker

The concept of the children’s table has moved from Thanksgiving dinner to presidential politics with the networks having a separate debate for the low-polling candidates for the Republican nomination. But the concept of the children’s table is also useful for understanding trade policy and the Trans-Pacific Partnership (TPP).

The TPP has two classes of issues. On the one hand, there are the issues that really matter to the drafters of the deal. These are issues like protection of patents and copyrights and other forms of investment. Disputes that arise over investment can be taken directly by foreign investors to the investor-state dispute settlement tribunals set up by the TPP.

The investor bringing the complaint gets to appoint one of the three judges hearing the complaint. A second judge is appointed by the country against whom a complaint is being brought. The third judge is jointly appointed by the investor and the government. This panel is then empowered to impose fines of whatever size it considers appropriate. This is entirely an extra-judicial process. The verdict is not appealable to any domestic court.

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The rationale for high drug prices: incredibly inefficient research

November 9, 2015 2 comments

from Dean Baker

Insanely high drug prices have been in the news lately. We are regularly hearing about new miracle drugs like the Hepatitis C drug Sovaldi. Sovaldi comes with an $84,000 price tag for a 3-month course of treatment. Many of the new cancer drugs cost well over $100,000 for a year’s dosage. And of course we had the case of Turing Pharmaceuticals, which raised the price of a Daraprim, an old but important anti-infection drug, by 5000 percent.

These stories of extraordinarily high drug prices are especially painful because they are unnecessary. In almost all cases drugs are cheap to produce. The reason they are expensive is because the government grants them a patent monopoly. (In the case of Daraprim, at the moment Turing is the only licensed manufacturer, even though the drug is off-patent.) Generic Sovaldi is available for just $300 a treatment in Egypt, less than one percent of the U.S. price. Most of the cutting edge cancer drugs would also be available for less than one percent of the U.S. price if they could be sold as generics in a free market. Read more…

The six-hour work day: Preparing for the Attack of the Robots

October 19, 2015 5 comments

from Dean Baker

We all have heard the stories about how the robots are going to take our jobs. The line is that innovations in computer technology will make robots ever more sophisticated, allowing them displace a rapidly growing number of workers. This could leave large numbers of workers with nothing to do, implying a massive amount of long-term unemployment.

There are two basic problems with this story. The first is a logical problem. The story of worker displacement by technology is not new, it goes back hundreds of years and it is ordinarily considered to be a good thing. This is what we call productivity growth. It means that workers can produce more goods and services in the same amount of time. This is the basis of rising wages and living standards.

If we see rapid productivity growth, as robots allow for the same output with fewer workers, this should allow the remaining workers to be paid more for each hour of work. This will allow them to spend more money, creating more demand in other sectors, which will allow displaced workers to be re-employed elsewhere.

Of course we have not seen workers getting the benefits of productivity growth in higher pay in recent years. This is due to policies and institutional changes that undermine workers’ bargaining power.  Read more…

Why is Donald Trump’s tax plan ridiculed but the TPP deal gets a pass?

October 7, 2015 2 comments

from Dean Baker

Trade deals seem to enjoy a special status among economists. While they are happy to use the economic toolbox to take apart policy proposals on minimum wage, financial regulation or almost anything else, for some reason they don’t like to use standard economic tools when it comes to the impact of trade deals like the Trans-Pacific Partnership (TPP).

There was no shortage of economists who were prepared to ridicule Donald Trump’s claim that his tax cut proposal would lead to 6% annual GDP growth. But where are the economists who will ridicule the Obama administration’s claims that the this new trade deal will lead to more rapid growth? Read more…

The Fed’s excuse makers still in high gear

October 6, 2015 5 comments

from Dean Baker

Remember when then Federal Reserve Board Chair Ben Bernanke assured the public that the problems in the financial system will be restricted to the subprime market? This one ranks, along with some comments from and about Alan Greenspan, as one of the worst economic predictions of all time. In other words, the folks at the Fed really missed it.

This is worth remembering because it seems that the Fed is trying to get the excuse making going in advance for the next economic crisis. The NYT reported on a Fed conference where they expressed skepticism as to whether they could stop the next crisis.

There are a range of views presented, not all of them silly. (Using interest rates as the primary tool against bubbles is not a good strategy.) However the idea that the Fed is helpless against bubbles looks like some serious lowering of expectations. Read more…

Job growth in the US weakens in September

October 2, 2015 2 comments

from Dean Baker

The Labor Department reported the economy created just 142,000 jobs in September, well below most forecasts. Furthermore, the prior two months’ numbers were revised down as well, bringing the average for the last three months to 167,000. In addition, there was a drop in the length of the average workweek of 0.1 hour causing the index of aggregate hours to decline by 0.2 percent. The household survey also showed a weak picture of the labor market. While the unemployment rate was unchanged at 5.1 percent there was a drop of 0.2 percentage points in both the labor force participation rate and the employment-to-population (EPOP) ratio. The drop in the EPOP brought the ratio back to its level of October 2014. Read more…

The epidemic of corporate crime

September 29, 2015 3 comments

from Dean Baker

Even those who have little respect for the state of corporate ethics must have been surprised by the news from Volkswagen. It turns out that the largest car company in world deliberately designed software to allow its cars to deceive emissions testing in the United States.

It’s hard to envision the process that led to this outcome. Did some bright and ambitious young executive suggest to his superiors that, rather than finding a way to comply with emission standards, it would be cheaper to design a software program to cheat on the test? They then presumably discussed what would be involved and gave a green light. The scene ends with the executive reporting back the success of cheating software and the German version of The Simpsons’ Mr. Burns rubbing his fingers together and saying, “excellent.”

We may never know the details of how the top brass at Volkswagen thought it would be a good idea to cheat on emissions tests, but they obviously decided that the savings from going this route was worth the risk of detection and the potential punishment. And, if the only punishment is a stretch of unemployment for people who have spent years in high-paying jobs, they are probably right.  Read more…

The success of austerity in Spain: The soft bigotry of incredibly low expectations

September 22, 2015 1 comment

from Dean Baker

Paul Krugman rightly criticizes the proponents of austerity for claiming Spain as a success story. As Krugman points out, its economy is growing, but it has a long way to go to make up the ground lost in its downturn.

He makes this point in a graph showing log GDP, but this picture is actually too generous. We should care about GDP per capita, and here the story is even worse.

Spain per cap GDP fredgraph

Biggest lesson from Financial Crisis: Wall Street gets what it wants

September 18, 2015 40 comments

from Dean Baker

Seven years ago this week, the world’s financial system was teetering on the brink of collapse. The bankruptcy of Lehman Brothers had completely shaken confidence in the banking industry. First, no one could trust the banks books; no one knew how much bad debt banks were concealing. Second, the too big to fail insurance seemed not to exist. After all, if Lehman was not too big to fail, who was?

At that point, policy could have gone two directions. One direction would have been to take advantage of this moment and let the market work its magic. The bloated financial structure that had developed over the last three decades was collapsing from its own excesses. The industry would have paid the price for the issuing and packaging of hundreds of billions of dollars of fraudulent loans, as they finally ran out of suckers to buy the junk. Read more…

Lehman Day: Making fun of the Second Great Depression Crowd

September 16, 2015 3 comments

from Dean Baker

This week marks the 7th anniversary of the collapse of Lehman Brothers, the huge investment bank. This collapse set off the worldwide financial panic that brought Wall Street to its knees. The anniversary of this collapse, September 15th, is the day set aside to ridicule the people who warned of a second Great Depression (SGD) if the Treasury Department and the Federal Reserve Board didn’t rescue the Wall Street banks.

Just to recount the basic story, there is no doubt that without a government bailout most of the big Wall Street banks would have gone under. Citigroup and Bank of America were both effectively bankrupt and remained on life support with hundreds of billions of dollars of government subsidized loans well into 2010. The remaining investment banks, Merrill Lynch, Morgan Stanley, and Goldman Sachs were all facing bank runs. These would have been unstoppable without the helping hand of big government. Many other financial institutions also would have been brought down in the maelstrom, but these giants were for sure dead ducks at the time of the bailouts.   Read more…

What Americans need: An ‘idiot-proof’ retirement system

September 1, 2015 3 comments

from Dean Baker

Volatility in the stock market over the last couple of weeks has caused enormous unease among investors big and small. Tens of millions of people with much of their retirement money in the market are worried about seeing a sudden plunge in prices. Many of these people will sell their stock to protect themselves from further losses, which demonstrates the basic problem with making retirement income dependent on an unstable, unpredictable exchange.

The story is that people tend to make bad decisions when they manage their money in the stock market. They are likely to sell at a low point after the market has just taken a big tumble, as has happened in the last two weeks. Then they buy back in during a run-up, paying much more than if they’d just held on to their stock. Read more…

Quick thoughts on the stock market and the economy

August 26, 2015 15 comments

from Dean Baker

We are seeing the usual hysteria over the sharp drop in the markets in Asia, Europe, and perhaps the U.S. (Wall Street seems to be rallying as I write.) There are a few items worth noting as we enjoy the panic.

First and most importantly, the stock market is not the economy. The stock market has fluctuations all the time that have nothing to do with the real economy. The most famous was the 1987 crash which did not correspond to any real world bad event that anyone could identify.

Even over longer periods there is no direct correlation between the stock market and GDP. In the decade of the 1970s the stock market lost more than 40 percent of its value in real terms, in the decade of the 1980s it more than doubled. GDP growth averaged 3.3 percent from 1980 to 1990 compared to 3.2 percent from 1970 to 1980.

Apart from its erratic movements, the stock market is not even in principle supposed to be a measure of economic activity. It is supposed to represent the present value of future profits. This means that if people are expecting the economy to slowdown, but also expect a big shift in income from wages to profits, then we should expect to see the market rise. So there is no sense in treating the stock market as a gauge of economic activity, it isn’t.

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The problem is not globalization, it is selective protectionism

August 19, 2015 3 comments

from Dean Baker

In an interesting piece on the decline of the political center, E.J. Dionne wrongly lists globalization as a villain. He tells readers:

“Globalization weakens the ability of moderate governments of both varieties to deliver on their promises. Capital can flee easily to more congenial climes, undercutting a nation’s tax base and its regulatory efforts.”

Globalization should also have the effect of reducing inequality by making it easier to take advantage of lower cost professional services (e.g. physicians services, lawyers’ services, dentists’ services) except that the United States has acted to maintain or even increase barriers to trade in these areas. It should also make it easier to circumvent patent and copyright monopolies that redistribute income upward, except we have consciously pursued policies to strengthen these forms of monopolies to limit the extent to which developing countries might provide vehicles for avoidance (in contrast to tax policy). Read more…

Disciplining corporate directors: The real culprits in CEO pay

August 10, 2015 3 comments

from Dean Baker

More than five years after the passage of Dodd-Frank the Securities and Exchange Commission (SEC) finally issued rules on disclosure of CEO pay last week. The financial reform law required that corporations make public the ratio of CEO pay to the pay of a typical worker at the company. Corporate lobbyists have spent the last five years complaining that this disclosure would impose an enormous burden. After much delay, the SEC finally decided to carry through with the requirements of the law and issued specific rules for the disclosure.

This is likely to provide useful information for people interested in trends in inequality, but it does not directly address the issue. At most it will serve to provide some degree of embarrassment to the companies where this ratio is most out of line. It’s worth thinking more carefully about why CEO pay got so ridiculous and how it can be reined it. Read more…

What the Export-Import Bank debate tells us about economists

July 30, 2015 2 comments

from Dean Baker

In the recent debate on trade policy most reputable economists argued for fast track trade authority and the approval of Trans-Pacific Partnership (TPP), which is likely to be the first trade deal to be covered by the new fast-track rules. Their argument was simple; the reduction of tariffs and other trade barriers will increase efficiency and economic growth. This is the standard argument for free trade.

Given the general view within the economics profession that TPP is good policy, it is striking that so few economists have been outspoken in opposition to the reauthorization of the Export-Import Bank. The reason is that the whole point of the Export-Import Bank is to have the government subsidize selected companies by giving them access to credit at below market interest rates. This is 180 degrees at odds with free trade. It means the government is allocating credit rather than markets. It would be expected to lead to the same type of economic distortions as tariffs and quotas.

The arguments put forward in support of the Ex-Im Bank should have been especially painful to economists since they are exactly the same arguments made in support of protectionist trade measures. For example, proponents of the Ex-Im Bank routinely talked about the number of jobs supported by the bank’s loans, implying that all of these jobs would somehow disappear without subsidized loans from the Ex-Im Bank. Read more…

An $18.42 Minimum Wage? (graph)

July 29, 2015 3 comments

from Dean Baker and Nicholas Buffie

Last year, President Obama called for increasing the federal minimum wage to $10.10 an hour by the end of 2015. He argued that after 2015, increases in the minimum wage should be tied to inflation, with the minimum wage rising in line with the consumer price index.

The purchasing power of the minimum wage peaked in the late 1960s at $9.54 an hour in 2014 dollars. That is over two dollars above the current level of $7.25 an hour. While raising the minimum wage to $9.54 would provide a large improvement in living standards for millions of workers who are currently paid at or near the minimum wage, it is worth asking a slightly different question: what if the minimum wage had kept in step with productivity growth over the last 44 years? In other words, rather than just keeping purchasing power constant at the 1968 level, suppose that our lowest paid workers shared evenly in the economic growth over the intervening years. Read more…

Wolfgang Schauble, the hero of the Greek austerity crisis?

July 21, 2015 19 comments

from Dean Baker

Like many people following the negotiations between Greece and its creditors, I was inclined to see Wolfgang Schauble, Germany’s finance minister, as the villain of the story. After all, Mr. Schauble insisted on severely punitive measures for Greece as a condition for continuing support from the European Central Bank (ECB). He appeared to be the bad cop relative to others in the negotiations, such as German Chancellor Angela Merkel, who was willing to make at least some concessions to keep Greece in the euro. But a more careful analysis arguably leads to the opposite conclusion.

Schauble did not argue for throwing Greece out of the euro simply as a punitive measure, although he quite obviously disapproved of the way Greece had run its budget and its economy. He argued, quite possibly sincerely, that at least a temporary departure from the euro zone would be the best path forward for Greece.  Read more…

Why people aren’t working; can we talk about the Fed?

July 17, 2015 2 comments

from Dean Baker

In her WaPo column Catherine Rampell points to the sharp decline in labor force participation rates for prime age workers (ages 25-54) in recent years and looks to the remedies proposed by Jeb Bush and Hillary Clinton. Remarkably neither Rampell nor the candidates discuss the role of the Federal Reserve Board.

There is not much about the drop in labor force participation that is very surprising. It goes along with a weak labor market. When people can’t find a job after enough months or years of looking, they stop trying. Here’s what the picture looks like over the last two decades.

prime age lfpr

Read more…


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