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July 14, 2010

Latest Posts from Economist's View

Latest Posts from Economist's View


Exaggerated Interest in the Debt

Posted: 14 Jul 2010 01:08 AM PDT

Dean Baker thinks the co-chair of the President's deficit commission should know the facts about the debt and associated interest payments, or at least take time to check them, before making assertions in public:

Erskine Bowles Goes Off the Deep End, by Dean Baker: When the co-chairman of President Obama's deficit commission gets his deficit numbers off by 100 percent, you would think this would be worth a little media attention. But apparently this is not the case.
Therefore when Erskine Bowles warned the National Governors' Association that the country would be spending $2 trillion a year in interest on the debt in 2020, virtually no reporters thought it was worth mentioning that he had exaggerated the interest burden by a factor of more than 2... 
It is difficult to believe that if Speaker Pelosi or some other prominent Democrat argued for a stimulus package because the unemployment rate is 19.0 percent that the media would ignore their disconnect with reality. It is hard to understand why neither Mr. Bowles nor his co-chair, former Wyoming Senator Alan Simpson, are not held to comparable standards of accuracy.(Thanks to Jed Graham who got it right.)

Why isn't there a jobs commission with powers equal to those that many want to give to the deficit commission?

How Bad is the Job Situation?

Posted: 14 Jul 2010 12:09 AM PDT

Scott Winship says that he was skeptical about extending unemployment insurance, but after seeing this chart he was "shocked ... and much more sympathetic to extension of unemployment insurance than I was yesterday":

Jobs

links for 2010-07-13

Posted: 13 Jul 2010 11:04 PM PDT

Eichengreen: Fiscal Fibs and Follies

Posted: 13 Jul 2010 04:23 PM PDT

I feel like I've hammered this point to death, but I also feel that, despite the incessant pounding, the nail is still loose. Maybe the answer is a bigger hammer. Or a better nail. What's the equivalent of a "molly" when trying to make an argument stick?:

Fiscal Fibs and Follies, by Barry Eichengreen, Commentary, Project Syndicate: Across the globe, the debate over fiscal consolidation has the distinct sound of two sides talking past one another.
On one side are those who insist that governments must move now, at all cost, to rein in budget deficits. Putting public finances on a sustainable footing, they argue, is essential to reassure financial markets. ... And if confidence is bolstered, consumption and investment will rise. In this view, cutting deficits will be expansionary. ...
On the other side are those who insist that additional public spending is still needed to support demand. Private spending remains weak, not least where continued high unemployment has led consumers, concerned about future prospects, to pocket their wallets. ...
So who is right? Consider the following image: consumers and investors as passengers in a car hurtling directly toward a brick wall. In this case, the driver stepping on the brake will give the passengers more confidence.
Here, the plausible passengers are southern European firms. They understand that their countries' fiscal positions are unsustainable. They know that debt default would be disruptive. Seeing the economy hurtling toward a brick wall, they are holding their collective breath, while evidence that the government is serious about stepping on the brake can induce them to exhale. In this case, fiscal consolidation is likely to affect their investment spending positively. ...
But what might work in southern Europe has no chance of working elsewhere. In other G-20 economies, including the United States, Germany, China, and Japan, the car is still cruising down an open road. Fiscal velocity may be considerable – that is, deficits may be large – but there is no sign of a brick wall ahead. Interest rates on government debt are still low. If the passengers were growing restive, they would rise. At this point, they have not.
In these countries, there is therefore no reason to think that fiscal consolidation would have a strong positive effect on confidence. That possibility could arise sometime in the future, when the proverbial brick wall comes into view. But it is not on the horizon yet... As a result, budget cuts would be strongly contractionary.
Finally there are borderline cases, like Britain. ... It is almost as if governments like Britain's are ... trying to terrorize the private sector, so that when the fiscal ax actually falls, consumers and investors will be sufficiently relieved that disaster has been averted that they will increase spending. If so, leaders are playing a dangerous game...
Or maybe politicians don't believe any of this and are simply intent on cutting spending for ideological reasons, irrespective of the economic consequences. But who would be so cynical as to believe that?

A car going quite a bit slower than the speed limit on a clear, open road could also make passengers happier -- and increase confidence by reducing their assessment of the time it will take to reach the full employment, higher growth destination -- by speeding up.

Should You be Worried about Inflation? What about Deflation?

Posted: 13 Jul 2010 11:34 AM PDT

I have a new post a MoneyWatch:

Should You be Worried about Inflation? What about Deflation?

The post explains the tools at the Fed has at its disposal to offset inflationary and deflationary pressures, and why I am more worried about the response to short-run deflationary pressures than I am about the response to the possibility of inflation in the long-run.

Trade Deficit Widens, Again

Posted: 13 Jul 2010 11:07 AM PDT

Tim Duy on today's release of new trade data showing a widening trade deficit:

The US trade deficit rose on the back of an import surge. From Bloomberg:

The trade deficit in the U.S. unexpectedly widened in May to the highest level in 18 months as a gain in imports outpaced an increase in shipments abroad.

The gap expanded 4.8 percent to $42.3 billion as U.S. companies imported more automobiles and consumer goods, Commerce Department figures showed today in Washington. The deficit was projected to narrow to $39 billion, according to the median forecast in a Bloomberg News survey. Imports and exports rose to the highest level since 2008.

As noted by Calculated Risk, you can't blame this one on oil - the petroleum deficit actually improved in both real and nominal terms. Overall, the goods deficit widened in real terms as well:

FW071210

International trade looks likely to detract from overall growth for a fourth consecutive quarter. So much for the rebalancing. The Obama Administration can continue to prattle on about export growth, but trade is a game with two sides - if you lose more jobs to imports than you gain from exports, doubling exports is not a particularly effective stimulus.

It is important to recognize that as the global activity rebounded from the depths of the recession, the improvement in the US external balance came to a screeching halt and then reversed. The reason is simple - we have offshored so much production capacity that it becomes impossible to grow without an expansion of the trade deficit. Policymakers have not allowed for sufficient currency adjustment or relative growth differentials for any other outcome to occur. Indeed, the picture is likely to deteriorate further in the months ahead:

The increase in trade flows shows how the global expansion lifted sales at companies like Alcoa Inc. Export growth may cool in coming months as the fallout from the European debt crisis limits overseas demand and a recent strengthening of the dollar makes American goods less competitive.

The challenges of addressing what is a structural trade deficit are magnified when one recognizes that manufacturing capacity is now shrinking in the US:

FW0705104

This makes the US more reliant on foreign production in the future, and also raises questions about the ability of the US economy to generate the output necessary to return those goods at some point in the future.

Also, this is relevant to the corporate cash debate. Are firms sitting on cash because of weak demand or distress over the implication of deficit spending? I find myself in the "weak demand" camp, but with a twist: When firms begin to deploy that capital, where will they put it go? To expanding capacity in the US? Or China? And will China ultimately just absorb the capital inflow, swelling currency reserves further?

What I fear is the latter. As production facilities in the US depreciate, firms are looking to replace that capacity with Chinese production. The owner of a chemical manufacturing firm explained it to me quite succinctly: When all of his customers moved to China, he really had little choice but to do the same. The tiny - although officially exalted - renminbi adjustment does nothing to change this trend. Simply put, only very large currency adjustments would be sufficient to deter US firms from continuing to pursue a China strategy.

On can continue to hold the fantasy that an army of well paid massage therapists or clerks at Trader Joe's can offset the impact of not just absolute declines in manufacturing employment but also absolute declines in manufacturing capacity. Holding onto that fantasy is much easier than recognizing that maybe, just maybe, the economic consequences of trade with China have been much more severe and long lasting than officialdom is willing to acknowledge.

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